Speech by World Bank Managing Director and Chief Operating Officer Sri Mulyani Indrawati at China Development Forum

Thank you Vice President Minister Gao, distinguished delegates, it is a great pleasure to be here to speak at the renowned China Development Forum.

In the coming years, the world economy and trade flows will be rebalanced, moving from North and West to East and South. Excess global savings will be searching for investment opportunities and connectivity will revolutionize both business and consumption. It will power the rise of a global civil society with ready access to general knowledge.

To adopt to the changing nature of globalization, countries will have to find new sources of competitiveness and trade integration. They need to mobilize public and private capital to promote productivity growth through infrastructure, skills, innovations and new technologies.

Today, I want to focus on trade and connectivity as an engine of renewed global growth.

Despite slowing growth, China remains one of the largest trading partners to key emerging and high-income countries.

China is correct in paying interest in how to organize an opening-up strategy that fits into its overall development and economic goals. Because we know from evidence that countries open to international trade tend to grow faster and provide more opportunities to their populations.

Trade has been a powerful engine of global growth in the past.

There is historic proof to focus on trade: In the two decades before the global financial crisis, trade outpaced global GDP growth by some three percentage points.

There were powerful factors driving this trend, including structural reforms that lowered trade barriers, a dramatic decline in communication costs, and rapid deepening of global supply chains.

Low and middle income countries benefited in particular from this trend-their trade in the decade and a half before the Global Financial Crisis grew by 9.3 percent, 2.5 percent higher than world exports. This shows that trade has been a powerful driver for inclusive development as well.

China was center stage in this development: its policies of opening up, crowned with the entry in the WTO in 2001, constituted a major boost for international trade.

Rapid growth and urbanization also created huge opportunities for exporters around the world, most notably for commodity exporters that benefited from China's drive to expand industrial capacity and infrastructure.

China's favorable tariff policies to some of the least developed countries and the China's overseas investments enabled many countries to unlock their trade potential.

But the trade-growth engine has been sputtering since the global financial crisis.

Global trade grew less than four percent a year between 2012 and 14. This is well below the pre-crisis average of about seven percent.

In light of this slowdown in trade, the critical questions are:

" First, is this a temporary or a structural phenomenon?

" Second, can better policies turn this trend around?

" And if so, which policies would be most effective in doing so?

To answer the first question, there are cyclical as well as structural factors at work in the global trade slowdown.

Recovery has been led by government demand, not by consumption and investment. Government demand is traditionally less trade intensive than investment demand.

The extension of the global value chain that drove the increase in trade intensity of growth seems to have come to a halt.

The sharp decline in commodity prices has suppressed nominal trade values-though not necessarily real values.

No major trade liberalization took place since China joining the WTO. Instead, countries have focused on bilateral and regional trade agreements.

But after many years of generating high trade volumes, China is part of the current slowdown.

China's exports to GDP saw a rapid decline-from some 35 percent of GDP to some 23 percent now, and its current account surplus declined from 10 percent of GDP to less than three percent now.

While China's imports held up after the global financial crisis as a result of the country's strong economic stimulus, its slowing growth has meant that import growth has slowed as well.

Combined with a sharp increase in the supply of major commodities, this has resulted in a major decline in commodity prices, which in turn has reduced the import demand of commodity exporting economies.

In addition, the rebalancing of its economy from investment to consumption and from industry to services is affecting its import demand-broadly shifting import composition towards consumer goods and services.

This brings us to the policy question: What needs to be done to revamp trade as an engine of growth?

We should avoid new protectionist trade measures and unwind trade-restrictive measures enacted since 2008. For example, the number of product lines subject to import restrictions by G-20 members has increased by half since 2007.

Regional trade agreements should remain open and inclusive, and focused on trade creation rather than trade diversion.

Reforms should include reducing barriers to merchandise trade including agriculture, services liberalization, and addressing "at-the borders" constraints, such as congestion at customs.

Logistical obstacles to trade have risen and, in all developing country regions, are significantly greater than in high-income countries.

How can better connectivity promote inclusive development?

Initiatives to improve regional connectivity hold the promise to include relatively isolated countries in the international division of labor, including landlocked countries in Central Asia and Central Africa such as Kazakhstan, Uzbekistan, Afghanistan, Ethiopia and Zambia.

The China's Belt and Road aims to strengthen infrastructure, trade, and investment links between China and 64 other countries that account collectively for 30 percent of global GDP, 62 percent of population and 75 percent of known energy reserves.

This makes it one of the most ambitious efforts to improve cross-border connectivity on a trans-continental scale.

The gains to countries that become part of the initiative are potentially large. They would come from all three aspects of the initiative - improved infrastructure, greater trade, and higher cross-border investment.

China's leadership and its financial backbone makes the Belt and Road initiative credible.

Furthermore, as the country's domestic economy is changing and labor costs are increasing, its overseas investment is gradually shifting from natural resource investment towards manufacturing.

Moving some of its production base abroad makes sense-much like it did for Japan in the 1970s and South Korea since the 1990s.

For the Belt and Road initiative, this is good news, as neighboring countries have an added incentive to join and deliver their part, because the pay-off would be investment from China, which in turn will create more jobs and income.

China already has trade links with most other countries falling under the initiative. It accounts for about 14 percent of imports and 9 percent of exports of 61 countries.

Harvesting the gains from increased trade and cross-border investment and better infrastructure will also require supportive policies and institutions.

Specifically, trade costs and competitiveness depend both on conditions "at the border" such as customs procedures, as well as requirements behind the border such as regulations on health, technical standards, logistics and services.

In this context, the Belt and Road initiative can help spur growth if it liberalizes trade and investment regimes across members in tandem with multilateral agreements and the improvements in physical connective infrastructure that the initiative promises.

Trade has been a powerful engine of growth in the past. Revamping it, through structural reforms, trade agreements, and investing in connectivity, will contribute to restarting growth.

The World Bank Group has a long tradition of helping countries designing and implementing policies that not only helped increasing trade. They also generated investment and assisted in building of infrastructure.

At the same time, the political support for structural reforms and the appetite for globalization that allowed many economies, and especially East Asian economies to benefit from an export-oriented growth model, have been waning.

This is partly because of the cost of reforms, which is often immediate, while the gains can only be felt in the medium and long-term. And too often too little attention is paid to protecting the poorest from any immediate burden. Over time, this neglect erodes public support to reforms, often expressed in resistance to trade agreements that are perceived as threatening jobs and livelihoods at home.

This is why the World Bank recommends social protection mechanisms and safety nets as part of major structural reforms. Our experience is that building more inclusive societies generates more buy-in for sometimes difficult reforms, including openness to trade.

The current global anti-trade sentiment predates the financial crisis, and is likely a consequence of growing income inequalities within many economies around the world.

Like many fast growing countries, China is now experiencing higher levels of inequality that require careful attention during its adjustment process.

Therefore, beyond trade policy, infrastructure and trade facilitation, policy makers, not only here in China, should ensure that their societies are inclusive within countries, not just between countries to safeguard political support for urgently needed reforms and especially trade reforms.

Source: The world Bank

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