The Chinese Economic Miracle: A
Revolution in the World Order
Sharda Visit to King’s
Dr. Peter Ibbott
Associate Professor of Economics
King’s University College at the
University of Western Ontario
June 26, 2014
Readings:
• “China 2030: Building a Modern, Harmonious, and
Creative High-Income Society”
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published by the World Bank and available at
http://www.worldbank.org/en/news/2012/02/27/china-2030-executivesummary
• “Is China Overinvesting and Does it Matter”
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Published by the IMF and available at
https://www.imf.org/external/pubs/ft/wp/2012/wp12277.pdf
• “Supersized cities: China’s 13 megalopolises “
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published by the Economist and available at
http://www.eiu.com/Handlers/WhitepaperHandler.ashx?fi=Megalopolis_Report_
July_2012.PDF&mode=wp&campaignid=Megalopolis2012
• “2013 Human Development Report”
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Published by the World Bank and Available at
http://hdr.undp.org/en/data
Shanghai: Bund
Shanghai: Pudong
The Chinese Economic Miracle: A
Revolution in the World Order
• China’s rise is rebalancing power and influence in
the world.
• The rate of change is unprecedented in human
history, and this raises many important questions,
but not very many good answers.
– Why has this change happened?
– Will it continue?
– Is this change making life better for ordinary people in
China?
– Are there other countries who are rising with China?
– Is this change truly revolutionary?
Is this change truly revolutionary?
2011 Nominal GDP in US$ billions (Source: IMF)
Vehicle sales 2007-2012
Pork consumption
Pork 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
1990 310 million
2010 666.9 million
US
1990 85.4 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
• 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.
Is this change making life better for
ordinary people in China?
• Revolutionary Change has provided ordinary
people both benefits and costs.
• Benefits:
– Longer Lives
– Better Education
– Falling Poverty
Is this change making life better for ordinary
people in China?
Costs
• Rising Inequality
• Pollution
• Congestion
• 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
• Overpopulation
Culture does not determine inequality.
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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!!!
Pollution: Economic cost to the environment (2011)
100-km Chinese traffic jam enters Day 9
Last Updated: Monday, August 23, 2010 | 1:43 PM ET
CBC News
External Links
Xinhua: 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: Is growing prosperity contributing to the
overpopulation problem?
Overpopulation
• One child policy introduced in 1978 (Deng Xiaoping)
has caused a number of unintended consequences of
enormous significance:
– 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.
China’s Population
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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
Rural-urban migration is a much more powerful
force than population growth. The result has
been the rise of super-megalopolises
• Guangzhou: ≈ 41 million
• Beijing-Tianjin : ≈ 30 million
• Shanghai: ≈ 25 million
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 caused Economic Stagnation
1949-58: 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 Stagnation
1958-61: 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 Stagnation
1959-61: “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 Stagnation
1966-76: 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?
The IMF Report argues that China must implement a
NEW long term strategy for the next phase of
development. This strategy should:
1. Complete the transition to a market economy
2. Accelerate the pace of open innovation
3. Go green
4. Expand Individual Opportunities and Improve
Social Services
5. Fiscal Reform
6. Become a responsible Global Player
Substantial hurdles ahead:
• Challenges posed by an ageing and shrinking
workforce,
• Rising inequality,
• Environmental stresses, and
• External imbalances and shocks.
• Brittle Political System
Are there other countries who are
rising with China?
• Much attention has been paid to the BRIC
countries as an emerging new base of
economic and political power
• The evidence suggests that Brazil, India and
Russia are unlikely to experience the same
level of revolutionary change as China.
• The stakes are highest for India.
China and India Compared: GDP per Capita
Source: IMF
An Indian Revolution?
• Average Per Capita Incomes in Purchasing
Power Parities crossed more recently, but there
is a growing gap (China and India).
• But India is slowly closing the gap on life
expectancy (China and India).
An Indian Revolution?
• India is noticeably trailing China in Education
and Poverty Alleviation
• Development and Education
• Development and Poverty
• But is not yet as unequal as China. In
particular, the poor have a more meaningful
impact on political decision-making in India.
An Indian Revolution?
• While the Indian political system is much more resilient
and more representative than China’s, it has been
difficult for India to make the changes necessary to
experience the same revolutionary change as China.
• India is in the unenviable position of falling behind
China, while facing the same costs of growth.
Population growth is a more serious problem for India
because of the failure to launch an economic
revolution.
• The big question is whether India is politically able to
develop policies that both encourage growth and
ameliorate the costs of growth?