The Economics of ChinaRAE 2015

Chirantan Chatterjee

What have we learnt so far about China?

• Lewis Model.

• Ethnic Strifes and the Opium Wars.

• The China-Japan relationship.

• Exports & Revealed Comparative Advantage of some sectors in China.

• China’s e-commerce industry.

Key Learnings

• China is not the first East Asian nation to grow rapidly for a sustained period

• There are important parallels between aspects of Chinese economic growth and those of other Asian countries

• These parallels include both strengths and weaknesses

• The weaknesses have the potential to limit China’s growth prospects

But China is Truly so much More to Ponder About

“ Even if it is a fading symbol of Chinese society, the bicycle remains atempting metaphor for its economy. Bikes especially when fully ladenare stable only so long as they keep moving. The same is sometimessaid about China’s economy. If it loses momentum, it will crash. Andsince growth is the only source of legitimacy for the ruling party, theeconomy would not be the only thing to wobble.”

The Economist, May 2012 Special Report on China

China in Global Economic HistoryChina’s changing share in the global economy, 1820-2001 (%)

Note: The proportion of the Chinese economy in the world in this figure is calculated based on estimated PPP data.

Source: Maddison (1998) and Penn World Tables.

0

5

10

15

20

25

30

35

40

1820 1870 1913 1950 1980 2001

% of Global GDP (PPP

China’s Dynasties

• China unified under the short-lived Qin dynasty (221 B.C. – 206 B.C.)

• China’s revered Han dynasty (202 B.C. – 220 A.D.) traded silk with the Roman Empire

• China re-united under the Tang dynasty (618-907)

• China lost ground militarily but gained ground technologically and economically under the Sung dynasty (960-1279)

• The Mongols dominated China for a century, during which Marco Polo visited the country

China’s Long Decline

• The Ming dynasty (1368-1644) repelled the Mongols, but turned China inward and penalized the merchant class

• Manchu invaders established the last imperial dynasty (1644-1912), but failed to halt China’s stagnation

• The Manchu dynasty was shaken by a devastating civil war, the Taiping rebellion (1850-1865)

• The Western world’s technological lead over China widened dramatically, leading to ill-matched military confrontations in the 19th century

A half-century of chaos

• The collapse of the imperial regime (1911-1912)

• The Warlord Era (1912-1928)

• The Nationalists (1925-1949)

• Japanese invasion (1930s-1945)

• Civil War (1945-1949)

• Average per capita GDP growth, 1900-1950 was negative!

China in the early 1950s

• Unification of the mainland under communism

• China’s “peace dividend”• The restoration of peace and civil order prompted an economic recovery

• China’s relatively moderate policies• Top leaders did not move to immediately “communize” China

• Early policies focused on restoration of stability rather than achievement of utopia

The Chinese economy under communism

1953

1955

1957

1959

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

0%

10%

5%

-10%

Annual Growth Rates in Real Consumption, 1953-1988

Source: Chow, 1993

The Great Leap Forward

The Chinese economy under communism

1953

1955

1957

1959

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

0%

10%

5%

-10%

Annual Growth Rates in Real Consumption, 1953-1988

Source: Chow, 1993

The Cultural Revolution

4th Decade of China’s Economic Reforms

• Growth • Exports• Infrastructure• Reserves• FDI

• Consequences of Growth • Inequality• Spatial Divergence• Corruption• Migrant Workers, Foxconns, Possibility of Future Structural Employment• Environmental Pollution & Carbon Emissions

So What Do we know of the Chinese Economic Reforms from the 1970s?• Decollectivization of agricultural production & Land user Rights.

• HRS (farmers made production decisions)• HRS resulted in output in agriculture increase by 61% between 78-84 and HRS’

contribution was close to 50% of that output increase (Lin, 1992).

• TVEs in the mid 1980s• Why did they come about?• What did they do in comparison to SOEs?• Result?• TVE 22% in 1978 -> 47% in 1991 | SOE 78% -> 53% (Qian & Xu 1993). • TVE peaks mid-1990s (129million in 1995 from 30 million in 1980) • TVE share of GDP 37.5% in 1995 from 14.3% in 1980.

