Bilateral donors are fast winding down their aid programmes in China, but the World Bank is hoping the government of China will be willing to pay for continued Bank assistance in social policy and development projects, according to the Bank’s Resident Representative in China, David Dollar. The Bank’s partnership with China, he told Nick Young, may now also extend to joint projects in Africa, given that China has shown how globalisation can work for the poor.

What role do you feel the Bank now has in China? The situation is completely different from when you came 20 years ago: the economy is three times the size, much of the development infrastructure that many of your early projects financed is now in place; you are no longer making IDA (soft) loans—the loans are commercial now and China can raise money on international capital markets, it has huge foreign reserves etc. So what is the role for the Bank in China now?

That’s a very good question. China can go out and borrow on the international market at a lower interest rate than we charge. So, clearly China does not money from the World Bank, it has a large amount of lot of financial reserves and a lot of different sources of funding. So certainly at this stage of our relationship the main objective of our assistance programme is to help China learn what reforms will help it meet its objectives. In the new 5-Year Plan the government has very specific objectives for economic growth but also to increase energy efficiency, to reduce the absolute emission of pollution, to improve what they call ‘social harmony’ which I interpret to mean strengthening health and education services particularly for poor rural populations. So China has a lot of ambitious development objectives and I think that if the Bank does its work well we can help local government and central government find out what reforms, what institutional change is actually going to meet these objectives.

That sounds like an essentially technical, advisory role. What’s the mechanism through which you roll that out given that the loan funding is now commercial? Is China at all willing to pay for these services from the World Bank?

Well, an economist would say that since China pays a higher interest rate to the World Bank than on international markets it effectively is. It only chooses to borrow from the World Bank for projects where its feels that World Bank expertise brings a lot to China and so China is willing to pay in the sense of a higher interest rate. But it’s still a lower middle-income country. The World Bank does have some far richer clients who actually pay directly for advice; not too many, but I believe Chile has been in that kind of relationship and certainly Saudi Arabia, which is a pretty wealthy country. China is far from that level of per capita income and personally I think it is appropriate to this situation where they take what are largely commercial loans and we provide technical expertise to work on particular issues.

The way you are putting it makes this sound a very China-driven process. I accept of course that China, in dealings with any donor or any foreign power, is in a very different position from, say, a small African country or any of the Bank’s least developed country clients. But I would guess that it’s still a negotiated process, in which you would say “We think this is what’s important for China at the moment. . .” Could you say to what extent the Bank’s priorities and China’s priorities are in harmony?

They are not automatically in harmony. So China has this set of objectives, its a kind of fairly broad set. Some of those concerns—security for example—we have nothing to do with: it’s not a competency of the World Bank. Some of their objectives relate to poverty reduction, development, environmental protection. The primary objective of the World Bank is to help developing countries reduce poverty. But we understand poverty in a pretty broad framework to include social development and we have learned that if you do not protect the natural environment then it is very hard to have sustainable poverty reduction. So we interpret that fairly broadly. So, I think there is a range of areas where the World Bank has expertise and a willingness to help. The process is: China has its objectives, we have areas where we think we have expertise, and we work together to essentially frame a programme that the Chinese think is good for them. Obviously they have a very well-functioning government, they are not going to do anything that they think is not in their interest, and we have a set of principles and procedures. Where we can make it all work together we have successful projects.

Are there areas where the World Bank would like to be offering assistance but where the Chinese government is reluctant to accept it or feels that it is does not need assistance?

Looking at our new programme for the next five years we have a number of innovative projects that deal directly with poverty reduction and social exclusion. Some of these are at early stages but it is very likely that we will follow through and do a project supporting rural-urban migration and helping migrants get access to social services in the cities. I view that as a good example of the kind of project that can help China with institutional change. You know: how do migrants get access to a full range of services that urban residents are entitled to? We are [also] working on a rural health project to help strengthen rural health insurance and the rural public health system and again it will be a kind of pilot project that operates in a few rural areas and the main objective is really to learn what kind of institutional arrangements—what kind of incentives, actually—lead to health services for poor rural populations. So I would say that we have got five or six projects like that under preparation during the next 5-year period and I think that’s a terrific way for China to use the World Bank. And so I’m a little frustrated that there are not more examples like that because there is some reluctance on the Chinese side to borrow commercial money to do these poverty and social projects.

