The Chinese Economic Miracle Liberal Arts 101 Dr. Peter Ibbott Associate Professor of Economics King’s University College at the University of Western Ontario October 2, 2012 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-executivesummary • “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 The Chinese Economic Miracle Q: What preceded the Chinese Economic Miracle? • 1949-58: Mao consolidates power and encourages families to have more children. Introduces China’s first five year plan, adopting the Soviet model in which large state monopoly firms pursued heavy industrial development. • 1958-61: The second five year plan abandoned the soviet industrial model by focusing on rural development. Under “The Great Leap Forward” 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 peoples communes were tasked with: – Banning all private holdings/gardens – Introducing new farming techniques that would turn China into a grain exporter – Accelerating the construction of state infrastructure, – Increasing steel production by using backyard furnaces. The Chinese Economic Miracle Q: What preceded the Chinese Economic Miracle? • 1962: The result was the “Great Chinese Famine”. Estimates of up to 45 million died of starvation, while 200 million suffered from serious malnutrition. During this time China exported grain.Mao is forced by the party to abandon change direction and Deng Xiaoping and others take over economic planning. • 1966: Mao introduces the Cultural Revolution and uses it to purge Deng Xiaoping and other leaders of the CPC who had earlier opposed him. The Chinese Economic Miracle Q: What started the Chinese Economic Miracle? • Mao dies in 1976, Gang of Four arrested • Deng Xiaoping seizes power from Mao's anointed successor Hua Guofeng • In 1978 Deng introduces significant economic reforms aimed at introducing market socialism The Chinese Economic Miracle 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. • 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 Stage 2 (late 1980’s to 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 1978 Economic Reforms • Agricultural output growth dramatically accelerated to 8.2% a year, agricultural prices fell, meat and vegetable production rose dramatically. • 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. China and India Compared 2011 Nominal GDP in US$ billions (Source: IMF) 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. Q: In what ways has China’s economic miracle failed to improve society? • Pollution • 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 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. Nanjing Road: Shanghai Q: In what ways has China’s economic miracle failed to improve society? • Failure to introduce meaningful 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 – Chinese market socialism has failed to deliver distributive justice. Gini-coefficient of national income distribution around the world 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 matters!!! Overpopulation • One child policy introduced in 1978 • 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. Population and Population Growth Rate http://upload.wikimedia.org/wikipedia/comm ons/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 Where do all these people live? Population Density Where do all these people live? Rural-urban migration has dramatically reshaped 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 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 Can this continue? Even if growth moderates, China is likely to become a high-income economy and the world’s largest economy before 2030. Notwithstanding this rosy outlook, per capita income is still a fraction of the average in advanced economies. 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 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 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 landrelated 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&D 2. 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, and c) 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 agerelated 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 underserved 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 objectives 3. 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.