The Chinese Economic Miracle: Looking back and Looking Forward

Teachers as Scholars at King’s

Dr. Peter IbbottAssociate Professor of EconomicsKing’s University College at the University of Western Ontario

March 28, 2014

Readings: • “China 2030: Building a Modern, Harmonious, and

Creative High-Income Society” • published by the World Bank and available at • http://

www.worldbank.org/en/news/2012/02/27/china-2030-executive-summary

• “Is China Overinvesting and Does it Matter”• Published by the IMF and available at • https://www.imf.org/external/pubs/ft/wp/2012/wp12277.pdf

• “Supersized cities: China’s 13 megalopolises “ • published by the Economist and available at• http

://www.eiu.com/Handlers/WhitepaperHandler.ashx?fi=Megalopolis_Report_July_2012.PDF&mode=wp&campaignid=Megalopolis2012

Shanghai: Bund

Shanghai: Pudong

China and India Compared: GDP per CapitaSource: IMF

2011 Nominal GDP in US$ billions (Source: IMF)

Annual disposable income - urban and rural households

Some Development Indicators• Different Paths: India and China Compared• Development and Education • Development and Poverty• Development and Inequality: Kuznet’s Curve

China's energy generation, 1971-2005

Vehicle sales 2007-2012

Pork consumptionPork has long been the most popular meat in China, but consumption was traditionally limited by the weak spending power of most of the population. As people's incomes have risen strongly since the 1990s so the amount of pork purchased has soared.

China US1990 310 million 1990 85.4 million2010 666.9 million 2010 110.4 million

Basic Education

• 1950: 20% over age 15 are literate• 2007: 93.3% over age 15 are literate while

99% of 15-24 year olds are literate• 2009, PISA (Program for International Student

Assessment) international rankings of 15 year olds placed Shanghai students first in the world in mathematics, science and literacy

Health

• 1949: Average Life Expectancy of 35 years• 2012: Average Life Expectancy of 74.8 years• Life Expectancy and per capita GDP • But life expectancy would be much higher if

respiratory illnesses (cigarettes, air pollution) could be reduced, water quality improved and food safety increased.

• Improvements to public health should provide huge gains in life expectancy.

Q: In what ways has China’s economic miracle failed to improve society?

• Pollution• Congestion

Pollution: Economic cost to the environment (2011)

100-km Chinese traffic jam enters Day 9Last Updated: Monday, August 23, 2010 | 1:43 PM ET CBC News

External LinksXinhua: Highway jam enters its 9th day, spans 100km(Note: CBC does not endorse and is not responsible for the content of external sites - links will open in new window)

                  (David Gray/Reuters)

A nine-day traffic jam in China is now more than 100 kilometres long and could last for weeks, state media reported Monday. Thousands of trucks en route to Beijing from Huai'an in the southeast have been backed up since Aug. 14, making the National Expressway 100 impassable, Xinhua News reported. A spokesman for the Beijing Traffic Management Bureau reportedly told China's Global Times newspaper that the backup was due to "insufficient traffic capacity … caused by maintenance construction.“ The construction is scheduled to last until Sept. 13.Stranded drivers appear to have few options when it comes to dealing with the jam. At least some drivers have complained that roadside vendors have increased their prices to take advantage of the traffic jam. One truck driver said he bought instant noodles from one vendor for four times the original price.

Q: In what ways has China’s economic miracle failed to improve society?

• Corruption• Consumerism

– Endless pursuit of status goods– Rising Search for spiritual alternative (Christianity

is growing very fast)– Vice (drugs, gambling, prostitution) is a rising

menace.– Congestion

Q: In what ways has China’s economic miracle failed to improve society?• Growing need for political and legal reform.

– Tiananmen Square Protests of 1989– Internet and press are subject to heavy handed censorship– Courts and police are corrupt and serve interests of the

party– Despite this, the government is having difficulty resisting

change:• Failure to introduce national history curriculum in Hong Kong • Need for legal reform to sustain investment

• Inequality – market socialism has failed to deliver distributive justice.

Culture does not determine inequality.