So there is still a debate about whether there will be commercial loans for projects of that kind?

Well, we’ve agreed to do them and that‘s a break-through in China.

Would it be a break-though globally?

No. Because I tell the Chinese countries like Brazil do not hesitate to borrow our commercial money to do extremely well-targeted, focused poverty projects for the poor—pay families so that poor rural girls go to school, that kind of thing, conditional cash-transfers. And we have facilitated some study tours of relevant Chinese policy makers to go to Brazil and see this. Because I think that if you are really looking ahead and concerned about the welfare of your country then you realise it can be a really good investment to put money into poverty reduction into programmes that reach certain disadvantaged or excluded groups.

I have some sympathy for where the Chinese government is coming from. It’s a very fiscally conservative government which has done this country quite well. There is a certain attitude that “We do not want to borrow expensive money to pay for schools, pay to run schools.” The government is going to have to run schools year after year forever so it is a matter of good public finance that you do not want to be borrowing money to run your schools year after year—you would want to do that out of tax-revenue. You would prefer to borrow money for some kind of capital construction. So I have a lot of respect for the basic fiscal stance of the government and I have no interest in encouraging any country to become indebted.

The issue as I see it here is that this is a very large economy where for some of these projects I mention we are talking about a loan of maybe 40 or 50 million dollars which is a tiny drop in the bucket for China. So the issue for China is [whether] it is a good investment to borrow what is for this country a very small amount of money in order to learn how to really reform their rural health systems. And if we learn something useful the Chinese can scale that up on a very large scale without any further lending from the World Bank. So to me the ultimate test of success is when you demonstrate some kind of innovation that will make people’s lives better and then it spreads around the country without any World Bank involvement. That’s real success.

Those two examples—rural to urban migration and health insurance—are both areas where the Bank has relevant past experience on which to build. In the South-West China poverty reduction project in 1995 there was a rural-urban migration component which was more basic in that is was attempting to facilitate migration, not looking so much at the receiver end. But it’s logical to go down-stream. And you have had a long series of health projects; in 1995 you originally identified health financing as a major issue and it seems, with the report last year from the State Development Research Council, that the government is finally signing up completely or very largely to the critique that was contained in that 1995 Bank report, which was quite strong. So again that is an area for you to progress into quite naturally. But you seemed to be suggesting that there are other policy areas you would like to be working on where there is still some reluctance. What other areas might you want to work in?

Well, I’m just thinking very open-minded now. There is a significant number of disabled people in China and they are disproportionately represented amongst the poor, it is often difficult for disabled children to go to school, especially in rural areas. So we have tried to build small components to assist the handicapped with different social services, but that is something we potentially could help China do on a much larger scale and again it’s an area where I’m not sure there is any easy answer. My philosophy is for a lot of these problems nobody knows for sure what the answer is and therefore you need to try out things on the ground and learn. And so I think education for handicapped or social services for handicapped people is a good example. We have done some very small things and potentially we could do something on a more medium-size scale that might be replicable.

Some of those examples come through the relationship with DFID if I’m not mistaken. You have in Liangshan, Sichuan a pilot project which I think Handicap International is implementing as part of a new poverty alleviation project that DFID is softening the loan for. Access to schools for disabled children, I assume, is DFID’s value-added for the education project, based on what they did in Gansu. So, is what you are saying that you would like to be able to work in that kind of area without the tease or sweetener of softening the loan through a bilateral contribution? Is that really what your position is?

Yes. We are thrilled to work in partnership with DFID. But they have made a strategic decision to phase down their programme in China now that China is a middle-income country. It is going to be harder and harder for China to find any kind of bilateral grants assistance and so my sincere advice to Chinese friends is: it’s in your interest to borrow small amounts of money if we can help you with this really serious project like access for handicapped people to social services. If you just think very broadly there is no reason why you can’t use a small loan to achieve something. Why does it have to be softened with a grant fund? For me that is just sincere advice to the Chinese government.

So, although it has been clear for quite a long time that the sun is setting on donor assistance here, there could still be a role for the Bank for another decade to come, working in social areas but on entirely commercial terms?

Yes.