The Death of Commune Agriculture

0

20

40

60

80

100

1979 1980 1981 1982 1983 1984

1 %

14%

45%

80%

98% 99%

Percent of households in Household Responsibility System

Source: World Bank

TVEs & HRS in China (Huang 2012)

TVEs & HRS in China (Huang 2012)

How About Changes in Urban-China?

• Started only in the late 1980s

• Entry barriers reduced for formation of de-novo private firms

• ‘Grasping the big, and letting go of the small’ strategy.

• Exports allowed FDI spikes

• Spillovers on TVE & SOEs – How?

Broader Issues - Exports

• Cheap Labor & Comparative Advantage

• Special Zones in Coastal Areas 1978-to-mid2000s.

• China entered WTO in 2002.

• Internal Migration:• 25 million in 1990 to 145 million in 2009

• 6 to 36 Bangalores

• India numbers? 309 million.

• Any guesses on when they started filling the pinch of labor shortage & the possibility of Lewis turning point?

Broader Issues - What about Poverty in China?

• Migrating rural folks supported rural incomes.

• Poverty incidence has dropped to 10% from 50%+ in the 1970s• Infant mortality 39% (1981) to 13% (2010)

• Illiteracy 1/3rd to 1/25th

• Life expectancy [35 (1949) -> 68 (1981) -> 75 (2010)]

• But there is a nuance to poverty reduction – what?• Temporal & spatial heterogeneity – what do I mean by that?

• HRS resulted in a 6 year spell of sharp poverty drop 1980-1986

• Pace slowed down thereafter w/urban poverty emerging.

Broader Issues – Shift in Economic COG

• From Agriculture to Industry• 40% in 1960 to 10% of GDP in 2010. • Industry? 50%• Services – 40% - increasing but not by as much as in India, SA & Brazil for example. • Even poor compared to Cambodia, Vietnam, Ethiopia.• Reminds you of something here from the Japan story?

• Structural changes in Agriculture• A shift from grain-focus to higher value cash-crops. • Nutritional patterns have changed.• Food prices are on the rise. • Employment moving from agriculture to industry (77% of the population in the urban cities

by 2050). • Any guesses then on what is happening to agriculture per se as labor moves out of it?

• Mechanization and consolidation.

Years taken to reduce the share of agriculture in the labor

force from 70% to 50%

0 10 20 30 40 50 60 Years

China 1978-1995

Japan 1870-1929

United States 1820-1870

Philippines 1950-1980

60 years

17 years

30 years

50 years

A rapid shift of labor out of agriculture...

Source: World Bank

Recent Development: Manufacturing is struggling to staycompetitivehttps://www.youtube.com/watch?v=HBWv_drz77I

Horserace between internal/external changes

China’s CRTS Model

• Gradual & progressive approach.

• Piloting and experimenting, then scaling up. • Classic example is rural reform starting with Xiaogang Village in Anhui

province. • Openness to foreign trade: SEZs -> lower tax rates & institutional autonomy -

> few regions -> high-tech & free zones.

• Why was this CRTS model pragmatic?• Mid-course corrections• Time to build accompanying institutions• Dual track to sustain new and old policies (protection & liberalization)• But could have engendered corruption.

• India’s example transcending political regimes?

China Going Forward: Income Inequality

• Income inequality & the Hukou system from 1951

• Urban-Rural income gaps became better from introduction of HRS but there is still within urban and within rural inequality.

• Key reason?• Urban: retrenchment of SOE workers in 1990s.

• Rural: non-farm job opportunities varies across regions.

• Income inequality & the Hukou system from 1951• Solutions?

• Competition to SOE & Elimination of Hukou?

• Easterlinian Tendencies

China Going Forward: Easterlinian Tendencies"Upon Hearing the News of Xu Lizhi's Suicide"by Zhou Qizao (周启早), a fellow worker at Foxconn

每一个生命的消失The loss of every life都是另一个我的离去Is the passing of another me又一枚螺丝松动Another screw comes loose又一位打工兄弟坠楼Another migrant worker brother jumps你替我死去You die in place of me我替你继续写诗And I keep writing in place of you顺便拧紧螺丝While I do so, screwing the screws tighter今天是祖国六十五岁的生日Today is our nation's sixty-fifth birthday举国欢庆We wish the country joyous celebrations二十四岁的你立在灰色的镜框里微微含笑A twenty-four-year-old you stands in the grey picture frame, smiling ever soslightly秋风秋雨Autumn winds and autumn rain白发苍苍的父亲捧着你黑色的骨灰盒趔趄还乡A white-haired father, holding the black urn with your ashes, stumbles home.-- 1 October 2014

Source: https://libcom.org/blog/xulizhi-foxconn-suicide-poetry

China Going Forward: It’s Environment

• Air: Beijing is the victim!

