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Unbalanced growth in China --- understanding Chinese Success in a
framework of political economy
Shen ， Ling
School of EconomicsShanghai University of Finance and Economics
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How to find me?
• http://se.shufe.edu.cn/
“people”
“Ling Shen”
“personal web page”
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Target
• Chinese economy grows very fast in last three decades. This should be understood systematically in order to share this experience with other developing countries.
• We focus on two main characteristics of Chinese growth, i.e., an authoritarian political institution and high income inequality.
• For each feature, we show firstly the facts, and then a theoretic model.
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• Briefly introduction of Chinese growth
• Understanding this growth in a framework of political economy
• Who enjoys this success
• Chinese financial system and its effect on growth
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1. A Brief Introduction of Chinese Success (All data without special notes are from Chinese Statistical Yearbook) 1978: 2007:Nominal GDP 364.5 Billion RMB 24953 Billion RMBGDP p.c. 381 Yuan RMB 18934 Yuan RMB
0
5000
10000
15000
20000
25000
30000
GDP(Bi l l i an RMB) GDP per capi ta
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Real GDP
0. 0
200. 0
400. 0
600. 0
800. 0
1000. 0
1200. 0
1400. 0
1600. 0
Real GDP I ndex 1978=100 Real GDP per Capi ta
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Real GDP Growth rate ( in RMB )Growth rate per year (1978-2007)
0. 0
2. 0
4. 0
6. 0
8. 0
10. 0
12. 0
14. 0
16. 0
GDP GDP per capi ta
9%
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WDI online GDP p.c. USD 2000
1970 1990 2008 Growth 70-90
Growth 90-08
China 122 392 1963 5.8 8.9
World 3324 4594 6024 1.6 1.5
High income1294
52133
9 2869
6 2.5 1.6
Low & middle income 637 957 1717 2.0 3.2
Rati o of Chi na to Worl d(%)
0. 0
5. 0
10. 0
15. 0
20. 0
25. 0
30. 0
35. 0
1970 1990 2008
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WDI online GDP p.c. USD 2000
1970 1990 2008 Growth 70-90
Growth 90-08
China 122 392 1963 5.8 8.9
Latin America & Caribbean
2678 3381 4767 1.2 1.9
Sub-Saharan Africa 547 534 619 -0.1 0.8 Rati o of Chi na to Af ri ca(%)
0. 0
50. 0
100. 0
150. 0
200. 0
250. 0
300. 0
350. 0
1970 1990 2008
Sub-Saharan Af ri ca
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WDI online GDP p.c. USD 2000
1970 1990 2008 Growth 70-90
Growth 90-08
China 122 392 1963 5.8 8.9
India 214 318 724 2.0 4.6
Japan1734
53336
940481 3.3 1.1
Korea, Rep. 1994 6895 15447 6.2 4.5
05000
1000015000200002500030000350004000045000
2008
J apan Chi na Korea, Rep.
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2. Possible Reasons of Rapid Growth
LKNAfY ,,
GK , LH ,
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From Jiang, Ze-min (Journal of Shanghai Jiaotong Uni., 2008 42(3))
2.1 Nature resources
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2.2 Investment
Total i nvestment (Tr i l l i on RMB)
02468
10121416
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2.2 Investment
The Composi ti on of GDP
-100
1020304050607080
consumpti on i nvestment net export
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Infrastructure “ 要致富，先修路”
1 1 11. 42
2. 19
10. 23
0
2
4
6
8
10
12
Rai l way road Ai rl i nes
1980=1 2005
Railway Road Airlines Highway
1980 53.3 883.3 195.3 0.1*
2005 75.4 1930.5 1998.5 41
Units: 1,000KM *: Data in 1988.
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1 568. 0
39340. 6
35044. 5
0
5000
10000
15000
20000
25000
30000
35000
40000
45000
移动电话年末用户 本地电话年末用户
1989 2005
1000pcs Mobile phone Telephone
1989 10 5,680
2005 393,406 350,445
Telephone( per 1000 persons) Mobile phone
1990 2000 2004 1990 2000 2004
World 98.96 161.32 191.43 2.13 122.47 279.43
China 6.03 114.7 241.05 0.02 67.52 258.32
USA 545.28 682.13 605.97 21.16 387.91 616.73
India 5.97 31.93 40.71 0.08 3.52 43.81
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2.3 Human Capital
The adult literacy rate
1990 2004
Middle-income countries
80.71 89.79
China 78.29 89.68
India 49.32 61.01
Russia 99.25 99.44
University Enrolment
rate2000 2004
World 19.5 24.8
Middle-income countries
16.3 26.5
China 7.6 19.1
India 10.2 11.8
Japan 47.4 54
USA 69.2 82.4
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2.4 Market-oriented reform: privatization and open-door policy
Empl oyees i n Pr i vate Enterpr i ses
0. 81 4. 50 6. 71 9. 56
24. 06
65. 86
91
10 9
30 29
0. 00
20. 00
40. 00
60. 00
80. 00
100. 00
1980 1985 1990 1995 2000 2006
Empl oyees i n Pr i vate Enterpr i ses(Mi l l i on) Annal growth rate(%)
• Is China already a market economy?
