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Lecture OneIntroduction to China’s Economic Growth

Instructor: Xingmin Yin

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Part One Dynamics of Development

Part TwoChina and Development Economics

Part Three Conclusions

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Part One Dynamics of Development

1. Brief discussion on economic growth records.

2. Transition: geopolitical standing3. How to understand the statistics?4. Analysis of the macroeconomic record

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1. Brief Discussion on Economic Growth Records A long-term rise in capacity to supply

increasingly diverse economic goods to its population, this growing capacity based on advancing technology and the institutional and ideological adjustments that it demands.

After 1978, there was a major political shift to a pragmatic reformism which relaxed central political control and modified the economic system profoundly.

These changes brought a more stable path of development and a great acceleration of economic growth.

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In the 25 years from 1978 to 2003 GDP rose nearly seven-fold, labor productivity rose four-fold, population growth decelerated sharply and per capita income rose nearly five-fold.

With per capita GDP rising 6.6 per cent a year, China enjoyed faster growth in this period than any other country.

The growth acceleration was mainly due to increased efficiency.

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Major Factors for Economic Growth Collective agriculture was abandoned and production

decisions reverted to individual peasant households. Small-scale industrial and service activities were freed

from government controls. The proportionate importance of state enterprise in

industry and services was greatly reduced and there was a huge expansion of industrial production in urban areas financed by private domestic savings and a very large inflow of foreign capital.

Exposure to foreign trade was greatly enhanced. This strengthened market forces, made it much easier to develop and absorb new technology and introduced consumers to a wide variety of new goods.

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Growth of GDP, by Sector, at Constant price(annual average compound growth rates)

1952-1978 1978-2003

Faming, Fishery & Forestry 2.2 4.5Industry 10.1 9.8Construction 7.8 9.8Transport& Communication 6.0 10.8Commerce & Restaurant 3.3 9.9Other Services 4.2 5.6GDP 4.4 7.9Per Capita GDP 2.3 6.6GDP Per Person Employment 1.8 5.8

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Structure of Chinese GDP, 1952-2003(per cent of GDP)

1952 1978 2003

Farming, Fishery & Forestry 59.7 34.4 15.7Industry 8.3 33.5 51.8Construction 1.7 3.4 5.3Transport & Communications 2.4 3.6 7.0Commerce & Restaurants 6.7 5.1 8.2Other Services 21.2 20.1 11.9GDP 100.0 100.0 100.0

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GDP Growth in China

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GDP 第一产业 第二产业 第三产业 GDP增长率第一产业增长率 第二产业增长率 第三产业增长率

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Discussion: Three Principal Components of the Definition of Economic Growth

1. The sustained rise in national output is a manifestation of economic growth, and the ability to provide a wide range of goods is a sign of economic maturity

2. Advancing technology provides the basis or preconditions for continuous economic growth- a necessary but not sufficient conditions

3. To realize the potential for growth inherent in new technology, institutional, attitudinal, and ideological adjustments must be made. Technological innovation without concomitant social innovation is like a light bulb without electricity- the potential exists, but without the complementary input, nothing will happen.

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2. Transition: Geopolitical Standing

The reform period was one of much reduced international tension.

China’s geopolitical standing, stature and leverage were greatly increased.

China became the world’s second largest economy.

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China’s Geopolitical Standing, 1820-2003

1820 1890 1913 1952 1978 2003

Share of World GDP 32.9 13.2 8.8 4.6 4.9 15.1

Share of World Population

36.6 26.2 24.4 22.5 22.3 20.5

Per capita GDP % of world average

90.0 50.3 41.7 23.8 22.1 73.7

GDP Ranking 1 2 3 3 4 2

Share of World Exports

n.a. 1.7 1.6 1.0 0.8 5.9

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Comparative Levels of Economic Performance, G5 and China

2003 GDPPer capitaIn 1990 $

2003 Population (million)

2003 EnergyConsumption

2006 Exports

($ billion)

China 4803 1288.4 1409 969Japan 21218 127.2 517 650France 21861 60.2 271 485Germany 19144 82.4 347 1126UK 21310 60.9 232 371USA 29037 290.3 2281 1038

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China is still a relatively low-income country, but this is a favorable position for a nation which wants to achieve rapid catch up.