That’s interesting. Can I move on to ask something else? Since about 1996 China’s government revenue has been increasing at approximately twice the rate of GDP. From a fiscal system that was not working it has created the basis of a modern fiscal system. Now obviously it started at a very low level, much as with China’s growth, so it would be premature to conclude that the State is now rolling in money and rich and presumably there are still constraints. But how long can we expect China’s government revenue to increase significantly above the rate of economic growth?

Well it’s very hard to make any kind of exact prediction, but common sense dictates that it cannot go on too much longer. I think the central government revenue collection was down below 10% of GDP at some point in the 1990s, which is very low by international standards. I do not have the exact figure but I’m pretty sure it’s up above 20% [now] so it cannot continue for many more years. Looking ahead to the next 5-Year Plan it makes much more sense to do programming on the assumption that government revenue is going to grow roughly in line with GDP.

Do you feel that there is a need for further reform of the tax system and what sort of reform do you feel is necessary?

I feel this way about pretty much every country in the world. This is not a developing country issue per se. Most countries could find improvements in their tax systems. Here, some of the obvious weaknesses are that there is a value added tax that is collected pretty effectively but it is only collected on goods basically, manufactured goods in particular, it’s not collected on services. Services are now a pretty large part of the economy, a growing part of the economy. There is no good reason not to tax the service sector.

I think it made sense in the early stage of reform to have a low tax rate for foreign investment because China was a kind of new player in the world market and they were trying to attract foreign investment. But China is now a big player in the world market, it gets lots of foreign investment. We have advocated that the government unify the tax rate for foreign firms and for domestic private firms, and for state enterprises too, for that matter. The rate for private firms now is 33%, the corporate profit tax rate. It’s 15% for foreign investors. So China is basically subsidising foreigners relative to its own entrepreneurs and I don’t see any good reason for this. So my advice would be to unify the rate at something around 20% which is the common corporate profit tax rate in this East Asia region. The foreign investors will complain a little bit but I don’t think they are going to go away if the profit tax rate goes up by 5%. On the other hand the domestic private sector would get a very nice boost because 33% is a pretty high tax rate, and most of these private firms are small.

Then, over time, an obvious reform in China is to introduce effectively a progressive income tax. That is hard to do in a developing country, it requires a lot of information. It works best when most of your citizens are having a pay check deposited electronically in their bank and they are getting a computerized statement of their income. Then you can, I think, run an effective income tax system, and I think China should be looking ahead to that because there is pretty sharp disparity in this country. I am personally in favour of a progressive income tax to try to generate revenue that can be used to help some of the more disadvantaged groups in society.

So, some of the wealth of the nouveau riche should go back to society—not through philanthropy but through taxation?

I am in favour of philanthropy too. One of our activities that we are pleased with of the last year is that we organized the China Development Marketplace where we gave out small grants to Chinese NGOs working around the country on social and environmental issues and we raised a little bit of private money for that. It was, frankly, hard, philanthropy is relatively new. It may have existed a hundred years ago, I do not honestly know, but it certainly did not exist much in socialist China. So I think it’s new and I think private philanthropy has an important role in helping societies function well.

I sometimes feel that China is keen to emphasise philanthropy because it does not want to tax the nouveau riche—because they are a very powerful, emerging elite.

I don’t honestly have a strong view on what the elite thinks about the tax system. I am, on a related issue, concerned about a reluctance to price and tax gasoline appropriately in this country—and there I do think there is a middle-class developing that becomes used to driving automobiles and they like having subsidized gasoline and I think that’s also part of the tax system.

Having some kind of substantial tax on gasoline is what I think of as a win-win-win policy. There is plenty of evidence that if you raise the price of gasoline people respond by driving less or buying more fuel-efficient cars so you will use less petroleum than you would otherwise. So it would help China deal with this concern about global supplies of petroleum, which are increasingly scarce. It would deal with environmental problems, it would make the environmental situation better than it would otherwise be and frankly you would mostly be taxing relatively well-off people and you could put money in public transport and other things that would benefit the larger public. So I call it win-win-win.

The same arguments, of course, hold entirely true for the United States where the Ford motor company markets SUVs that do 14 miles to the gallon and gasoline is very cheap.

