Development of China
- An Economy in Transition
Introduction:
Why do we look at China?
•
Development – underdevelopment, less development,
problems of underdevelopment
China represents a large proportion of the world
economy
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–
–
–
–
•
Population (Mid-2001): 1.27 billion (20.7% of the world total)
Land: 3.70 million square miles (7.1% of the world total)
GDP (1999): US$ 989 Billion (3.2% of the world total)
GDP annual growth (1999): 7.05% (2.72 times of the world average)
GNI PPP[1] per capital (1999): US$ 3550 (53% of the world average)
China is under transition and developing through a
unique path. It may provide lessons or experiences for
other developing countries or countries under transition.
[1] Gross National Income in Purchasing Power Parity (GNI PPP) per capital
Purposes of This Lecture
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Measure the development
Determines of the development
Outcomes the development process
Policy for the development
Major Topics
(1) General theory
(2) Brief history of China’s development
(3) Models of development in China
(4) New Challenges
(5) Policy and new reforms
(1) General Theory
Output
Production
Time
Development Indicators
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•
•
•
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Economic
Demographic
Social
Infrastructure
Geographic
Human Development Index
Production Function
4 determinants of a country’s productivity
• Y = A F(L, K, H, N), or
• xY = A F(xL, xK, xH, xN), (if x >0) or
• Y/L = A F(1, K/L, H/L, N/L), (if x=1/L)
Long-run of Economic Growth
- Selected Countries
a
Country
Period
Japan
Brazil
Canada
W Germany
United States
China
Mexico
UK
Argentina
Indonesia
Pakistan
India
Bangladesh
1890-1990
1900-1987
1870-1990
1870-1990
1870-1990
1900-1987
1900-1987
1870-1990
1900-1987
1900-1987
1900-1987
1900-1987
1900-1987
Real GDP per Person Real GDP per
at Beginning of
Person at End of
a
Period
Perioda
$1 149
595
1 815
1 669
3 063
547
886
3 676
1 753
681
564
516
476
$22 036
4 664
23 301
19 503
24 922
2 386
3 640
18 549
4 507
1 638
1 208
904
512
Growth Rate
(Per Year)
3.00%
2.39
2.15
2.07
1.76
1.71
1.64
1.36
1.09
1.01
0.88
0.65
0.08
Real GDP is measured in 1985 Canadian dollars.
Source: Mankiw, N. Gregory, et. al., Principles of Marcroeconomics, First Canadian Edition, Dryden, Harcourt
Brace & Company, Canada, p. 237.
(2) History of China’s Development
• First Five-Year Plan (1953-1957)
– A new economic order modeled on the Soviet Union example,
emphasizing the development of capital-intensive heavy industry
• Great Leap Forward (1958-1960)
– The break away from the Soviet model and introduction of a new
program aimed at rapidly raising industrial and agricultural
production
• Cultural Revolution (1966-1976)
– The pursuit of Mao’s own development strategy of a self-reliant
economy and political struggle
• Economic Reforms (1978- )
– To move the economy from a planned economy to one that is
more market-oriented
(3) Model of China Development
• #1: Socialist planned economy:
– Government planning is basic means of allocating resources
– Production quotas: quantity rather than quality
– Suppress consumption to increase saving: invest in heavy
industry
– Self-reliant and uninvolved in foreign economic relation
– Results:
• Overuse of industrial equipment
• Shortage in supply: production and consumption goods
• Unstable economy growth
Model of China development
(cont’d)
• #2: Socialist market economy:
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Market is basic means of allocating resources
State controls at the macroeconomic level
Economic structural Reform
Results:
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Competition: establishment of the diversified ownership
Efficient: profit maximization
Open: involved in foreign economic relation
Fast and stable economy growth
Economic Reforms:
• Rural reform
– Increase of agricultural production and rural income
• Open-door policy
