HOW DOES THE GROWTH AND INNOVATION STRATEGY OF CHINA AFFECT THE WORLD ECONOMY

1. HOW DOES THE GROWTH AND INNOVATION STRATEGY OF CHINA AFFECT THE WORLD ECONOMY? Robert Boyer Presentation prepared for DIIS seminar Copenhagen, January 18th, 2010

2. INTRODUCTION A new phase for the world economy The need for a redeployment of basic tools The diffusion of innovation-led strategies: the need for an assessment

3. THE LECTURE: THREE STEPS In search of a new framework for the national / international macro economy The growth regime of China: more domestic competition than export led. The future growth regime : can it be endogenous innovation led?

4. IN SEARCH OF A NEW FRAMEWORK FOR THE NATIONAL / INTERNATIONAL MACROECONOMY

5. The 90s : the United States, Japan and China and the stability of the world economy The Americans: the consumers of last resort The Japanese: the savers of last resort The Chinese: the manufacturers of the world

6. Figure 1 -Can two vicious circles make a world virtuous configuration?

7. The 2000s : Still another configuration for the world economy The Americans: the consumers of last resort�and beneficiary of world excess of saving The Japanese: a recovery in response to the dynamism of Chinese imports of equipment goods and high-tech components The Chinese: the manufacturers � and the savers of the world

8. Figure 2 � Towards a duopoly at the world level?

9. Macroeconomics becomes global: farewell to closed economy models From a closed economy model to the interaction of two national economies: the US and China A lasting overcapacity in manufacturing in China, hence a pressure towards price wars An upward drift of the relative prices of oils and raw materials

10. A possible explanation of the Alan Greenspan puzzle Not any increase in long term interest rates in the US: the consequence of the excess savings of Asia The moderation of core inflation: the definite impact of Chinese overcapacity in commodities The surge of consumption prices: the under capacity in the production of raw materials These are direct consequences of the America / Asia (China) duopoly

11. A contrario, a drastic challenge of neoricardian international trade theory The mobility of frontier technologies towards China The quasi unlimited supply of labor in China The size of the potential Chinese market

12. The role of increasing returns to scale Consequently, the emergence of the hypothesis that manufacturing world prices are Chinese prices

14. Figure 3 � Unit production costs in China and the rest of the world

15. CHINESE GROWTH : A DOMESTIC COMPETITION LEDMORE THAN A TYPICAL EXPORT LED REGIME

16. 1. The Chinese institutional forms in historical perspective Introducing progressively market incentives into a rather centralized economic system - Increasing the production for the market before down sizing the nationalized sector

17. Figure 4 - The example of the steel industry

18. - A quasi minimalist public spending Figure 5 - the two phases of State public spending

19. A pragmatic and sequential extension of local successful experiments A large decentralization of public policy

20. A crucial step: the decentralization of decisions at the provincial level - The example of public spending Figure 6 - The long term evolution

21. Figure 7 - an international comparison - The structure of a quasi federal state?

22. The foundations of local state corporatism (Oi 1992)� �a core hypothesis to understand the specificities of Chinese growth

23. 2. The macroeconomic growth regime: domestic competition led Basically, a series of pro growth socio-political alliances Capital accumulation is the major tool for sustaining this alliance

24. Figure 8 - Macroeconomic Structure of the Chinese Economy

25. A built in propensity to overcapacity and excess in credit financing on top of retained profits. Hence a domestically generated fierce competition in order to capture increasing returns to scale An implicit society wide compromise: enjoy the dividend of growth in counterpart of the ruling of the Communist Party

26. The dynamism of exports: the logical outcome an unbalanced distribution of income

28. 3. Some quite unorthodox features of this institutional architecture and growth regime Guanxi and Communist Party as a multilevel coordination processes, quite imperfect substitutes for legal, formal rules Corruption: converting formally collectivist institutions into capitalist ones. It is not necessarily an obstacle to development!

29. A genuine mixed economy: the false opposition between private and public firms, since they are densely connected The diversity and fuzziness of property rights help in the evolutionary process of catching up

30. The multinationals are part of this pro growth alliance and contribute to over accumulation Foreign relations are more governed by the appropriation of frontier technologies than mercantilist objectives!