China’s level of income is still much lower than that of Japan,

China still has great scope to capture the advantages of backwardness, and its period of super-growth can last longer than it did.

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3. How to Understand the Statistics?

Chinese experience has been fascinating, unpredictable and often difficult to understand.

Official statistics still exaggerate GDP growth and understate levels of performance.

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4. Analysis of the Macroeconomic Record

A. Labor inputB. Investment rates and capital inputsC. Total factor productivityD. Structural changeE. Performance in the rural sectorF. Industrial policy and performanceG. The transformation of relations with the

outside worldH. The changing role of fiscal and monetary

policy

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A. Labor Input Employment rose faster than the population of

working age due to increasing participation of women.

Under the household system rural residents were not allowed to migrate to urban areas. They did not have the social benefits which urban dwellers enjoyed.

In the reform period, allocation of labor has improved, particularly in rural areas, where the boom in small-scale industry and service employment absorbed surplus labor from farming.

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Vital Statistics, Labor Input and Education Levels, 1952-2003

Crude Birth Rate

Per 1000

Life Expectancy

at birth

Per cent of Population Employed

Years of EducationPer person

aged 15 and older

1952 37.0 38 36.4 1.701978 18.3 64 41.9 5.332003 13.0 72 49.7 10.20

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Quality of Labor In the reform period, higher education

enrolment has risen very fast, from less than a million in 1978 to nearly 20 million in 2007.

There has also been a surge in the number of Chinese studying abroad.

From 1952 to 2003, the average level of education of the population aged 15 and over increased from 1.7 years to 10.2 years.

Life expectancy at birth rose from 38 years in 1950 to 72 in 2003.

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Student Enrollment by Level of EducationChina, (000s)

Higher Secondary Primary Pre-school

1952 191 632 51100 4241978 856 65483 146240 78772005 15615 85809 108641 217902007 18849 82433 105640 23488

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The Impact of Human Capital Improvement to Economic Growth

The increase in the quality of the labor force contributed importantly to China’s production potential, which was further strengthened by improvements in health.

Improvements in sanitation, diet and wide availability of modern drugs have been the main contributors to increased life expectancy.

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B. Investment Rates and Capital Inputs

The Chinese ratio of inventory change to GDP fell sharply in 2000-2003, when it averaged 1.55 per cent.

Since 1978, capital productivity has improved substantially and capital/output ratio in 2003 was 2.6.

Although the state continues to have a significant role in the allocation of investment funds, the overall impact of greater non-state participation was to direct investment into areas where the yield is higher.

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Investment in Fixed Assets(1980-2003)

固定资产投资

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( )固定资产投资 亿元 增长率

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C. Total Factor Productivity After 1978, the rate of growth of labor input

declined, the rate of growth of the education stock slowed and capital inputs increased at the same pace.

GDP growth accelerated sharply, labor productivity grew much faster than before, capital productivity ceased being negative and total factor productivity increased by 2.95 per cent a year.

The improvement in resource allocation……

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China Basic Growth Accounts(annual average compound growth rates)

1952-78 1978-2003

Population 2.02 1.20GDP 4.39 7.85Per Capita GDP 2.33 6.57Labor Input 2.57 1.89Education 4.49 2.63Quality Adjusted Labor Input 4.87 3.23Non-Residential Capital 7.72 7.73Labor Productivity 1.78 5.85Capital Productivity -3.09 0.11 Capital per Person Engaged 5.02 5.73Total Factor Productivity -1.37 2.95Export Volume 2.60 14.42

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The above table provides a set of simplified growth accounts for the two major phases of Chinese growth: 1952-78 and 1978-2003.

In both periods there were substantial advances in educational levels which improved the quality of the labor force.

International experience

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C. Structural Change There were massive structural changes in

China between 1978 and 2008. Agricultural output and employment grew

much slowly than the rest of economy. The most dynamic sector was industry whose

share of GDP rose to 52 per cent. The service shares of GDP and employment

grew substantially.