– Turnaround from an inward-looking, self-reliant economy to one
that participates in the world economy (foreign trade, FDI, and
SEZs)
• Industrial reform
– Enterprise reform and price reform
• Financial reform
– Company’s responsible for financial performance and borrow
money from banks; raise capital at the stock market
• SOEs reforms
– Ownership restructuring
Comparison of Two Development Models
China (1952-1977)
China (1978-1998)
10000
10
5000
5
0
0
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
1956
GDP
1954
400
400000
300
200
200000
100
0
0
GDP per capita
15
600000
1998
15000
500
1996
20
600
1994
20000
800000
1992
25
700
1990
25000
800
DPG per capita (USD)
1988
30
1000000
1980
30000
GDP (USD million)
1978
35
GDP per capita
35000
1952
900
40
DPG per capita (USD)
GDP
40000
1200000
1986
GDP (USD million)
1984
45
1982
45000
(4) New Challenges to China
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Three transitions
Population and environmental pressures
Employment insecurity
Growing inequality and poverty
Macroeconomic instability stemming from
incomplete reforms
Three Transitions
• From a planned economy to a market-based
one
• From a rural, agricultural society to an
urban, industrial one
• From a non-WTO nation to a WTO one
Population and Environmental
Pressures
Population and Urbanization in China
140000
35
120000
% of Urban
100000
30
25
20
60000
15
40000
10
20000
5
0
0
19
52
19
62
19
70
19
78
19
85
19
87
19
89
19
91
19
93
19
95
19
97
80000
Persentage of Urban Population
Population (year-end) (10 000 persons)
Population
• Large in number (1.27
billion)
• Low growth rate (1%)
• Low urbanization
(30%)
• Large number of
floating population
(~100 million)
Employment Insecurity
6
5
4
3
2
1
0
1978 1982 1985 1988 1991 1994 1997
Urban
Unemploy
ment Rate
Growing Inequality
Per Capita Annual Income of Urban and Rural Household and The Related Index
Year
1978
1980
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
Per Capital Annual Net Income of
Per Capital Annual Disposable Income of
Rural Household
Urban Households
(USD)
Index (1978=100)
(USD) Index (1978=100)
16.15
100.0
41.52
100.0
23.13
139.0
57.75
127.0
48.08
268.9
89.37
160.4
51.25
277.6
108.78
182.5
55.94
292.0
121.19
186.9
65.89
310.7
142.85
182.5
72.73
305.7
166.35
182.8
82.99
311.2
182.61
198.1
85.68
317.4
205.63
212.4
94.80
336.2
245.05
232.9
111.44
346.9
311.66
255.1
147.64
364.4
422.76
276.8
190.77
383.7
517.90
290.3
232.90
418.2
585.11
301.6
252.73
437.4
623.98
311.9
261.43
456.8
656.00
329.9
(5) Policy and further reforms:
• The spread of market forces must be
encouraged
• The government must begin serving
markets (by building the legal, social
physical, and institutional infrastructure)
• Integration with the world economy must be
deepened – facing WTO
(6) Summary
• Economic prosperity varies substantially
around the world - some countries are times
richer than others
• Economic growth rates also very
substantially - the relative position of
countries can change over time
Summary (cont’d)
• The standard of living depends on the
economy’s productivity
• Productivity depends on 4 determinants physical capital, human capital, natural
resource, and technological knowledge
Summary(cont’d)
• Government policies can influence the
economy’s growth rate in many ways:
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encouraging saving and investment
encouraging investment from abroad
fostering education
maintaining property rights and political stability
allowing free trade
controlling population growth
promoting the research and development of new technologies
Summary (cont’d)
• The accumulation of capital is subject to
diminishing returns:
– The more capital an economy has, the less additional output the
economy gets from an extra unit of capital,
– higher saving leads to higher growth for a period of time, but
growth eventually slows down as the economy approaches a higher
level of capital, productivity, and income,
– the return to capital is especially high in poor countries (catch-up
effect).