Transcript From “Scale Dividend”

China’s Next 30 Years:
From “Scale Dividend”
to
“Productivity and Institutional Dividend”
Dr. QIN Xiao
Chairman, Boyuan Foundation
New York, 10 January 2011
1
Agenda
1.
The two 30-year periods since 1949
2.
The “good old days” are gone: “scale dividend” waning
3.

Population aging & deceleration of urbanization

Over-drafted globalization and global rebalancing

Market reform and price deregulation of production factors

Slowdown of China’s potential growth rate
The way out: “productivity and institutional dividend”

In pursuit of “productivity dividend”

Awakening the new “institutional dividend”
2
The two 30-year periods


The first period (1949-1978)

centrally planned economy

primitive industrialization, but

rigid, isolated from outside which was proved to be inefficient
The second period (1979-2009)

reform and opening up

high growth, integration with world economy

imbalance, and consequential social inequality & injustice
3
The second 30-year period: “Scale Dividend”

The characteristics of growth drivers in the past 30 years can be
summarized as “scale dividend”
Exogenous
Endogenous
Institutional changes
Demographic dividend
Market reform
Globalization
Expand PPF & market demand
High saving rate Cheap and sufficient labor
Ensure capital and labor supply
Scale Dividend
4
The next 30 years: How will it be?

Growth drivers, both exogenous and endogenous, demand and
supply, will undergo fundamental changes.

The next 30 years will not be an extrapolation of the past, but
rather a new era with new characteristics:


from high speed back to normal

from “scale dividend” to “institutional and productivity
dividend”
China’s economy has experienced its “high growth” phase, and is
entering a new phase that will be healthier, more balanced, and
more sustainable.
5
Agenda
1.
The two 30-year periods since 1949
2.
The “good old days” are gone: “scale dividend” waning
3.

Population aging & deceleration of urbanization

Over-drafted globalization and global rebalancing

Market reform and price deregulation of production factors

Slowdown of China’s potential growth rate
The way out: “productivity and institutional dividend”

In pursuit of “productivity dividend”

Awakening the new “institutional dividend”
6
China’s population is aging
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
-0.5%

From 2000 on
 Growth of working age population
has declined, will drop to zero in
2015 and become negative
thereafter
 No. of people over 65: 111 million
now; 166 million in 2020; 232
million in 2030; 316 million in 2040,
in excess of 20% of the total
population
total population growth
working-age population growth
3.5%
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
From 1980-2010
 Working age population growth has
outpaced total population growth
 Abundant labor resources and low
dependency ratio generated
“demographic dividend”
-1.0%
Working-age Population
Aging Population as % of total
1200
25%
millions
1000
20%
800
15%
600
10%
400
5%
200
0
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050

0%
(Millions)
1980
2010 CAGR
Working Age Population
560
918
1.66%
Total Population
980
1354
1.08% 7
Data Source: UN Population Prospects, 2008 Revision
“Demographic dividend” is diminishing

Dependency ratio has
reached its lowest point in
2010 and will now increase
“Demographic dividend” is
diminishing
Dependency Ratio
90%
80%
70%
1980, 67%
60%
50%
2015, 40%
40%
30%
2010, 39%
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050

Data Source: UN Population Prospects, 2008 Revision
“Demographic dividend” diminishing implies a slowing of labor supply
growth, increased labor cost, increased household expenditure,
decreased saving rate and capital formation, which essentially mean the
growth model characterized by low consumption and high investment
supported by cheap labor will change.
8
Population migration: China’s urbanization
China urbanization rate
50
45
40
35
30
25
20
15
10
5
0
increment of urbanization rate % RHS
2008, 45.68
1.6
1.4
1.2
1
1978, 17.92
0.8
0.6
0.4
0.2
0
Migrant worker as % of total urban employed workers
48%
46.30%
46%
44%
42%
40%
38%
35.10%
36%
34%
32%
2009
2008
2007
2006
2005
2004
2003
30%
2002
Migrant workers as a
percentage of total urban
employment rose
significantly, but beginning
in 2005 the growth rate
slowed
urbanization rate %
1978
1980
1985
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008

Urbanization rate increased
from 17.9% in 1978 to
45.7% in 2008
2001

9
Lewis turning point has been reached

Recent labor shortage & wage increase in east coast cities

Although some scholars argue there is still surplus labor in rural area, three
factors have impeded further migration: (1) institutions (“urban-rural dual
residence system”), (2) competency (age, knowledge and skill of rural labor),
and (3) urban public goods and services (social safety net, education).

