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World Bank Paper: China’s Economy ‘Overheating’ With AM-US-China

August 25, 1993

WASHINGTON (AP) _ Urgent reform is needed to keep China’s economy from growing too fast, World Bank economists said Wednesday. They recommend tougher management rather than more decentralization.

″A failure to manage the economy and avoid inflation is the single largest threat now to the overall success of the reform program,″ the economists said in a paper assessing China through June 1993.

The document by Peter Harrold and Rajiv Lall of the bank’s China division said, however, that the situation is not out of control and a series of reforms could cool China’s ″overheated″ economy. Economies are in trouble when fast growth causes excessive demand, inflation, shortages, rapid increases in property values and speculation.

China’s economy grew 12.8 percent last year, compared with 7.2 percent in 1991 and 3.8 percent in 1990. Growth into mid-1993 was at an annual rate of about 14 percent, the report said.

It called China’s economy ″half-reformed,″ adding, ″It is critical that this situation should impel the government to move rapidly to deepen a wide range of reforms,″ particularly those that will allow management of the economy.

It recommended tax reform, price reform, steps to encourage savings and reduction of import barriers as critically needed measures.

The economists said that Chinese authorities took some steps towards reform last year but ″concrete measures have yet to be taken.″

The report decried the ″widely held notion in China that centralization of authority is contrary to reform, and that all decentralization is good for reform.″

A key challenge, it said, ″will be to overcome local opposition in this regard and to unify views in favor of an aggressive program to strengthen macroeconomic management capability.″

It recommended strong measures in fiscal, financial and trade reform and suggested that the Chinese government create labor markets rather than enterprises, regulate competition rather than prices, manage health insurance rather than health care and build roads rather than factories.

″The market economy does not necessarily require less government, just different government,″ the report concluded, ″and in many reform areas, defining this new role for government and designing appropriate new institutions is the challenge to be addressed.″

The report said China’s growth has been a major achievement at a time of lackluster world economic performance.

It noted, however, that $11 billion in foreign investments was matched by an even larger outflow of foreign exchange, allowing no increase in reserves.

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