I happen to be a US citizen, I’m a big advocate of very steep taxation on automobiles. I used to ride my bike to work when I lived in Washington. Here I would be scared to ride my bike to work, I mean it’s a less friendly environment for cyclists. But I am an advocate of steep taxation of energy products and investing in public transportation, bike lanes, things like that.

Going back to the corporate tax. It seems to me that what you are suggesting is obvious: unify it at a rate that is average for the region, that seems to be obvious. So what’s the reluctance here? Is it because China is so keen to get the foreign investors coming in still?

Well now we are getting into speculation. It seems to me that there are some coastal provinces that have done very well by attracting foreign investors and they actually contribute a lot of the tax revenue to Beijing and I think they probably are concerned. If you are really talking about unifying it at 20% then frankly it is hard to see where the opposition comes from because that is not going to deter foreign investment. Once you start talking unification of course it might occur to someone to unify at 33% and to be honest a 33% corporate tax rate would seriously reduce foreign investment into China because it would suddenly make it less attractive than most of Asia. So maybe some provincial leaders feel that once you open that debate, once you agree that unification makes sense, it’s kind of risky where you end up unifying. I’m sure there are some people who would like to lower the private sector profit tax rate to 15%. My own view is that that is a little bit low. If you have a really well-functioning income tax system then the taxation of corporate profits is not that important because anything that goes back to rich people you get them on the income tax. But if you are worried that your income tax system may have a lot of leakage then corporate tax is a good way to make sure that capitalists pay a fair share of tax.

How about the consumption taxes or VAT? Are they progressive? Don’t they put up consumption barriers?

Yes, general VAT taxes do have a somewhat regressive character and that is why progressive income tax can compensate for that—and then, frankly, energy taxation. Energy is used much more by well-off people than by relatively poor people and it is not that hard to design some subsidy, some kind of life-line scheme for low-income people to have access to energy. So I am a big fan of rational energy pricing and taxation and I think you can use that to make the system more progressive.

And there are things you can do on the VAT. I confess that I do not know the details of China’s VAT [but] I know it does not cover services. Many countries exempt certain food items and things that are widely consumed by the poor. I am guessing that the rural poor in China probably do not pay much VAT, they have lot of their own consumption. But that’s a good question: I have not seen a really good study of the overall incidence of the tax system in China and my hunch would be that a neutral kind of system would be slightly regressive.

Moving onto a different topic: I started by asking about the World Bank’s role in China. What about China’s role in the World Bank?

The World Bank is one of the so-called Bretton-Woods institutions set up after World War II, which I guess formally includes the World Bank and the IMF. I’m not sure if people consider the WTO as strictly speaking a Bretton-Woods institution: it was the precursor of the GATT which was set up after WWII as part of basically an Anglo-American plan to create international institutions to prevent the kind of beak-downs in trade and capital flows that we had during the Great Depression and World War I and World War II. Now my own view is these institutions have been pretty successful, we have seen a better stretch of development in the world economy over the last 50 years than we have ever seen before and we have had some very impressive reductions in poverty in the last 25 years. So I think you have to give these institutions some credit for creating a relatively stable global economic environment. That said, the voting power in the IMF and the World Bank reflects the state of the world economy around 1950. So, Europe has a big weight, the United States, Japan. Developing countries generally have small weights. An interesting thing in the last 25 yeas [is that] the developing countries have been growing much faster than the rich countries, which is very good for poverty reduction and a for creating a more balanced world. But it means that the voting structure in the IMF and World Bank is kind of out of synch with the reality of the world economy now. So, I have to be careful what I say now, but I think I can say that it makes sense for big developing countries like China and India and Brazil to have more voting weight and more power, more staffing within these institutions if they are going to be truly global institutions that reflect contemporary reality. I think the Chinese would like to have more weight within the World Bank. I think there is some agreement about increasing China’s quota in the IMF, there is supposed to be some concrete plan by September, when we have our annual meetings. So I think you can say there is slow change in the governance of these institutions. Certainly, a lot of voices in countries such as China feel that these changes should be much faster. Frankly, Europe is going to be the big loser. The US has actually kept its weight in the world economy pretty stable so it’s hard to argue that the US is over-represented relative to its economic size, but Europe is definitely over-represented relative to its economic size. So if you start talking about changing the weights, China, India, Brazil, Mexico, they all go up, somebody’s weight has to go down, right？ There is only 100% that you can allocate so if China’s percentage goes up it makes sense for some European countries or Europe as a whole to have less weight and I think it’s difficult for some countries to accept that.

