Transcript 1 - Gatton College of Business and Economics

Economic Growth in
China
SUMMARY BY: JOHN POWERS
1. Understanding China’s Growth: Past,
Present, and Future
Author: Xiadong Zhu (2012)
Zhu, Xiaodong. 2012. "Understanding China's Growth: Past, Present, and Future." Journal of Economic
Perspectives, 26(4): 103-24.
2. How Reform Worked in China
Author: Qian, Yingyi (2002)
Qian, Yingyi, 2002. "How Reform Worked in China," CEPR Discussion Papers 3447, C.E.P.R. Discussion Papers.
Part 1: China’s Unprecedented Growth
 The pace and scale of China’s economic transformation have
no historical precedent.
 1978: One of the poorest countries in the world. Real GDP
per capita = 1/14 of the United States.
 Since 1978 GDP has grown at an average rate exceeding 8
percent per year. GDP per capita now 1/5 of the United States.
 Largest economy in the world by some measures.
The Past (1800-1978)
 China was a world economic and technological leader in
the “premodern” era. (Song Dynasty 1200)
 Leaders in iron output, urbanization rate, advanced
technologies.
 By end of 15th century China began to fall behind
Western Europe well before Industrial Revolution.
 Why? Political-Institutional System, Elite Groups,
Resistance to adoptions of new technologies
The Past Cont’d
 Imperial System significantly weakened after Opium Wars
and Sino-Japanese War of 1894-1895.
 Continued unrest and WWII prevented industrialization
process from gaining momentum until 1950’s. Per capita
GDP Declined between 1800-1950.
 1950-1978 average growth rate of real per capita GDP
modest 3%. Government-led Industrialization period.
Government-led Industrialization (19521978)
 Popular thinking – To speed up industrialization process increase
investment in heavy industries -> Steel, Concrete, Heavy Machinery
 China’s Approach – Limit household consumption and set low
prices for agricultural goods -> Force savings and surplus -> Extract
from Agricultural Sector and use for investment in Industry.
 Not Sustainable, Welfare Consequences, Decreased Agriculture
production + Weather Shocks
 Great Leap Forward = Great Leap Famine (15 million deaths)
1978 - Present
 Industrialization policies pursued from 1952-1978 created adverse
incentives and gross misallocation of resources. Resulted in
declining aggregate productivity, recurring food crises and little
improvement in living standards.
 Enter Deng Xiaoping -> Sought to improve aggregate economic
performance and living standards.
 Policy: Gaige Kaifang “ reform and opening up”
1978 – Present Cont’d

No grand design of systematic reform policies
 Reforms gradual, experimental and decentralized
 Total Factor Productivity Grew Rapidly except in State Sector
 Government Increased Prices for Ag. Goods
 Collective Farming System -> Household-Responsibility System (
fixed quota at set price – excess sold for market rate)
Other Areas of Growth
 Productivity growth in nonagricultural sector mainly due to rise of
the nonstate sector (5.87 percent)
 1978-1988 share of total employment in nonstate sectors
increased to 39% ( +15%)
 “Fiscal Contracting System” City-county level governments
controlled state owned enterprises. Township and Village level
governments controlled rural collective enterprises. “Township and
Village Enterprises”
 Nonstate Employment now 60% of total Employment.
Future
 So far when the effect of one set of reforms on productivity seem
exhausted, the government finds a way to initiate new reforms that
reignite growth. Sustainable?
 Evidence from other East Asian economics Japan, Korea, Taiwan
suggest the growth must eventually slow.
 What will be the key source of growth?
Opportunities
 From 1978-2007 total factor productivity has risen from 3 percent
to 13 percent of U.S. level.
 2 more decades of growth and productivity still below Japan in
the 1950’s or South Korea and Taiwan in 1960’s.
 Opportunity to raise productivity by reducing still-existing
distortions and inefficiencies in production.
 Despite reforms Banking Sector still dominated by state-controlled
banks lending to government projects and state sector business.
2. How Reform Worked in China
 Underling China’s reform is a serial of institutional changes
concerning the market, firms and the government in the form of
“transitional institutions.”
 The institutions achieve two objectives -> Improve economic
efficiency through incentives and competition. Make reforms a winwin game and interest compatible for those in power.
 Evolution of Imperfect Institutions
Effective Reform
 Overtook United State in total GDP in term of PPP (purchasing
power parity) this year.
 Largest economy in the world by this measure.
 No question that reform has worked
 China has adopted many policies advocated by economists (open
trade, foreign investment etc. ) but without liberalization,
privatization and democratization. Impressive!
The Challenge of Reform
 Not about knowing where to end up but about searching a
feasible path toward the goal.
 Not enough to study the best practice institutions as desirable
goal. One needs to fit imperfect institutions and political reality who
function as stepping stones in transition process toward the goal.
 Efficiency improvement and total factor productivity badly needed
reforms and improvement. China has shown imperfect but sensible
institutions can perform.
Conclusions
 China is a great example of an argument against simplistic and
naïve views on institutional reform. Every economy has tremendous
amount of moving parts.
 Institutional development needs to fit into initial conditions and
be compatible with ruling groups. Does it need to be this way
forever? Probably not.
 This study does not predict eventual success but argues that
reform is certainly not doomed to fail because they do not follow
traditional reform.