• Canada: Gini = 32.1• Korea: Gini = 31.4• Taiwan: Gini = 34.2• Peoples Republic of China: Gini = 41.5• Hong Kong: 53.3

Politics and economic policy matters!!!

Overpopulation• One child policy introduced in 1978 (Deng Xiaoping)• Less impact on growth than is commonly believed and has

caused a number of unintended consequences of enormous importance: – Increased the proportion of males to females– Encouraged the state to use its power to violently intervene in the

most important decisions made by ordinary families. – Has caused China to have a rapidly aging population which will

soon increase the dependency ratio and further weaken the already weak social safety net

– Will put increasing pressure on the health care industry and further reduce access to primary health care for most ordinary Chinese families.

Q: Does overpopulation prevent China from overcoming its problems?

Population and Population Growth Rate

http://upload.wikimedia.org/wikipedia/commons/3/3e/China_Pop_Pyramid_Forecast.gif

Population and Population Growth Rate• 2 AD: 86,000,000• 1000: 87,000,000• 1500: 110,000,000• 1800: 260,000,000• 1900: 400,000,000• 1950: 546,815,000• 1982: 1,008,065,000 (reaches 1 billion)• 2010: 1,337,825,000 (almost 1 in 5 people live in China)• 2020: 1,387,792,000• 2030: 1,393,076,000• 2040: 1,360,906,000• 2050: 1,295,604,000

Q: Where do all these people live? Population Density

Q: Where do all these people live?

Overpopulation: Rural-urban migration is dramatically reshaping China• Urban growth was slow rising from According to the 1953 and 1982 censuses,

the urban population as a percentage of total population increased from 13.3 in the 1953 census to 20.6 percent in the 1982 census.

• From 1982 to 1986, the urban population increased dramatically to 37 percent of the total population as rural agricultural workers left the land in the largest rural urban-migration in human history.

• By 2000 this had risen to 50% of the total population (650 million)• Between 2010 and 2025 an additional 300 million people are expected to leave

the countryside and move to the cities taking the urban population to 75%. Rural urban migration has caused the rise of super-megalopolises• Guangzhou: ≈ 41 million• Beijing-Tianjin : ≈ 30 million• Shanghai: ≈ 25 million

Number of Cities in China with 1 million people or more34 in 2000, 102 in 2012, 221 in 2025

Q: What do all these people want?

• Middle class lifestyle:– Car (already world’s largest automobile market)– TV, Internet, Music, Movies, Mobile phones

• http://www.youtube.com/watch?v=9bZkp7q19f0

– Consumer goods• Global brands are coveted

– Status recreational activities – Quality Education in the Arts and Science– Home ownership

Q: What Caused the Chinese Economic Miracle?

Mao’s Revolution and Stagnation1949-58: Mao consolidates power • encourages families to have more children• introduces China’s first five year plan based on the

Soviet model • the “Commanding Heights” of the economy are to be

seized by large state monopoly firms pursuing heavy industrial development.

Mao’s Revolution and Stagnation1958-61: Mao abandons the soviet industrial development model for “The Great Leap Forward” to “grass-roots” or agrarian socialism. Policy turns away from the commanding heights towards rural development. • Small rural agricultural collectives were merged into

large, rural “People’s Communes” in order to better exploit the gains from the division of labor.

• The People’s Communes:– Banned all private holdings/gardens– Introduced new farming techniques that would turn China

into a grain exporter– Accelerated the construction of state infrastructure, – Increased steel production by using backyard furnaces.

Mao’s Revolution and Stagnation1959-61: “The Great Leap Forward” begat the “Great Chinese Famine” where between 18 - 45 million died of starvation, while 200 million suffered from serious malnutrition. During this time, China exported grain.

1961-65: The failure of the Great Leap Forward causes the party to force Mao into a ceremonial role within the party. • Leadership of Economic Policy is assumed by Liu Shaoqi

and Deng Xiaoping. • They reversed the Great Leap Forward by breaking up the

People’s Communes. • Deng famously argues that "It doesn't matter whether it's

a white cat or a black, I think; a cat that catches mice is a good cat."