• Water: 57.3% of groundwater in 198 cities was “bad” or“seriously bad” and about 1/3 of national major rivers weredeemed “polluted” or “seriously polluted.” 1,000 out of 4,000water treatment plans did not meet the national standards(Economist, 2013).

• 29% of World CO2 emissions w/the ‘world’s factory’ in 2011.

• Food Safety.

China Going Forward: It’s Economic Geography

• Long history from the Qing dynasty.

• Great Leap Forward & Great Famine exacerbated regionalinequality in the 1960s, became better in the 1980s, but againdiverged with coastal development.

• China’s Go West Strategy.• 70 construction projects.

• 1 trillion Yuan.

• Heterogeneous policy responses to address provincial issues,Guangdong’s problems are different from Sichuan’s.

China Going Forward: The World & China

International Trade & Capital Flows

China & the Developing World

International Institutions & Global Governance

China Going Forward: The World & China

International Institutions & Global Governance

1) Before 1980s, 1980-2010, Post-20102) China, WTO, Slowed Learning & DSM

China Going Forward: The World & China

China & the Developing World

- Primus inter pares among developing nations: $6000 around 2011, 4X India's, 8X Bangladesh's, 12X Ethiopia's. "world’s largest developing country”.- China as a comparator (State + element to 'Washington Consensus')- China as a trading partner.

o Resource hungriness of China; If China's economic structure changes, it w/impact other economies

o “…as of end 2011, 15.6% of their Africa investment is in manufacturing and 30.6% in mining, with finance at 19.5% and construction at 16.4%. From what I can see, there is far more manufacturing investment from China than from the United States.” (Brautigam, 2013)

o “Once feted as saviors in Africa, Chinese have come to be viewed with mixed feeling—especially in smaller countries where China’s weight is felt all the more….Chinese expatriates in Africa come from a rough-and-tumble, anything-goes business culture that cares little about rules and regulations. Local sensitivities are routinely ignored at home, and so abroad.” (The Economist, 2011).

o Scrutiny of the AID model from China.

China Going Forward: The World & China

International Trade & Capital Flows

- 1990: Chinese exports 14th and imports 17th, smaller than Belgium. By 2012, largest exporter & 2nd largest importer.

- Openness to trade: China - 70%; US-20%; Japan - 30%.

- Four aspects to trade beyond tariff & non-tariff barriers:o De-monopolization.o FDIo WTO Accession.o Global Value Chains.

- The story of its capital flowso Largest FDI recipient among all developing countries.o Small volumes of foreign bank borrowing and foreign portfolio

inflows are the outcomes of its capital control policies. (Help escape 97-99 and 07-09, at the cost of lesser efficiencies)

o Current account surplus (WTO & rising ratio of marrying-age young men to young women since 2002 - larger self-savings)

China’s Regression to the Mean?

China’s Regression to the Mean?

China’s Regression to the Mean

- Super rapid growth periods are short lived. China, Taiwan, Korea.

- Super rapid growth ends almost always w/growth deceleration

- Near complete regression to the world mean.- The Middle Income Trap

China: Departing Thoughts

• Is it the People’s Republic of Corruption?

• Will it get old before it becomes rich?

• What will be the future of its SOEs?

• China’s explosion in USPTO patents & Innovation capacity?

• Exchange rate manipulation – the smoking gun?

• The role of its Golden Triangle – Govt. SOE & SOB.

• Spirituality & China? (when Maitreya meets the Dragon)• https://www.youtube.com/watch?v=Ax2My4hZchM

Acknowledgment

• Some sections of this lecture borrows thoughts from:

Fan et.al (2013). The Economics of China: Successes and challenges. Working Paper 19648, National Bureau of Economic Research.