Lecture One Introduction to China ’ s Economic Growth

1. Lecture OneIntroduction to China’s Economic Growth Instructor: Xingmin Yin

2. Part One Dynamics of Development • Part TwoChina and Development Economics • Part Three Conclusions

3. Part One Dynamics of Development • Brief discussion on economic growth records. • Transition: geopolitical standing • How to understand the statistics? • Analysis of the macroeconomic record

4. 1. Brief Discussion on Economic Growth Records • A long-term rise in capacity to supply increasingly diverse economic goods to its population, this growing capacity based on advancing technology and the institutional and ideological adjustments that it demands. • After 1978, there was a major political shift to a pragmatic reformism which relaxed central political control and modified the economic system profoundly. • These changes brought a more stable path of development and a great acceleration of economic growth.

5. In the 25 years from 1978 to 2003 GDP rose nearly seven-fold, labor productivity rose four-fold, population growth decelerated sharply and per capita income rose nearly five-fold. • With per capita GDP rising 6.6 per cent a year, China enjoyed faster growth in this period than any other country. • The growth acceleration was mainly due to increased efficiency.

6. Major Factors for Economic Growth • Collective agriculture was abandoned and production decisions reverted to individual peasant households. • Small-scale industrial and service activities were freed from government controls. • The proportionate importance of state enterprise in industry and services was greatly reduced and there was a huge expansion of industrial production in urban areas financed by private domestic savings and a very large inflow of foreign capital. • Exposure to foreign trade was greatly enhanced. This strengthened market forces, made it much easier to develop and absorb new technology and introduced consumers to a wide variety of new goods.

7. Growth of GDP, by Sector, at Constant price(annual average compound growth rates)

8. Structure of Chinese GDP, 1952-2003(per cent of GDP)

9. GDP Growth in China

10. Discussion: Three Principal Components of the Definition of Economic Growth 1. The sustained rise in national output is a manifestation of economic growth, and the ability to provide a wide range of goods is a sign of economic maturity 2. Advancing technology provides the basis or preconditions for continuous economic growth- a necessary but not sufficient conditions 3. To realize the potential for growth inherent in new technology, institutional, attitudinal, and ideological adjustments must be made. Technological innovation without concomitant social innovation is like a light bulb without electricity- the potential exists, but without the complementary input, nothing will happen.

11. 2. Transition: Geopolitical Standing • The reform period was one of much reduced international tension. • China’s geopolitical standing, stature and leverage were greatly increased. • China became the world’s second largest economy.

12. China’s Geopolitical Standing, 1820-2003

13. Comparative Levels of Economic Performance, G5 and China

14. China is still a relatively low-income country, but this is a favorable position for a nation which wants to achieve rapid catch up. • China’s level of income is still much lower than that of Japan, • China still has great scope to capture the advantages of backwardness, and its period of super-growth can last longer than it did.

15. 3. How to Understand the Statistics? • Chinese experience has been fascinating, unpredictable and often difficult to understand. • Official statistics still exaggerate GDP growth and understate levels of performance.

16. 4. Analysis of the Macroeconomic Record • Labor input • Investment rates and capital inputs • Total factor productivity • Structural change • Performance in the rural sector • Industrial policy and performance • The transformation of relations with the outside world • The changing role of fiscal and monetary policy

17. A. Labor Input • Employment rose faster than the population of working age due to increasing participation of women. • Under the household system rural residents were not allowed to migrate to urban areas. They did not have the social benefits which urban dwellers enjoyed. • In the reform period, allocation of labor has improved, particularly in rural areas, where the boom in small-scale industry and service employment absorbed surplus labor from farming.

18. Vital Statistics, Labor Input and Education Levels, 1952-2003

19. Quality of Labor • In the reform period, higher education enrolment has risen very fast, from less than a million in 1978 to nearly 20 million in 2007. • There has also been a surge in the number of Chinese studying abroad. • From 1952 to 2003, the average level of education of the population aged 15 and over increased from 1.7 years to 10.2 years. • Life expectancy at birth rose from 38 years in 1950 to 72 in 2003.

20. Student Enrollment by Level of EducationChina, (000s)

21. The Impact of Human Capital Improvement to Economic Growth • The increase in the quality of the labor force contributed importantly to China’s production potential, which was further strengthened by improvements in health. • Improvements in sanitation, diet and wide availability of modern drugs have been the main contributors to increased life expectancy.

22. B. Investment Rates and Capital Inputs • The Chinese ratio of inventory change to GDP fell sharply in 2000-2003, when it averaged 1.55 per cent. • Since 1978, capital productivity has improved substantially and capital/output ratio in 2003 was 2.6. • Although the state continues to have a significant role in the allocation of investment funds, the overall impact of greater non-state participation was to direct investment into areas where the yield is higher.