Mao’s Revolution and Stagnation1966-76: Mao encourages the Cultural Revolution and uses it to purge Liu Shaoqi, Deng Xiaoping, and other leaders of the CPC who had earlier opposed him. • The Red Guards are placed at the vanguard of class struggle

against “right leaning elements” who had resisted agrarian socialism.

• Grass-roots revolutionaries go on a campaign to identify and purge perceived enemies of the new order through campaigns of forced self criticisms and re-education through labor.

• The aims of the cultural revolution expanded to shift power out of the cities to the grass-roots people’s collectives.

• Works of historical and cultural value are destroyed because they were thought to be at the root of "old ways of thinking".

An Economic Revolution Begins• Mao dies in 1976. Hua Guofeng is Mao’s anointed

successor. He takes power and moves quickly to marginalize extremist elements within the party. The Gang of Four are arrested and the cultural revolution ends.

• 1976-80: Deng Xiaoping consolidates his power in the party and quietly pushes Hua Guofeng into retirement. The transition is peaceful.

• 1978: Deng introduces significant economic reforms aimed at introducing “market socialism” under a new banner “Socialism with Chinese Characteristics”.

The Chinese Economic Miracle

Economic Revolution: Stage 1 (1978-84) • De-collectivization of agriculture, and the introduction of the

“household responsibility system”. Farmers are granted long term leases and allowed to privately farm and sell their produce in new private markets.

• Agricultural output growth dramatically accelerated to 8.2% a year, agricultural prices fell, meat and vegetable production rose dramatically.

• Special Economic Zones were created that permitted foreign investment and encouraged local entrepreneurs to start up businesses.

• But: most industry remained state-owned.

The Chinese Economic Miracle

Economic Revolution: Stage 2 (1985-2010)• the privatization and contracting out of much state-

owned industry• lifting of price controls, protectionist policies, and

regulations, • But: state monopolies in sectors such as banking and

petroleum remained. • But: The conservative Hu Jintao Administration more

heavily regulated and controlled the economy after 2005, reversing some reforms.

The Chinese Economic Miracle

Impact of Economic Reforms• Overall the reforms unleashed economic growth

that is unprecedented in human history– GDP Growth rate of 9.5% a year– China's economy became the second largest after the

United States. – More than 500 million people lifted out of poverty– Now the world’s largest exporter and manufacturer– In transition from middle-income to high-income

status.

The Chinese Economic Miracle

Why did the economic reforms work?• The sources of economic growth are:

– Growth in the Labour Supply – Growth in Capital – Growth in Productivity

• Growth in GDP per capita requires– Capital Deepening (K has to grow faster than L)– Total Factor Productivity has to rise

• The reforms to agriculture and the introduction of private enterprise increased the productivity early in the process

• Later reforms encouraged a high savings rate while encouraging private investment by domestic and foreign enterprise.

The Chinese Economic Miracle

Will the miracle of high growth continue?• As the process continues, limits to growth begin to

assert themselves• Labour growth will decline because of the a stagnant

population and the reduced flow of rural migrants to the cities.

• Productivity growth will begin to slow as technology in China catches up to leading economies. – The Law of Convergence.

• Capital growth has fueled the last 15 years of growth, and this is not sustainable.

The Chinese Economic Miracle

Why are high levels of investment unsustainable? • Micro studies of firms show evidence of over-investment by State

Owned Enterprises (SOE’s) and many private enterprises.• China’s banking system is biased towards SOE’s and many of these are

very vulnerable to defaulting on their debt if there is a downturn in demand.

• Much of China’s investment has been directed at the housing sector and there is considerable evidence of a speculative bubble in prices and over-supply in the housing stock.

• Over the last 10 years, the capital-output ratio has risen faster and higher than levels seen in other developing countries. At the same time there has been a fall in the return to capital. Eventually a tipping point will be reached. A rapid adjustment could cause confidence to collapse triggering a financial crisis, recession and a potentially very hard landing.

Two questions:1. Can China’s growth rate still be among the highest in the

world even if it slows from its current pace?2. Can it maintain this rapid growth with little disruption to

the world, the environment, and the fabric of its own society?

