Transcript roland2009l1

The economics of institutional
reform and development in China
Gérard Roland
UC Berkeley
Lecture 1. The Chinese Miracle.
Stylized facts and puzzles.
1. Introduction
• Chinese growth since the beginning of the
reform process in 1978 has been very
impressive. Three decades of very high
growth in a country of over a billion
inhabitants is akin to an economic
“miracle” and is one of the most important
economic events since England’s
industrialization.
• Real GDP grew at an average rate of
more than 9% during 30 years.
• Real GDP per capita at more than 8%.
• Consumption at nearly 8%.
• Foreign trade as a % of GDP from less
than 10% to more than 60%...
Table 2. Growth of various indicators.
Fixed
telephone
(million)
Mobile
telephone
(million)
Auto
production
(million)
Passenger
cars per
1000 pop
Urban
housing per
person (m2)
Super
highway
length (km)
1978
-
-
0.15
-
6.7
-
1985
3.12
-
0.44
-
10.0
-
1990
6.85
0.018
0.51
-
13.7
500
1995
40.71
3.63
1.45
1.33
16.3
2,100
2000
171.53
84.53
2.07
2.93
20.3
15,300
2003
271.60
269.95
4.44
5.41
23.7
29,700
2005 July
337.44
363.17
5.07
(2004)
6.96
(2004)
-
-
Source: Qian-Wu (2005)
Table 3. Evolution of employment.
Non-agricultural employment (million)
Total
Industry
Service
1978
118.35
69.45
48.90
1985
159.16
103.84
55.32
1990
222.15
138.56
83.59
1995
276.34
156.55
119.79
2000
330.99
162.19
168.80
2003
359.00
160.77
198.23
Source: Qian-Wu (2005).
Table 4. Rural poverty reduction.
Chinese national standard
World Bank standard
($1/day)
Poverty
population
(million)
% of rural
population
Poverty
population
(million)
% of rural
population
1978
250
30.7%
-
-
1990
85
9.5%
280
31.3%
1993
75
8.2%
266
29.1%
1996
58
6.3%
138
15.0%
1998
42
4.6%
106
11.5%
2002
28
-
88
-
Source: Qian-Wu (2005).
• While the growth is impressive, not
everything is rose.
• Income inequality has increased and many
social problems, environmental problems.
Figure 3
China: SO2 Levels in Major Urban Areas, 1980-2004
with international comparisons
0.45
Ambient SO2 milligrams per cubmic meter
0.4
0.35
Major City Maximum
0.3
Tokyo City Center 1965
0.25
0.2
Seoul 1990
0.15
New York City 1972
0.1
Major City
Average
0.05
0
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Figure 4
Trend of Primary Labor Force Share vs. Urban TSP Concentration
0.5
0.4
China Annual Average for 30+ Cities
1986-2003
Tokyo 1966-1997
0.3
Seoul 1984-1998
0.2
Kitakyushu City 1959-2003
0.1
0.0
60
50
40
30
20
10
Primary sector labor force share (percent, with strong downward time trend)
0
Ambient TSP milligrams per cubic meter
0.6
Table. Income and consumption inequality.
Gini coefficients
1988
1995
2003
National
0.39
0.44
0.45
Rural
0.32
0.38
0.37
Urban
0.23
0.28
0.32
Source: Qian-Wu (2005).
Consumption inequality
1991
2003
Richest 20% to
poorest 20%
2.02
3.95
Richest 10% to
poorest 10%
2.42
5.66
Puzzle 1. China’s transition
success.
• This impressive high growth period is the
result of the transition process from
socialism to capitalism. China’s
performance during the transition period is
much better than that of other transition
countries. Why did China do so much
better than other transition countries?
China has high growth. Other transition countries
had output fall and decline!
R e a l G D P tr e n d s i n tr a n si ti o n e c o n o m i e s a fte r l i b e r a l i z a ti o n
180
160
140
G D P in d e x
120
100
80
60
40
20
C h in a 1 9 8 3 = 1 0 0
P o la n d 1 9 8 9 = 1 0 0
0
1
2
3
4
5
6
n u m b e r o f y e a r s a f t e r lib e r a liz a t io n
7
8
9
R o m a n ia 1 9 8 9 = 1 0 0
L a t v ia 1 9 9 0 = 1 0 0
R u s s ia 1 9 9 1 = 1 0 0
Differences between China and other
transition countries.