31. 4. Imbalances and contradictions of this socio-political regime A waste of capital due to over accumulation at the detriment of a general increase of standards of living

32. Figure 11 - A high but declining profit rate

33. A financial volatility and fragility in spite of an impressive restructuring of bad debts, constantly recreated by over accumulation

34. A typical bubble

35. The choice of the exchange rate regime imply large trade surplus, accumulation of reserves� � An excessive liquidity, source of speculation, and inflation� ... And it implies the risk of protectionist backlash

36. Figure 14 - The explosive Chinese trade surplus

37. The very success of China creates structural unbalances at the world level ...In the adjustment of saving and investment ...The run for appropriating natural resources �The geopolitical hegemony of the US

38. The progressive loss of control by the political authorities of a complex, contradictory and divided society and economy... An evidence: on 2007-2008 a typical dilemma of Chinese economic policy: - fighting inflation - without killing the dynamism of growth

39. The social and domestic imbalances are acute social inequalities, dual citizenship, housing, heath care, aging fighting inflation And the call for an harmonious society and endogenous innovation is not easy to implement

40. III. WILL THE FUTURE GROWTH REGIME OF CHINA BE INNOVATION LED?

41. An explicit recognition by public authorities about the design of a national system of innovation The legacy of the past: a Soviet-type of SSI, with typical problems for linking basic research, innovation and economic activity

42. A continuous flow of organizational and institutional reforms Building connections between research and industry Opening to world technology Various incentives for innovation at the firm level

43. A fast increase in the volume of RD� but still a limited size in international perspective

44. A large pool of researchers�But low productivity in terms in patenting

45. Presently, a clear external dependency for high tech products and technologies�

46. �A high import content of high tech Chinese export

47. A productivity revolution in the manufacturing sector due to the import of technological frontier investment goods�

48. How much national is the Chinese System of Innovation? A significant dependence with respect to the flow of technologies within multinationals�

49. �The contribution of Chinese firms to high tech net exports is negative But a clever use of international collaborative research�

50. �and a significant pool of Chinese students and researchers abroad

51. The Chinese domestic firms are catching up rather slowly with respect to foreign multinationals with plants in China

52. A clear regional concentration of innovations, high tech industries and exports� More a series of local clusters� �Frequently with international connections� �Than a really national system

53. The existence of two innovation styles and growth regimes Chinese firms specialize in specific sectors (metal product, machinery, transport equipment) linked to domestic demand

54. For the time being, the domestic effort in RD does not seem to show out in the performance of Chinese firms� �An conversely, the spillover from FDI is still modest

55. Provisional conclusions : An original far sighted strategy for promoting long term growth�but A growing importance of the innovations made and captured by foreign multinationals The quite problematic success of an endogenous and indigenous innovation process in the present decade

56. CONCLUSION C1 � China displays a rather unique institutional configuration: a series of local meso-corporatisms in competition under the tentative control by the central state. C2 � The speed and resilience of Chinese economic growth is largely the outcome of a competition led accumulation regime. Among provinces, localities, large cities Among various types of firms On the world market

57. C3 � A large fraction of Chinese trade surplus and international frictions originates in such an unbalanced domestic growth Permanent trend towards overcapacity Unbalanced income distribution at the detriment of wage-earners and welfare Difficult management of credit and money C4 � The impressive productivity performance of domestic Chinese firms still comes from the rapid adoption of frontier technologies but not yet from the emerging of an endogenous national system of innovation

58. C5 � The quick and seemingly successful response to the world crisis by the Chinese authorities is actually deepening the previous growth model Significant autonomy of fiscal policy Control of exchange rate Massive stimulation of infrastructures and productive investment at the local level

59. Table 8 � The public spending program 2008-2010 by sectors

60. C6 � Paradoxically, these quite remarkable short term achievements of economic policy might be quite detrimental to the long run viability of the present growth regime Unprecedented overcapacity A creeping protectionism from the rest of the world Recurring speculative bubbles Permanent recreation of bad loans.

61. Figure 21 � The widening gap between consumption and investment (% of GDP)

62. C7 � A domestic demand led regime will take at least one decade to be implemented, and the emergence of a strong and autonomous innovation system will still take another decade.

63. Thank you for your attention Robert BOYERCEPREMAP (Paris), GREDEG (Sophia-Antipolis).140, Rue du Chevaleret 75013 PARIS, France Invited Professor at CBP, Copenhagen Business School e-mail�: robert.boyer@ens.fr web�site : http://www.jourdan.ens.fr/~boyer/