23. Investment in Fixed Assets(1980-2003)

24. C. Total Factor Productivity • After 1978, the rate of growth of labor input declined, the rate of growth of the education stock slowed and capital inputs increased at the same pace. • GDP growth accelerated sharply, labor productivity grew much faster than before, capital productivity ceased being negative and total factor productivity increased by 2.95 per cent a year. • The improvement in resource allocation……

25. China Basic Growth Accounts(annual average compound growth rates)

26. The above table provides a set of simplified growth accounts for the two major phases of Chinese growth: 1952-78 and 1978-2003. • In both periods there were substantial advances in educational levels which improved the quality of the labor force. • International experience

27. C. Structural Change • There were massive structural changes in China between 1978 and 2008. • Agricultural output and employment grew much slowly than the rest of economy. • The most dynamic sector was industry whose share of GDP rose to 52 per cent. • The service shares of GDP and employment grew substantially.

28. Indicators of Sectoral Growth Rates, GDP and Employment

29. The industry made a great contribution to China’s economy progress. • The growth rate of industry was 11.1% in 2004. • How to understand the lower growth rate of service sector that was taken place in the last decade? • Is it sustainable for China’s economy growth?

30. Labor Productivity, Growth Rates

31. The large inter-sectoral differences in labor productivity levels and growth are due in substantial degree to differences in the sectoral distribution of physical capital and education. • These elements of causality are already embodied in the aggregate growth accounts.

32. Discussion • Structural changes generally reflect two basic forces which are operative in all countries as they reach successively higher levels of real income and productivity. • The first of these is the elasticity of demand for particular products. • The second basic force has been the differential pace of technological advances between sectors. • Both these forces have been operative in China.

33. E. Performance in Rural Sector • Agriculture • Rural activity outside agriculture

34. Rural/Urban Distribution of Population and Employment, million

35. F. Industry Policy and Performance • Rapid industrialization was the top priority for the new China. • It was expected to provide the flow of materials and machinery to raise the rate of investment and provide the hardware which would guarantee military security. • Industry has been much more heavily capitalized than most other parts of the economy.

36. Until 1978, industry was tightly controlled and investment fully funded by government. • In the reform period since 1978, government has operated with much looser rein. • ……

37. Industrial Competition • After 1978, competition fro state firms came from the huge growth of output in low-cost, low-wage township, village and individual enterprises in rural areas, from rapid expansion in the tax-favored special enterprise zones in coastal areas and from imports which rose from US$11 billion in 1978 to US$660 billion in 2005. • Between 1978 and 2003, industrial labor productivity rose by 6.5 per cent a year.

38. The Service Sector • Since 1978 retail trade and restaurant activity has been almost completely liberated and the ownership structure has reverted to what it was in 1952. • After 1978, when the service sector was released from official constraints, it grew very fast. The barriers to entry were small.

39. G. The Transformation of Relations with the Outside World • Foreign trade was a state monopoly and was heavily concentrated on imports of capital goods and technology. • The new political leadership which emerged after the mid-1970s decided to abandon the previous policies of autarkic self-reliance and open the economy to the benefits several other Asian countries had derived from an expanding world economy. • A major element in the new policy stance was the creation of special economic zones.

40. Chinese export volume doubled from 1952 to 1978 and rose 28-fold from 1978 to 2003. • In 2003 China’s exports were 8 percent of the world total, a substantial rise on the 1978 situation when their share was 0.8 per cent.

41. Volume of Merchandise Exports,annual average compound growth rates

42. Value of Merchandise Exports,Constant prices, million 1990 dollars

43. Trade • In the 1950s, China’s exports were concentrated on food, raw materials and textiles. • By 2005 the structure of exports was highly diversified, with 86 per cent consisting of a range of manufactures. • Its import structure has also diversified. • The geographic distribution of trade has been highly diversified since 1978.

44. FDI • In 1978 China had no foreign debt and virtually no foreign direct investment. • The annual inflow of direct foreign investment rose from $3.5 billion in 1990 to $60 billion in 2003. • The total inflow from 1979 to 2005 was more than $620 billion.

45. Important Issues in International Activity • Should large and powerful multinational corporations be encouraged to invest in the developing economies, and if so, under what conditions? How have the emergence of the “global factory” and the globalization of trade and finance influenced international economic relations? • Are free markets and economic privatization the answer to development problems, or do developing country governments still have major roles to play in their economies?

46. H. Macro-management and the Changing of Fiscal and Monetary Policy • Size and structure of government revenue and expenditure. • The explosive growth of household savings and the rapid monetisation of the economy were the most important elements preventing a financial crisis. • In 1978 the money supply was less than a third of GDP, but by 2005 it was bigger than GDP. • Since 1978, the government has created a much more complex banking structure.

47. Part TwoChina and Development Economics • How does China fit into the received views of development economics? 1. Economic Development in Theory 2. China’s comparative economic performance: a quantitative look.

48. 1. Economic Development in Theory • What is the real meaning of development, and how can different economic concepts and theories contribute to a better understanding of the development process in China? • What are the sources of national and international economic growth? Who benefits from such growth and why?

49. What can be learned from the historical record of economic progress in the now developed world? Are the initial conditions similar or different for contemporary developing countries from what the developed countries faced on the eve of their industrialization? • Why do people continue to migrate to the cities from rural areas even though their chances of finding a job are very slim?

50. Some Specificities in China • As 65% of China’s populations still reside in rural areas, how can agricultural and rural development best be promoted? • Does China educational system really promote economic development, or is it simply a mechanism to enable certain select groups or classes of people to maintain positions of wealth, power, and influence?