Is this a big issue for China?

I think it is. I hear senior people in China talk about this all the time. I see a positive side to that, which is that the Chinese leadership seems to feel that these are useful institutions even as they exist. The Chinese participate very actively and then the desire to have more weight suggests that China thinks they could become fairer institutions in today’s world.

Continuing with the theme of China’s role in the world:- People across Europe and the States are waking up to the fact that China exists, that it’s big, that it impacts on their lives in all sorts of ways that they are not too sure about, but feel a lot of anxiety about. I would like to look, firstly, at the specific issue of China’s emerging role as a donor. There was a report concerning a loan that China recently made to Angola, I think a two billion dollar loan.

I don’t know. I saw some reports, but I do not know the details of that.

Well, I just wanted to know how much of a concern it is to the Bank in African countries, where you have been trying to create a process of poverty development planning with the Bank then supplying development finance. How concerned is the Bank that China may, as appeared to happen in the case of Angola, subvert that process by coming in with its own loan on terms that are un-transparent and that may lower the bar for transparency in these international financial transactions? Is that something that you engaged with in your role here?

Yes. I am about to go to Washington for the discussion at the World Bank of our new programme for China and it’s a 5-year programme that we are calling a ‘Country Partnership Strategy’ rather than a ‘Country Assistance Strategy’ because we see it having this two-fold character that on the one hand we continue to assist China in ways that you and I have discussed but we call it a partnership strategy because we increasingly see China and the World Bank potentially working together in a positive way in other parts of the World. Implicit in that is welcoming China to play a larger role in the world. There’s still a lot of poverty in Africa, China is going to become a donor, a development actor in Africa, that’s potentially very positive.

But there is also a concern. If you look at the history of development assistance there are lots of examples of failure and bad practices that led to bad outcomes in Africa and other places, so it would be nice if China avoided making some of the same mistakes that Western donors made or Japanese donors made in an earlier period. So what does that mean concretely? I think most of the international community supports transparency in these kinds of official financial dealings. Its one thing if two private companies do something that’s within the law that’s their own private business. But if a government is lending money to another government, official finance, I think there is broad agreement that it should be transparent for a variety of reasons. For one, we know a lot of poor countries have a history of getting into debt problems. We have had debt crises repeatedly, and transparency is one way of trying to help avoid getting into that over-indebted situation.

So, concretely, the World Bank is trying to work together with China on a number of specific initiatives in Africa. The President of China announced a programme of concessional loans and EXIM Bank of China will execute some or maybe even all of that programme. So we have started a technical assistance programme with the EXIM Bank telling them about the kind of things that the World Bank does in project finance, how we work together with agencies like EXIM Bank from other countries, and trying to find some concrete projects in Africa that we can co-finance. At this point of development assistance I would say there’s pretty much an agreed framework that most developing countries buy into and most of the donor countries buy into and the issue is to what extent will China buy into the framework and cooperate with international institutions like the World Bank, [or] to what extent does it want to go off on its own. I do not think there is a simple yes-no answer, but certainly on the World Bank’s side we are hoping that we can engage with China in Africa and also in some of the low-income countries in this region.

Let me say that many of us in the World Bank welcome China bringing new ideas into the development debate. So on the one hand it is fine if China wants to provide financial assistance—there is certainly a need for that—but it is actually probably more interesting for African countries to hear about some of the things that have been done in China and think about whether or not those lessons are relevant for the African context. We do see part of our role at the World Bank now [as being] to help other countries learn about China—both developing countries, who might take useful lessons, but also frankly I think we have a useful role in helping wealthy country shareholders like the United States, Western Europe and Japan [to] learn about what is really happening in China because frankly there are a lot of misunderstandings about what goes on.

Can I ask you to say a bit more about this idea of China as an exemplar? It was the conference in 2004—the Shanghai Poverty Conference—where China was premiered as a success story in development terms. Can you give me a couple of examples of specific things that you think China has done right that African countries can learn from? Because it seems to me that they are so different, the contexts are so different, what is going to be transferable? It is also seems to me that there are still some very serious questions about China’s growth because, although you were saying earlier that developing countries are growing now faster than developed countries, there is always this question of what kind of growth and how that growth is being distributed. If it is simply creating very enriched elites and living standards are not improving for the majority, or even large minorities, of the population, then it is dubious in what sense that is progress. It seems to me that the jury is still out in China. Deng Xiaoping was once allegedly asked what he thought the impact of the French Revolution was and he said “Well it’s far too soon to say.”

