World Bank Chief Robert Zoellick pauses while speaking at the Asia Society's annual dinner in Sydney
World Bank Chief Robert Zoellick pauses while speaking at the Asia Society's annual dinner in Sydney August 14, 2011. REUTERS

The world economy is stepping into a new danger zone, World Bank President Robert Zoellick said on Saturday, as growth slows and investor confidence weakens.

Speaking in Beijing, Zoellick urged Europe and the United States to tackle their debt problems, and noted that near record-high food prices and volatile commodity markets are threatening the most world's vulnerable people.

The financial crisis in Europe has become a sovereign debt crisis, with serious implications for the Monetary Union, banks, and competitiveness of some countries, he said.

My country, the United States, must address the issues of debt, spending, tax reform to boost private sector growth, and a stalled trade policy.

Turning to China, where he is leading a World Bank study on how the nation can improve its economic growth model, Zoellick was upbeat.

China is well positioned to become a high-income nation in the next 15 to 20 years, from its status as an upper-middle income country now, he said.

The question is whether China can avoid the middle income trap, where national productivity and income growth stalls after per capita income hits $3,000 to $6,000, Zoellick said.

If China were to continue on its current growth path, by 2030 it would have an economy equivalent to 15 of today's South Koreas, using market prices, he said.

It's hard to see how that expansion could be accommodated with an export and investment-led growth model.

Although China is the world's second-largest economy, its per capita gross national income stands at just $4,260, World Bank data showed, less than a tenth of the $47,140 seen in the United States.

Critics have long said China relies too much on heavy investment and exports to drive its economy, and should encourage domestic consumption.

For Chinese consumption to take off, analysts say China needs to cut income taxes, improve healthcare services and labour mobility, and reduce Beijing's share of national income by raising dividend payouts from state firms, among other measures.