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Indicators of Sectoral Growth Rates, GDP and Employment

1952-78 1978-2003 Change

GDP Agriculture 2.20 4.52 2.32Industry & Construction 9.76 9.76 0.00Tertiary 4.18 7.60 3.42Whole economy 4.39 7.85 3.46Employment

Agriculture 2.02 0.51 -1.51Industry & Construction 5.84 2.83 -3.01Tertiary 3.20 3.65 0.45Total employment 2.57 1.89 -0.68

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The industry made a great contribution to China’s economy progress.

The growth rate of industry was 11.1% in 2004. How to understand the lower growth rate of service

sector that was taken place in the last decade? Is it sustainable for China’s economy growth?

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Labor Productivity, Growth Rates

Labor Productivity 1952-78 1978-2003 Change

Agriculture 0.17 3.99 3.82Industry & Construction 3.70 6.74 3.04Tertiary 0.96 3.82 2.85Aggregate Labor Productivity 1.78 5.85 4.07

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The large inter-sectoral differences in labor productivity levels and growth are due in substantial degree to differences in the sectoral distribution of physical capital and education.

These elements of causality are already embodied in the aggregate growth accounts.

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Discussion Structural changes generally reflect two basic

forces which are operative in all countries as they reach successively higher levels of real income and productivity.

The first of these is the elasticity of demand for particular products.

The second basic force has been the differential pace of technological advances between sectors.

Both these forces have been operative in China.

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E. Performance in Rural Sector

Agriculture Rural activity outside agriculture

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Rural/Urban Distribution of Population and Employment, million

Rural Population

Urban Population

Agricultural Employment

Rural Non-Agricultural Employment

Urban Employment

Total Employment

1952 503.19 71.63 173.17 9.50 24.62 207.29

1978 790.14 172.45 283.73 31.50 86.28 401.52

1987 816.26 276.74 308.70 81.30 137.83 527.83

2005 745.44 562.12 318.56 166.30 273.31 758.25

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F. Industry Policy and Performance

Rapid industrialization was the top priority for the new China.

It was expected to provide the flow of materials and machinery to raise the rate of investment and provide the hardware which would guarantee military security.

Industry has been much more heavily capitalized than most other parts of the economy.

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Until 1978, industry was tightly controlled and investment fully funded by government.

In the reform period since 1978, government has operated with much looser rein.

……

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Industrial Competition After 1978, competition fro state firms came

from the huge growth of output in low-cost, low-wage township, village and individual enterprises in rural areas, from rapid expansion in the tax-favored special enterprise zones in coastal areas and from imports which rose from US$11 billion in 1978 to US$660 billion in 2005.

Between 1978 and 2003, industrial labor productivity rose by 6.5 per cent a year.

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The Service Sector Since 1978 retail trade and restaurant activity

has been almost completely liberated and the ownership structure has reverted to what it was in 1952.

After 1978, when the service sector was released from official constraints, it grew very fast. The barriers to entry were small.

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G. The Transformation of Relations with the Outside World

Foreign trade was a state monopoly and was heavily concentrated on imports of capital goods and technology.

The new political leadership which emerged after the mid-1970s decided to abandon the previous policies of autarkic self-reliance and open the economy to the benefits several other Asian countries had derived from an expanding world economy.

A major element in the new policy stance was the creation of special economic zones.

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Chinese export volume doubled from 1952 to 1978 and rose 28-fold from 1978 to 2003.

In 2003 China’s exports were 8 percent of the world total, a substantial rise on the 1978 situation when their share was 0.8 per cent.

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Volume of Merchandise Exports,annual average compound growth rates

1952-78 1978-2003

China 2.6 14.3Japan 13.2 4.1South Korea 26.1 11.2Germany 10.0 4.8United Kingdom 4.6 3.1United States 5.2 5.9

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Value of Merchandise Exports,Constant prices, million 1990 dollars

1952 1978 2003

China 8063 16076 453734Japan 4163 147999 402861South Korea 51 21146 299578Germany 20411 241885 785035UK 45597 148487 321021USA 51222 190915 801784

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Trade In the 1950s, China’s exports were

concentrated on food, raw materials and textiles.

By 2005 the structure of exports was highly diversified, with 86 per cent consisting of a range of manufactures.

Its import structure has also diversified. The geographic distribution of trade has been

highly diversified since 1978.