Lewis turning point has been reached earlier.
Age Structure of Rural Population
Wage Growth of Migrant Workers
25%
19.60%
20%
7.20%
Data Source: F. Cai 2010
2008
2007
2004
3.40%
2003
0%
8.20%
5.60%
2002
5%
8.60%
2006
7.60%
10%
2005
15%
10
Data Source: NBS
Urbanization will decelerate

“City development report of China (2010)” published by China
Academy of Social Science pointed out urbanization will
decelerate in future, with average increase of 0.8-1ppt,
instead of 1.35-1.45ppt of the past ten years.
Deceleration will imply massive fixed asset investment and
infrastructure construction will slow, including road, railway,
housing industry & building materials, auto, telecom. This is
likely to curb the demand of investment.
11
Over-drafted globalization:
China becomes an export-dependent economy
Imbalance in the world economy
1%
~0.45ppt increase per year
in the past decade
5%
4%
3%
40%
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
2000, 3.16%
1986
1984
0%
1980, 0.79%
1982
2%
2006, 35.87%
China Export as a % of its GDP
35%
30%
2000, 20.80%
25%
2009, 24.09%
20%
15%
10%
1978, 4.60%
5%
Data Source: Bloomberg
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
0%
1984
Developed economies:
overconsumption, high leverage,
financial deficit
6%
1982

Emerging economies: trade
surplus, foreign reserve, excess
liquidity with inflation pressure
and asset bubble
7%
1980

2009, 7.63%
8%
1980

China export’s share of world
trade volume, as well as China
export’s share of its GDP
increased dramatically during the
last 30 years
1978

China Export’s Share of World Trade Volume
9%
12
Painful global rebalancing

The 2008 global financial crisis and consequential global economy
recession revealed the imbalance of global economy. This has taught
us that globalization cannot treat the imbalance of individual
economies as a cost, especially big economies. It is necessary to
carefully maintain the balance of both current account and
economic structure.

The imbalance doesn’t imply an end to globalization. Rather, a new
equilibrium between emerging and developed economies will
generate a new round of “globalization dividend”
Rebalancing requires collaboration between emerging and developed
economies. For China, it will be difficult to maintain an exportdependent model. Instead, it should base its growth on its own market.
13
China’s market reform facing bottleneck

Market reform and opening up has been a vital driver for China’s
economic growth
 Rural reform in the 1980’s boosted agricultural productivity
 SOE reform in 1990’s energized industrial development
 Since China’s participation in WTO, “Made in China” went global

In recent years, institutional reform has slowed; market reform has
encountered a bottleneck. One problem is the prolonged price
regulation of production factors, including capital (exchange rate,
interest rate), land (esp. industrial land), labor, energy, mineral resources
(tax), public utilities, and may also include environmental costs and
safety costs.

Price distortion is essentially fiscal subsidies and unfair wealth transfer,
which has partly contributed to the “scale dividend” of the last 30 years.
14
Price distortion hard to maintain
Investment Spree
Resource
Misallocation
“Renationalization”
Imbalanced
Structure
Price Distortion
Underdeveloped
Service Sector
Low-quality Growth
Income Disparity
Corruption
& Rent-seeking
Deregulation would result in a market mechanism to determine
real costs and profits, and a fairer distribution of income, whereby
market constraints and incentives will facilitate the transformation
of China’s growth model.
15
Potential growth: back to normal

Without “scale dividend”, potential output growth is set to slow
from 9%-10% to around 7%-8%.

It may create problems or add costs, e.g. unemployment, inflation,
lower corporate earning etc. However, in general, it would be a
process leading China back to normal, a healthier growth.
Worries about the sustainability of the “China miracle” will also
fade.

Therefore, it will be essential to China’s development in the next
30 years for China to tackle critical issues properly during the
transformation.
16
Agenda
1.
The two 30-year periods since 1949
2.
The good old days are gone: “scale dividend” waning
3.

Population aging & deceleration of urbanization

Over-drafted globalization and global rebalancing

Market reform and price deregulation of production factors

Slowdown of China’s potential growth rate
The way out: “productivity and institutional dividend”

In pursuit of “productivity dividend”

Awakening the new “institutional dividend”
17
In pursuit of “productivity dividend”

Total factor productivity (TFP) has been widely used in explaining
the long-term trend of economic growth.

According to academic literature, although with variation, the
basic conclusion is the same: China’s growth relies too much
on factor inputs, especially capital inputs. The contribution
from TFP has been very low. Other indicators, such as energy
and material consumption, technology innovation and patent
registration, shows that China underperforms the international
benchmark.

The theme for the next 30 years is to achieve endogenous growth
through improvement of human capital, technical innovation
(including resource utilization) and the upgrading of
industrial structure from low value-added to high valueadded.
18
Awakening the new “institutional dividend”




The key to institutional reform is to transfer government
function
Let the “invisible hand” do its work
 administrative approval
 price control
 monopoly
 State Owned Enterprises
Strengthen functions in relation to:
 providing public goods
 improving legal system and credit system
The success in releasing new “institutional dividend” is the
key to China’s successful economic transformation in the
next 30 years.
19
Thank you!
20