• 1) China started off poorer.
• Sachs-Woo, 1992: Being an agricultural economy, China
was facing the classical problem of development
(transfer of rural labor force to urban industry) whereas
other transition countries were facing issue of transfer of
labor from SOEs to private sector. BUT …
• .. Other countries have been facing classical problem of
development and have not had success.
• …While some “convergence à la Solow argument” may
apply, it does not explain why East European countries
had an output fall and long decline in the nineties. Still
leaves open issue of why China did better than other
transition countries.
China started off poorer.
• Blanchard- Kremer, 1997. China had less
complex economy. More complex
economies with institutional weaknesses
should have larger output fall.
• China did not have any output fall. Does
not explain either lack of any output fall or
high growth.
Differences between China and other
transition countries.
• 2) China did not introduce democratization
• Little academic work on this but much journalism. Issue
nevertheless quite crucial.
• Main argument is that absence of democracy gave the
Chinese government more freedom of maneuver to
introduce painful reforms.
• Ironically, reforms were less painful in China compared
to countries that democratized.
• Moreover, countries that democratized less or had antidemocratic backlash have tended to do less well (former
CIS countries had longer output fall).
• TO SUMMARIZE: China’s transition success not clear in
view of the overall transition experience.
Puzzle 2. High growth despite
relatively low quality of institutions.
• China represents a puzzle for the new
mainstream view in economics according
to which quality of institutions is a main
factor explaining high growth and
differences in development. (Hall and
Jones, 1999; Acemoglu, Johnson and
Robinson, 2001). China does not rank
highly in terms of institutional comparison.
Table. Freedom house index of political freedom and civil liberties.
1990
2000
2003
PR
CL
Status
PR
CL
Status
PR
China
7
7
N Free
7
6
N Free
7
6 N Free
Czech
-
-
-
1
2
Free
1
2
Free
Hungary
2
2
Free
1
2
Free
1
2
Free
India
2
3
Free
2
3
Free
2
3
Free
Mexico
4
4
P Free
2
3
Free
2
2
Free
Peru
3
4
P Free
3
3
P Free
2
3
Free
Romania
6
5
N Free
2
2
Free
2
2
Free
Russia
-
-
-
5
5
P Free
5
5
P Free
Singapore
4
4
P Free
5
5
P Free
5
4
P Free
Ukraine
-
-
-
4
4
P Free
4
4
P Free
Source: Qian-Wu (2005).
CL
Status
Table. Rule of Law Index.
Country/Region
2004
2002
2000
1998
1996
Singapore
95.7
92.3
98.9
99.5
99.4
Hong Kong
90.3
84.7
90.4
90.8
90.4
Japan
89.9
88.3
90.9
90.3
88.0
Hungary
78.7
77.6
78.6
76.2
75.3
South Korea
68.6
76.5
73.8
76.8
81.9
Malaysia
64.7
67.9
71.1
76.8
82.5
Turkey
54.6
53.1
59.9
65.9
58.4
Thailand
51.7
60.2
69.0
69.2
71.1
India
50.7
55.6
62.0
67.0
56.6
Romania
48.3
52.0
51.9
49.7
44.0
Brazil
46.9
45.9
53.5
56.8
46.4
Mexico
45.9
47.4
46.0
40.0
54.2
China
40.6
48.5
48.7
52.4
37.3
Peru
31.9
36.7
38.5
37.3
40.4
Russia
29.5
21.4
18.7
22.7
19.9
Ukraine
23.2
21.4
26.2
23.2
28.3
Source: Kaufmann et al. (2005). From Qian (2005).
Table. Ease of Doing Business.
Country/Region
Ranking
Singapore
2
Hong Kong
7
Japan
10
Thailand
20
Malaysia
21
South Korea
27
Hungary
52
Peru
71
Mexico
73
Romania
78
Russia
79
China
91
Turkey
93
India
116
Brazil
119
Ukraine
124
Source: World Bank 2006, Doing Business report. From Qian (2005).
Table . Regulatory quality.
