Brewing up a model to refresh the economy
- By Ni Tao
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E-mail Shanghai Daily, March 26, 2015
Lagarde's recipe
Lagarde's "recipe" is structural reform, which means different things to different nations.
"For some countries, it could be significant investments in infrastructure; for some it could be pressing ahead with trade liberalization or reforms in education, health care and social security net; for some it could be deregulating the labor or service market," she said.
She went on, explaining that "the base we have for policy-making — just as Darjeeling was to my mother's tea — is structural reform." One needs to look no further than China to realize how important structural reform is for a country's economic fortunes.
The taste of China's new cup of economic "tea" will depend on the results of the ongoing structural reform.
For a long time, the ability to "reinvent itself" has been China's secret to its successful transformation from an inward-looking economy to a much more open economy, Lagarde noted.
Biggest challenge
The biggest challenge for China's economy, as she saw it, is not to fall into the middle-income trap, since it officially aspires to the status of a middle-income country by 2030.
"This is why China inaugurated key structural reforms to lift incomes and living standards in the long term. This reform will hopefully lead to new norms of slower, safer, and more sustainable growth that is desirable," she said.
It is against this background that the IMF forecast GDP growth for China this year at 6.8 percent, about half a percentage point less than last year, said Lagarde.
"I think it is OK, because it is good for China and its people, and is good for the world.
"By having an economic cup of tea more slowly, China will end up with a richer taste," Lagarde told the audience.
A typical example of this tempered growth is the slowing of credit expansion over the past few months, which has helped contain financial vulnerability.
In addition to the ambitious market-oriented reform outlined in the third plenum of the 18th Party Congress, the former French finance minister urges greater competition in sectors such as finance, education, health, telecommunications and logistics.
"Those are sectors where... once the obstacles are being removed, the barrier to entry is low" to young, entrepreneurial minds.
Talking of deepening reform, especially in terms of financial deregulation, Lagarde said maintaining the reform momentum will be "essential," and this means "taking further steps to liberalize the deposit rates and exchange rates... removing implicit government guarantees, especially for state-owned enterprises... developing a greater tolerance of corporate default, to create more room for healthy companies to thrive and access credit."
Like those before her, she warned of the danger of embracing growth that comes at a price, namely, worsening environmental damages and rising income inequality.
"This is why China is moving toward a developing model that will generate, hopefully, greener, more inclusive and more widely shared growth," she said.
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