Transcript growth from below - Asia Ruminations

Politics and China’s Economic
Growth from Below
Professor Zhang Jun
China Center for Economic Studies,
Fudan University
Mr. Rajiv Sikri, Special Secretary, Ministry of
External Affairs, Government of India:
“Firstly, the Indian economy has grown within a
democratic, federal framework that necessitates
consensus and imposes many well-known
constraints. Secondly, the indigenous private sector
has played an important role in the growth of
the economy and the process of economic
reforms. Thirdly, the bulk of the resources for
India’s economic development have been
generated from within the country, not from FDI”
• Indian political system imposes constraints
on economic transition and growth;
• Indian economic growth has been a result
of globalization of its IT-enabled service, a
dividend of its institutional assets (law,
contracts and English speaking).
• Indian politics has not been helpful in
reaping the opportunity of development;
in generating strong momentum for faster
growth, and in attracting FDIs.
Politics of Faster Growth
• While Indian politics hinders investment
and growth, Chinese politics induces and
facilitates the rapid process of capital
formation in both infrastructure and
manufacturing, which has been the source
of fast growth in China.
Growth with Chinese Characteristics
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Rising trade dependence ratio,
Strong FDI-trade ties;
Increasing regional disparity;
Rising capital-output ratio;
Annual Growth of Exports and of Imports in China
120.0
100.0
80.0
60.0
40.0
20.0
0.0
1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
-20.0
Exports growth
Imports growth
Growth of Manufactured Exports in China
100.0
3500.00
90.0
3000.00
80.0
2500.00
70.0
60.0
2000.00
50.0
1500.00
40.0
30.0
1000.00
20.0
500.00
10.0
0.0
0.00
1980
1985
1986
1990
Manufactured exports
(100 million US$)
1995
Share of manufactured
exports(%)
2000
2002
Evolution of Export/GDP Ratio in China
0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
1978
1980
1985
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Influx of FDIs to China (USD billion)
700.00
600.00
500.00
400.00
300.00
200.00
100.00
0.00
19791984
1985
1989
1990
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Figure 1: Share of China's Export related to Foreign investment
70
60
Percentage
50
Exports of FIEs
40
Exports of Processing and Assembling by Domestic Enterprises
30
Total
20
10
0
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Regional Disparity
A Linkage
• China’s faster economic growth has largely
been a result of globalization of its
manufacturing since 1990s; That’s why
China has enjoyed such higher
export/GDP ratio since 1990s.
• However, the globalization of Chinese
manufacturing was facilitated by influx of
FDIs to China.
• The influx of FDIs, however, is attracted
and promoted by politics rather than
economics of Chinese economy: China
enjoys much better quality of urban and
inter-city infrastructure than India, not
because both countries have different
supply of factors of production (labor,
financing and land), but because both have
quite different politics.
Performance–Based Politics
• China has changed its politics without
changing much of its political system, via
(1) a process of successful government
transformation; and (2) a build-up of
effective political governance.
Quotations from Deng
• It doesn't matter whether the cat is black or
white, as long as it catches mice;
• It is particularly essential at current stage of
development to campaign against the leftist
thoughts.
• We have to renovate our cadres system by
replacing the elderly with those who are both
young, professional, and knowledgeable.
Political Wisdom
• Pragmatism taking over orthodox;
• Providing political safeguard and legitimacy
for pro-business and pro-market initiatives
from below;
• Faster renovation of human capital of
Chinese officials and bureaucrats.
Getting Incentive Right
• All the elements combined have quickly
evolved into an unique political governance
without change much of Chinese political
system, a governance that combines both
political control and market performance
into the incentive structure for its officials;
• In terms of political governance, the big
difference between Mao and Deng is: Mao
buries markets, but Deng uses them.
Mao and his Colleagues
Growth from below
• The new politics drives officials and local
governments to shift to pro-business
policies and to initiate market-enhancing
transformation, thus induces growth from
below.
• China has only one government and 31
provincial competitors of each other,
competing for better performance of
investment and growth, while India has 27
different governments with too much
divergent political interests.
• In order to attract FDIs and to promote
investment in manufacturing, which has
become a very important objective of
political governance, Chinese local
governments are committing to improving
the quality of infrastructure;
• For a better participation of private sector
in the build-up infrastructure, Chinese local
governments have developed sustainable
private-public sector alliances for financing
and operation of infrastructure.
• Most local governments have done very
well in commercializing the projects of
infrastructure;
A Success of “Marketing the City”
Looking Ahead
• India is grappling with a more fundamental
difficulty: how to raise investment rates,
and China’s difficulty is how to raise
efficiency of investment;
• China’s trouble is capital that costs zero,
India’s is zero capital.
China has too much liquidity
(average1994-2001)
140
120
100
80
60
40
20
0
China
India
M2/GDP
Korea
stock market capitalization/GDP
Japan
FDI/GDP
US
• The investment rate of China today is
much higher than that of Japan and US. It
is also far higher than those of Hong Kong
and Taiwan, whose investment rates
between 1966 and 1998 were something
like 25.4% and 23.7% respectively.
China's Nominal Investment/GDP Ratio(1980-2000）
40
35
30
CF/GDP
25
20
STFA/GDP
15
10
5
0
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Incremental Capital-Output Ratio（5 years
moving average）
6
5
4
3
2
1
0
1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
• The pattern of growth with Chinese style
is somehow distorted by wrong pricing
system;
• Faster growth in China has been generated
within and by the political system which
makes finance, land, and social welfare
cheaper to accommodate investment and
growth.
Getting Prices Right
• Given the setting of politics, China’
growth hinges on faster growth of
investment and exports;
• To raise the efficiency of investment,
getting prices right is the fundamental
challenge facing China for the decades to
come.
• China’s growth will eventually need to be
based on right prices of physical, financial
and human resources;
• In this regard China will have to accelerate
the financial reform, social welfare reform,
privatization, and land tenure reform, and
so on, in order to generate more efficient
and dynamic growth.
• But that does not mean China will need to
revolutionize its political system. Given the
flexibility of Chinese politics, China will
continue to generate more growth and to
respond to internal and external challenges,
through marketisation, opening up,
political governance, and careful grappling
with regional disparity.
• Thank you