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FDI (Bi l l i on USD)
0. 0010. 0020. 0030. 0040. 0050. 0060. 0070. 0080. 00
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Share of FDI rel at i ve to Total I nvestment (%)
02468
1012141618
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
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3. Economic growth in dictatorship• Most developing countries have dictatorial political institution.
Sample（ 157）
GDP per capita[USD] Average
growth rate
[% p.a.]
Civil Liberty Index
1972-741970 2004
Developing 113 300 2370 4.78 4.56
Developed 44 2446 28550 6.66 2.81
• Civil Liberty Index: from Freedom house
1.0 --- 7.0 political environment of economic development.
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• Discussion in a political economy model
3.1 Do we “need” a dictator? 3.2 When will a dictator be “good”?
3.3 When will democratization happen?
.
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3.1 Do we “need” a Dictator?
0. 010. 020. 030. 040. 050. 060. 070. 080. 090. 0
pri vate consumpti on publ i c consumpti on
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Some facts:• Democracy
has higher growth rate on average
• and quite stable --- less hope to catch up
• Dictatorship is a risky project
C.L.Sample
157
Civil Liberty Index
1972-74
Average growth
rate[% p.a.]
Variance of growth
rate
7~6 42 6.38 4.37 8.03
5.9~5 27 5.22 4.46 6.28
4.9~4 18 4.28 4.44 5.49
3.9~3 23 3.26 6.00 4.32
2.9~2 28 2.08 6.07 5.51
1.9~1 19 1.02 7.46 0.89
Ave 4.07 5.84 6.62
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Dictatorial countries: Index of civil liberties (1.0 - 7.0) bigger than 6.0 in 1972/74. All data from UN and Barro-Lee 1994.
real GDP p.c. of some dictatorial countries 1970-2000
0
2000
4000
6000
8000
10000
12000
14000
Congo(democratic rep.) Gabon Guinea-BissauMali Mozambique UgandaChina Korea(South) Oman
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• Do we “need” a Dictator?• Barro (1996): “Democracy and growth”, Journal of economic
growth(1),pp.1-27
• Tarares and Wacziarg (2001): “How democracy affects growth”, European Economic Review (45),pp.1341-1378
• Democracy: Advantage: more human capital investment, less inequality Disadvantage: less physical capital investment
• Dictatorship: Advantage: more infrastructure (physical) investment Disadvantage: more corruption
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Main features of the model1. Utility function:
2. Production function:
tt
tt
NAkY
Aky
0,10,,
)ln()1(ln
gpi
bCU ii
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3. Capital evolution functions:
4. Political institutions:
dictatorship: the single ruler decides the tax rate and
investment
democracy: simple majority rule – the median voter
gt
ptt
tt
bbb
kbkk
0010
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• The optimality problem in democracy ：
Proposition 1 ： If there is no government, or government is democratic,
the economy could have a zero growth rate – in a “poverty trap” -- under certain conditions.
bcyts
bcUb
..
ln1lnmax
11
10
01
1
yify
yif
b
bbydb
dU
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• The optimality problem in dictatorship ： For individuals:
• Proposition 2 ： If there is a selfish dictator, the incentive of private
investment decreases.
Nbbb
bcyts
bcU
gp
pp
pp
b p
/
1..
ln1lnmax
)1)(1(
)/()/()1(1
)1)(1(
)/(0
NbyifNby
Nbyif
bg
g
g
p
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gp
gg
gg
b
bNbb
bcNyts
bcUg
..
ln1lnmax
N
NbyifNbNy
N
Nbyif
bp
p
p
g
)1(
)()(1
)1(
)(0
For dictator：
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• Proposition 3 ： Under certain conditions, even a selfish dictator would
lead the economy to leave the “poverty trap”, i.e., to achieve a positive growth rate.
1)1( 00 AkyN
0** pb
01 0 Nybg
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3.2 When will a dictator be “good”?
• “Stability overrides everything.” ---- Deng, xiaoping
稳定压倒一切 －－－ 邓小平 • McGuire, M.C. and Olson, M. (1996) “The Economics
of Autocracy and Majority rule”, Journal of Economic
Literature 34, pp.72-96
• Timing:
Private Investment
Production
Expropriation
Growth- enhancing policy
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• Shen, ling (2007) “When will a dictator be good?” Economic Theory 31(2), pp. 343-366
• Endogenous life-time of dictatorship:
• Political transition (Gun Model)
Parameters revealed
Citizens:
revolution or not?
Dictator: good policy or bad one?
Investment Production
Expropriation
Dictator: represses or not?
revolution
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• Dictator has incentive to transfer more to
citizens if they have a lower incentive to invest.
