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Social security reform 'key to boosting domestic demand'

(China Daily)
Updated: 2009-06-01 16:42

China should reform its social security system in a bid to boost domestic demand and transform the current growth model that relies too much on exports, according to leading international economists.

Vivek Arora, the International Monetary Fund's chief representative in China, told a financial forum that the nation would have to rely more on domestic consumption to continue achieving the scale of economic growth witnessed over the past three decades.

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Exports, the pillar of China's growth, collapsed late last year as major markets, including the United States, Japan and the European Union, entered recession.

China's economy therefore suffered a sharp slowdown. Gross domestic product (GDP) expanded 9 percent year-on-year in 2008 and 6.1 percent in the first quarter of 2009, compared with 13 percent in 2007.

Economists warned that it would not be easy to revive the Chinese economy by boosting domestic demand as many people are unwilling to open their wallets due to insufficient social security coverage.

"China should carry out social security reforms, such as in healthcare, pensions and education, to reduce economic uncertainty and boost consumer spending," Arora told the China Finance Summit.

He acknowledged that China's economic data for March and April had shown signs of recovery as its 4-trillion-yuan stimulus package fed through the economy.

The infrastructure-focused government spending could ease the slowdown in the short term, but it might not be the solution in the long run, Arora stated.

Pier Carlo Padoan, deputy secretary of the Organization for Economic Cooperation and Development, said that many countries need to adjust their growth models, and in China the government should improve social security for that purpose.

Padoan added that he is convinced that China will succeed in transforming the growth mode to rely more on domestic consumption.

Eric Maskin, the 2007 Nobel Prize Laureate in Economics, told reporters that he anticipated China's high saving rate would turn into more domestic consumption.

China's saving rate rose to 49.9 percent in 2007 from 37.5 percent around 1998, compared with 4.2 percent in the United States in February this year.

Arora added that China should encourage major banks to provide more funding to small- and medium-sized enterprises (SMEs) to help them ride out the crisis.

Chinese banks usually lend to big State-owned enterprises and infrastructure projects while shying away from SMEs for fear of the bigger bad loan risk.

Arora said that despite the slowdown, China might continue to be the largest contributor to the world's economic recovery because many other major economies see their GDP contracting.

The IMF official said the global economy would not see a repeat of the Great Depression of the 1930s as countries have taken more coordinated and resolute steps to tackle the crisis.

Maskin said the global financial crisis may conclude by the year's end and the financial market may return to normal next year. However, he admitted that it would take longer for the real economy to recover.