That’s a great line

Yes, there’s a lot of wisdom in that, and although everyone accepts that 200 million people in China have been “lifted out of poverty,” as they say, I think really for most people the jury is still out on whether this reform process has benefited the whole of the Chinese population. Government concerns about instability are, I think, very real and there are very real problems there, problems with political reform. I’m not of the school that China collapses tomorrow, but there is that school and there is that possibility I suppose. So given all that background, apart from the fact that Beijing is bursting at the seams with high-rises, and we can see construction all around us, apart from that, what are the concrete lessons that Kenya or Nigeria could learn from China’s example?

That’s a really good question. First, I think it is very important not to set up China or any country as a model. Usually when the World Bank declares someone a success story that’s usually the beginning of the end and things start unraveling！Actually, I respect the Chinese leadership very much. They say China’s lessons might be useful for other developing countries but they are very quick to say that they do not see China as a model, so I respect that and I think that’s sincere. But there certainly are plenty of problems here, environmental problems, social problems. Smart people in the leadership have pointed out that quite a few developing countries have developed up to about the USD 2,000 per capita income level [but that] not too many countries go a lot beyond that. So I would say the jury is out on whether China will make a full transition to developed status, we won’t know that for quite a long time.

But I would say that I think the evidence is pretty strong that the overwhelming majority of people in this country have much better lives than their families had 10 or 20 years ago. And in recent years the evidence suggest that rural income has been going up by about 5% per year and urban income has been going up at about 12% so there is a growing gap and a lot of unhappiness, but nevertheless rural poverty has continued to decline in this country.

To be very specific on the lessons. I could answer at the macro or micro—my instinct is to go micro because I think that is probably more interesting for the readers but also we have a nice example. One of the things we are very proud of is we have had a very successful series of interventions on the Loess Plateau in China. It’s a long story but it’s an area that had become terribly degraded: Gansu, parts of Inner Mongolia, Shaanxi, Shanxi, it’s a big part of the world. We have worked with local communities there for over fifteen years and a lot of it has seen a remarkable transformation from brown, completely denuded hills and valleys to a much greener environment where people have a sustainable livelihood. It’s involved changing what people are growing and raising to make it environmentally sustainable. It has involved some voluntary out-migration because there were just too many people living in these areas and also some very clever environmental interventions that have worked well. John Liu has made a film about this for the BBC. We are now working with African partners to bring him and his film to Africa because there are parts of Africa which have actually very similar topography and the basic story is really getting the community to work together to make some decisions about how to change the community’s livelihood in order to become environmentally sustainable.

This requires getting people to recognise that what you are doing is unsustainable as evidenced by this deforestation and desertification all around you and then together learning that there are other ways, that there are other potential crops or animal husbandry that are more environmentally sustainable. And then also some areas just simply have to be set aside to regenerate and you have to agree as a community that you will not try to get income from this protected area. It’s complicated, but John’s done a great job telling this story visually and by interviewing people. Fortunately he had done some filming there in the early ‘90s so he has very dramatic ‘before and after’ evidence and interviews. So what we want to do is take that to Africa and see if we can work with African communities facing similar environmental degradation just to see concretely how did China attack this kind of problem. So I think that’s one very specific example that I am excited about right now.

At a more macro level I think until recently there was a lot of pessimism about development—“is development really possible?”— and frankly China has shown pretty dramatically that in this global economy a country can rise up very powerfully and go from being an extremely poor minor player in the world economy. China is now the second largest economy in purchasing parity terms and it’s the third largest trading nation, it’s become a very significant player. Population size has something to do with that but I think that in many ways China has saved globalisation. I think there was a lot of skepticism about whether a poor country can prosper in this global system and actually China has given pretty powerful evidence. I have done some work in India and I see a lot of Indian policy-makers and intellectuals looking at China and the lesson they draw is well, actually, that they have not opened up their economy enough to global trade and global investment.