• Emphasize the trade off faced by the dictator:
---economic benefit in short term
---induce earlier revolution in long term
• Stability does not necessarily lead to a better
dictator.
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4. Who enjoys ?
• Poverty level: <100 yuan p.c. in 1978 250 Million• <625 yuan p.c. in 2000 32 Million
Poverty Rati o(%)
0
5
10
15
20
25
30
35
1978 1984 1985 1986 1987 1988 1989 1990 1992 1994 1995 1997 1998 1999 2000
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• In general, Gini coefficient of the income increases since 1985.
Rel at i ve i ncome of the rural to the urban
0. 00
0. 10
0. 20
0. 30
0. 40
0. 50
0. 60
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HH Income(RMB) in each province (2007)
0
5000
10000
15000
20000
25000
30000Shanghai
Zhejiang
Beijing
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What is the effects of income inequality on economic growth?
• Traditional ideas:
– The saving rate increases in the income.
– The rich saves more than the poor proportionally.
– Hence, redistribution from the poor to the rich will increase the aggregate investment
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What is the effects of income inequality on economic growth?
The poor The rich Aggregate
Income 400 400 800
Saving rate 30% 30% 30%
Save 120 120 240
Income 200 600 800
Saving rate 10% 50% 40%
Save 20 300 320
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• Lucas Puzzle (1993)
– South Korea and the Philippines were similar in the early 1960’s with respect to: GDP per capita, Population, urbanization, HC etc.
– However, the growth rates in following 30 years are very different: 6% vs. 2%
What is the effects of income inequality on economic growth?
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Gini
(%)
Q1 Q2 Q3 Q4 Q5 Q3+Q4
Q5/Q1 Q5/
(Q1+Q2)
1965
Korea 34.34 5.8 13.54 15.53 23.32 41.81 38.85 7.21 2.16
Philippines
51.32 3.5 12.5 8 20 56 20.5 16 3.5
1988
Korea 33.64 7.39 12.29 16.27 21.81 42.24 38.08 5.72 2.15
Philippines
45.73 5.2 9.1 13.3 19.9 52.5 33.2 10.1 3.67
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• From anecdotal to formal empirical evidence– Alesina and Rodrik (1994)– Persson and Tabellini (1994)– Perotti (1992,1994,1996)
• Initial inequality is detrimental to long-run growth.
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What are the effects of income inequality on economic growth?
• Bénabou, Roland. (1996) “Inequality and Growth” in Ben S. Bernanke and Julio J. Rotemberg, eds., NBER macroeconomics annual 1996. Cambridge, MA: MIT Press, pp. 11-74.
• Ling Shen (2009) “Urban-rural disparity: the demand analysis” The Journal of Developing Area 43(1) pp.87-107
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Overview
• Theories:
– Imperfect capital markets– Political economy– Social conflict model
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4.1 Imperfect capital markets
input
output
Production function
100
100
<100
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• What is this kind of output?
– Human Capital
– The poor guy can achieve more human capital than the rich when both of them get 1 Dollar additionally.
– If there is a perfect capital market
– The poor can borrow from the rich
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– However, the capital market in reality is imperfect.
– Hence, redistribution from the rich to the poor is good for the economic growth.
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4.2 Democracy
• The poor is majority.
• They choose a higher income tax to expropriate the rich.
• The rich expect such expropriation.
• Hence, they invest less.
• Lower economic growth
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4.3. Social conflict and Property rights
Good Bad
Good 40, 60 10 , 70
Bad 50, 30 20, 40
• A prison’s dilemma with capital accumulation
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5. Unbalanced economy in China: capital market
• Literature: Growing like China (Song 2009)
• Some stylized facts:
– High saving rates and huge investment
– What should we expect with this fact?
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– high return rate of capital
– What should we expect with this fact?
– huge foreign reserves
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• A theory with two sectors: SOE & DPE
– SOE is less efficient
DPE is more efficient
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• A theory with two sectors: SOE & DPE
– However, Chinese banks are SOE, too.
– Hence, it is much easier for SOE to get loans from financial markets.
– DPEs have to save for themselves.
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• A theory with two sectors: SOE & DPE
– Starting from huge investment
– Although both sectors have a decreasing tendency of the return rate, the share of DPE increases.
– It leads to a moderate decreasing return to capital in China.
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A theory with two sectors: SOE & DPE
T T+1
Share of GDP(%)
The return of
capital(%)
Share of GDP(%)
The return of
capital(%)
SOE 80 20 20 15
DPE 20 40 80 30
Total 24 27
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• A theory with two sectors: SOE & DPE
– China is an open economy
– Growing income and saving
VS.
decreasing SOE share
– huge foreign reserves
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• A theory with two sectors: SOE & DPE– The Evolution of the economy
Saving Banks
Foreign countries SOE DPE
x
Saving Banks
Foreign countries DPE