The World Bank report answers both questions in the affirmative, i.e., by 2030, China has the potential to be a modern, harmonious, and creative high-income society. Achievable but neither certain nor easy.

What are the risks and challenges?

1. Internal Risks and Challenges• depletable resources• demand-pull and supply-push inflation • demography, aging population • pace of human capital accumulation

2. External Risks and Challenges• global economic slowdown• high resource prices• new emerging competitors

What does China need to do?Implement a NEW long term strategy for the next phase of development. The 12th Five Year Plan an excellent place to start. The IMF Report recommends that China seek to implement policies that: 1. Complete the transition to a market economy2. Accelerate the pace of open innovation3. Go green4. Expand Individual Opportunities and Improve

Social Services5. Fiscal Reform6. Become a responsible Global Player

1. Complete the transition to a market economy

• Implement structural reforms,• Strengthen the foundations for a market-based economy, • Redefine the role of government its relationship to markets and

the private sector,• Reform and restructuring state enterprises, developing the

private sector,• Promote competition, • Provide more intangible public goods and services like systems,

rules,• Introduce modern corporate governance practices, e.g.,

separating ownership from management

Financial sector reform: • Allow commercializing the banking system,• Allow interest rates to be set by market forces,• Deepening the capital market, • Developing the legal and supervisory

infrastructure to ensure financial stability, • Build the credible foundations for the

internationalization of China’s financial sector.

Labor market reform: • Ensure workers can move in response to market

signals,• Introduce measures to increase labor force

participation rates, and• Use social security instruments (pensions, health,

and unemployment insurance).

Land reform: • Increase efficiency of land use, • Reform policies for acquisition of rural land for

urban use, and• Reduce local government dependency on land-

related revenues.

2. Accelerating the pace of open innovation Needed: An open innovation system that fosters both

Product and Process innovation How? Increasing Chinese domestic R&D

1. By participating in global R&D2. By establishing a research and development

infrastructure via:a) increase the technical and cognitive skills of

university graduates,b) build a few world-class research universities with

strong links to industry, andc) foster research parks, innovative cities.

3. Go green

Why ?

• Increased efficiency, • Improve the level of well-being,• Sustain comparative advantage,• Achieve and sustain economies of scale, and• Sustain rapid growth.

How ?

• Public education and awareness,• market incentives,• Regulations, • Public investments, • Industrial policy, and• Institutional development.

4. Expand Individual Opportunities and Improve Social Services

• Expand opportunities and promote social security,• Facilitate equal access to jobs, finance, quality social

services, and portable social security,• Help households manage employment, health, and age-

related risks,• Increase labor mobility,• Manage the large rural-urban differences in access to jobs,

key public services, and social protection.

4. Expand Individual Opportunities and Improve Social Services

• Deliver more and better quality public services to under-served rural areas and migrant,

• Restructure social security systems to ensure secure social safety nets

• Mobilize all segments of society, public and private, government and social organizations, to share responsibilities in financing, delivering and monitoring the delivery of social services.

5. Fiscal Reform

Three key dimensions: 1. Mobilize additional fiscal resources to meet rising

budgetary demands,2. Reallocate spending toward social and

environmental objectives3. Ensure that budgetary resources available at

different levels of government.

Note: fiscal reform as an essential prerequisite for many of the other reforms

6. Becoming a Global Player 1. Seek mutually beneficial relations with the world,2. Use multilateral institutions and frameworks and open regionalism,3. Intensify trade, investment, and financial links with the global

economy,4. Seize the benefit from further specialization, and diversification,5. Integrate into the global financial system, which will involve opening

the capital account,6. Take steps toward internationalizing the RMB as a global reserve

currency,7. Help shape the global governance agenda such as:

• climate change,• global financial stability, • effective international aid structure,• development in poor nations.

Substantial hurdles ahead:• The risk of a hard landing in the short term, • Challenges posed by an ageing and shrinking

workforce, • Rising inequality, • Environmental stresses, and• External imbalances and shocks.

The Chinese Economic Miracle: Looking back and Looking Forward

Teachers as Scholars at King’s

End

Dr. Peter IbbottAssociate Professor of EconomicsKing’s University College at the University of Western Ontario

March 28, 2014