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FDI In 1978 China had no foreign debt and virtually

no foreign direct investment. The annual inflow of direct foreign investment

rose from $3.5 billion in 1990 to $60 billion in 2003.

The total inflow from 1979 to 2005 was more than $620 billion.

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Important Issues in International Activity Should large and powerful multinational corporatio

ns be encouraged to invest in the developing economies, and if so, under what conditions? How have the emergence of the “global factory” and the globalization of trade and finance influenced international economic relations?

Are free markets and economic privatization the answer to development problems, or do developing country governments still have major roles to play in their economies?

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H. Macro-management and the Changing of Fiscal and Monetary Policy

Size and structure of government revenue and expenditure.

The explosive growth of household savings and the rapid monetisation of the economy were the most important elements preventing a financial crisis.

In 1978 the money supply was less than a third of GDP, but by 2005 it was bigger than GDP.

Since 1978, the government has created a much more complex banking structure.

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Part TwoChina and Development Economics

How does China fit into the received views of development economics?

1. Economic Development in Theory2. China’s comparative economic

performance: a quantitative look.

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1. Economic Development in Theory

What is the real meaning of development, and how can different economic concepts and theories contribute to a better understanding of the development process in China?

What are the sources of national and international economic growth? Who benefits from such growth and why?

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What can be learned from the historical record of economic progress in the now developed world? Are the initial conditions similar or different for contemporary developing countries from what the developed countries faced on the eve of their industrialization?

Why do people continue to migrate to the cities from rural areas even though their chances of finding a job are very slim?

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Some Specificities in China As 65% of China’s populations still reside in ru

ral areas, how can agricultural and rural development best be promoted?

Does China educational system really promote economic development, or is it simply a mechanism to enable certain select groups or classes of people to maintain positions of wealth, power, and influence?

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Economic Development The development is both a physical reality and a sta

te of mind in which society has, through some combination of social, economic, and institutional processes, secured the means for obtaining a better life.

Three Objectives of Development

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To increase the availability and widen the distribution of basic life –sustaining goods such as food, shelter, health, and protection.

To raise levels of living including, in addition to higher incomes, the provision of move jobs, better education, and greater attention to cultural and humanistic values, all of which will serve not only to enhance material well-being but also to generate greater individual and national self-esteem.

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To expand the range of economic and social choices available to individuals and nations by freeing them from servitude and dependence not only in relation to other people and nation-states but also to the forces of ignorance and human misery.

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2. China’s Comparative Economic Performance: A Quantitative Look

A. DemographyB. Savings rateC. Discussion on educationD. Income distributionE. Rural industrialization

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Demography The population growth rates fro China are now

estimated at 0.6 percent a year, approaching those of high-income countries.

China displays considerable geographic variation in population growth among provinces, but the highest rates are only about 1.1 percent and the lowest close to zero.

High male-to-female ratio; Life expectancy

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Demographic VariablesChina India Low Middl

eHigh

Population, billions 1.296 1.08

Population growth, annual,%

0.6 1.4 1.8 0.9 0.7

Infant mortality, per 1000 live births

26.0 61.6 79.5 30.9 6.1

Life expectancy at birth 71.4 63.4 58.8 70.0 78.7

Males per 100 females, ages 0-4

120 107

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Change of Population人口变化

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B. Savings Rate China has achieved high savings rates at much

lower levels of per capita income, and regardless of income levels.

Like other transition economies, the composition of savings has undergoing significant change.

What is particularly interesting is the composition of China’s savings and the differences between income and consumption versus asset accumulation of households.

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C. Discussion on Education World Bank studies often report that China

spends too little on education compared to other countries.

The most common measure of education spending is the GDP share of educational expenditures. 2.2 percent for China in 1998.

Actually, China population looks well educated in comparison with other developing countries.

China’s education improvement is especially evident in the spread of secondary schooling and university levels.

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D. Income Distribution Regional income differences: coast versus

inland regions. Urban-rural income differences: without

migrants, China’s urban-to-rural income ratio is now at about 3.3, and with migrants, the ratio declines to about 3.0. Both these ratios are high by international standards.

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Hukou, Household Registration System While geographic differences in incomes are univer

sal, in China these differences seem relatively large. This raises the question of why this is the case, and

what can be done about it. China’s hukou system and related policies that co

ntinue to hinder rural-to-urban movement are the most obvious explanation.