Country/Region
2004
2002
2000
1998
1996
Hong Kong
99.5
89.3
98.4
98.4
98.9
Singapore
99.0
99.0
100.0
100.0
99.4
Hungary
86.7
84.2
88.2
88.0
74.6
Japan
83.7
78.1
81.8
69.0
82.3
South Korea
71.9
75.5
69.5
58.2
78.5
Mexico
68.0
66.8
76.5
75.5
74.0
Malaysia
64.5
69.4
64.2
70.1
82.9
Brazil
58.1
63.3
64.7
57.1
60.2
Peru
57.1
62.2
73.3
81.5
76.2
Thailand
51.2
64.8
77.5
56.0
69.6
Romania
49.8
55.1
35.8
58.2
30.4
Turkey
48.8
55.6
55.1
80.4
71.3
China
35.0
37.8
36.9
42.9
47.0
Ukraine
33.5
27.0
11.2
17.9
23.8
Russia
30.5
43.4
5.3
31.5
31.5
India
26.6
43.4
38.5
41.8
44.2
Source: Kaufmann et al. (2005). From Qian (2005).
Table . Corruption perceptions.
Country/Region
2004 Rank
2004 Score
Finland
1
9.7
Singapore
5
9.3
Hong Kong
16
8.0
Hungary
42
4.8
Mexico
64
3.6
Thailand
64
3.6
Peru
67
3.5
China
71
3.4
Turkey
77
3.2
Romania
87
2.9
Russia
90
2.8
India
90
2.8
Ukraine
122
2.2
Source: transparency International.
GDP per capita
(PPP$)
Figure. Institutional quality and GDP per capita.
18000
15000
12000
9000
BLR
RUS
6000
KAZ
TKM
AZE
UZB
TJK
UKR
GEO
CZE
SVK
HUN
EST
HRV
POL
LTU
BGR
LVA
ROM
KGZ CHN
ARM
VNM
SVN
3000
MDA
0
-15
Qian (2005).
-10
-5
0
5
10
Institutional
Quality Index
•
•
•
•
China’s institutional quality, corrected for income per capita is not
that low.
There have been significant improvements since the beginning of
the reform period on the legal and political front.
Still, the coexistence of strong growth and weak institutional quality
is a puzzle. How to explain high growth despite low quality of
institutions in comparison to international norms?
Possible answers we will investigate:
1. Transitional institutions were created at different points during the
transition process that were very imperfect but helped move the reform
process forward and thus operate large scale resource reallocation and
creation of markets.
2. Meritocratic administration fundamental in explaining sustained growth.
•
Success in transition and in growth are linked but useful to look at
them separately. High growth presupposes successful transition
but successful transition does not automatically imply high growth.
Explaining the growth success
• Lecture 2. We will look at the basic sources of
growth over the last decades to understand
better the anatomy of growth in China and see
what the macro-indicators tell us. Traditional
growth analysis will give us anatomy of growth
but will not give us detailed causes of the
Chinese success and we will need to dig in more
deeply in understanding the causes and
consequences of the institutional changes
associated with China’s transition process.
Explaining the transition success.
• Lecture 3. Chinese gradualism. Experimental
approach to reforms and flexibility of
administrative organization played a very
important role in a) getting reforms started, b)
providing flexibility for reversal in case of failure.
Chinese M-form organization made
experimentation much easier since it could be
done at a small scale without disturbing the rest
of the economy. Chinese gradualism was
criticized in the 1980s but proved more
successful than East European “big bang”
approach.
Explaining the transition success.
• Lecture 4. The dual-track approach to
price liberalization. Price liberalization at
the margin helped prevent the output fall,
protected existing rents and acted as
Pareto-improving reform. Was criticized for
some of the rents it generated. Represents
a general political economy device for
creating reform without losers.
Explaining the transition success.
• Lecture 5. Fiscal decentralization and
incentives of bureaucrats. Reform of
organization of government and provision
of incentives to bureaucrats played
important role in creating support for
growth. Local and provincial governments
became interested in promoting reform
and growth.
Explaining the transition success.
• Lecture 6. Meritocracy and yardstick
competition. Leaders with more success in
growth got faster promotion. Organization
of government facilitates yardstick
competition. Promotion within government
administration a strong incentive for elite
members.