Modern service sector would boost jobs, income, and living standards: Lagarde

China’s economic takeoff over last two decades has been powered by manufacturing, but next round of reforms must increase the role of the service sectorm, Lagarde said

March 25, 2014 9:01 IST | India Infoline News Service
China could ensure more sustainable, higher-quality growth in future by unleashing the services sector, creating a modern, globally-integrated financial sector, and by adopting measures to safeguard the environment, says the head of the IMF.

Addressing an audience at the China Development Forum in the capital, Beijing, Christine Lagarde said despite the enormous progress made by China in recent years, the country now confronted what she described as “serious obstacles” to its “next transformation”.

“The challenge is clear: to make growth more inclusive, friendlier to the environment, and more sustainable,” said Lagarde, who was speaking during her three day visit to the country.

The three “steps” highlighted by the IMF head: firstly, an unleashing of the services sector, secondly, the building of a modern, globally integrated financial sector, and lastly, the promotion of inclusive growth, combined with green policies, are included in the reform blueprint announced at China’s Third Plenum last November.

Unlocking the potential of the service sector

China’s economic takeoff over the last two decades has been powered by manufacturing, but the next round of reforms must increase the role of the service sector, she said.

“This will not only unlock the substantial growth potential in that sector, but also boost employment, consumption, and living standards,” she added.

Despite being first in the world in “creative exports”—exports based on exclusive trademark registrations in China—Lagarde said productivity and innovation could only flourish with modern education, advanced health [care], and integrated financial systems.

“So the barriers to entry in these key areas need to be reduced, so that innovation can keep China at the leading edge of economic progress,” said the IMF chief.

A stronger, more competitive financial sector

Lagarde also identified China’s financial sector as a potential source of higher-quality growth and improved welfare. But this sector had to be opened to greater competition and knowledge-transfer, in tandem with stronger macroeconomic policy frameworks, and better regulation and supervision.

The IMF head said a gradual opening up of the capital account would facilitate the creation of a modern, globally-integrated financial sector “while helping to diversify domestic savings and make the economy more resilient to shocks.”

This measure could also strengthen the role of the renminbi as a global currency, said Lagarde. “The renminbi could, over time, achieve the status of an international reserve currency—and occupy a position on a par with China’s economic size.”

Reducing inequality and environmental damage

Reducing inequality and protecting the environment would improve the quality of growth, but also make that growth more sustainable, said the IMF head.

Lagarde identified a number of measures to encourage inclusive growth including promoting women’s participation in the labor market.

She applauded the steps which China had taken to protect the environment including the proposal to implement an environmental protection tax.

But, Lagarde said, more must be done to make growth greener. “One issue that the IMF has been emphasizing for many countries is the better pricing of natural resources—and stricter enforcement of rules.”

China, a “stabilizing force”

Speaking about the role of the country within the global economy, Lagarde said China had been a “stabilizing force” in the world economy.

“China’s success is critical to the success of the global economy,” said the IMF chief.

“By taking the steps to achieve its next transformation, China will not only help itself, it will also help the world,” she added.

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