What can governments do about geographic income differences?

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Household Distribution of Income The well-known Kuznets (1955)”inverted U” hypo

thesis that inequality will first rise and then fall as countries develop has been the subject of many theoretical and empirical studies.

In the early 1980s China was considered one of the more equal countries in the world, with Gini coefficient of less than 0.35. By the 2000, after more than a decade of rapid growth, China’s Gini had risen to about 0.45. This Gini coefficient reflects a level of inequality in the mid to high range compared to other countries.

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In China’s most developed eastern region, inequality initially increased, but then stabilized and now is declining.

The East has consistently been on the forefront of China’s economic reforms and development. If other regions follow suit, then the recent rise in inequality need not be a cause for long-run concern.

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Regional GDP per capita

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Rural and Urban Cases The rural Gini went from 0.24 to 0.36 and the urban

from 0.18 to o.33, and across-the board increase in inequality.

While inequality in China has risen, poverty has declined.

China’s poverty headcount at $1 per day has fallen from 64 to 17 percent between 1981 and 2001.

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Income Gap between Urban & Rural Areas

城乡差别

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上海城市居民收入 上海农村居民收入 河南城市居民收入河南农村居民收入 四川城市居民收入 四川农村居民收入

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E. Rural Industrialization Economists have long recognized the potential

ole of rural industry in the development process.

Rural industry, because of its geographical location and reliance on labor-intensive technologies, can generate employment for underemployed rural workers, increase rural incomes, promote balanced and equitable growth, and provide an alternative to over-urbanization, with its attendant problems of congestion and dislocation.

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The Role of Rural Industry Rural industry in China is generally equated with to

wnship and village enterprises (TVEs). As defined here, China’s TVEs are businesses located in townships and villages that are owned collectively or privately, mainly by rural units and individuals.

They include collectively owned township and village enterprises, joint venture enterprises with significant local owners, and household businesses.

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The pattern of TVE ownership has evolved over time. Initially, collective ownership was dominant, but since the 1990s expansion of private TVEs has been rapid, and many collective TVEs have converted to private ownership.

TVEs operate in all sectors but are overwhelmingly in industry, albeit with a significant presence in the service sector.

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China’s TVE sector has indeed contributed significantly to China’s overall growth and has generated both employment and income for the rural population.

The share of TVE net value added in China’s total GDP has increased from only 6 percent in the early 1980s to more than 30 percent.

Employment in the TVE sector has shown similar, rapid growth. Between 1980 and 2002, TVE’s share of rural employment rose from 9 to 27 percent.

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Explaining the Rise of China’s Rural Industry

What factors explain the growth of China’s rural enterprises, and to what extent are they particular to China?

Can we compare China’s factors for rural industry with other developing countries?

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The Key to the Success of Rural Industry The availability of cheap rural labor; The decentralization of production through

subcontracts with urban enterprises and traders. Subcontracting is important because it provides access to capital funds, technology, and markets, which are often inaccessible to small-scale rural entrepreneurs. It requires to depend on public investments in roads, communications and other infrastructure.

The presence of rational contracting, maintained by personal ties, mutual trust and community obligations……

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Local governments at the township and village levels were key to the initial success of TVEs.

Private entrepreneurs often sought bureaucratic sponsors and registered their businesses as collective firms. This phenomenon was as common that it gave rise to the phase “wearing the red cap.”

Some of these institutional factors have since changed.

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Lessons from the Chinese Experience

The factors underlying growth in China’s rural industry can be found in other economies.

China’s experience has important ways, reflecting the evolution of institutions in the process of economic transition. Thus, China does not provide a model that can be easily transferred elsewhere.

Will China’s rural industry eventually decline?

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Part Three: Conclusions Development economics is a district yet very important exten

sion of both traditional economics and political economy. It is concerned with efficient resource allocation and the stea

dy growth of aggregate output overtime both developed and developing countries.

The world economy will be prosperous in the coming years, which provides many opportunities for developing country to increase their exports.

China will continue to experience the high growth rate and expand its industrial capacity.

China is facing many challenges and issues, which may be turned into the opportunities for development.

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Thank You!