Unbalanced growth in China --- understanding Chinese Success in a framework of political economy

1. Unbalanced growth in China--- understanding Chinese Success in a framework of political economy Shen，Ling School of Economics Shanghai University of Finance and Economics

2. How to find me? • http://se.shufe.edu.cn/ “people” “Ling Shen” “personal web page”

9. Target • Chinese economy grows very fast in last three decades. This should be understood systematically in order to share this experience with other developing countries. • We focus on two main characteristics of Chinese growth, i.e., an authoritarian political institution and high income inequality. • For each feature, we show firstly the facts, and then a theoretic model.

10. Briefly introduction of Chinese growth • Understanding this growth in a framework of political economy • Who enjoys this success • Chinese financial system and its effect on growth

11. 1. A Brief Introduction of Chinese Success (All data without special notes are from Chinese Statistical Yearbook) 1978: 2007: Nominal GDP 364.5 Billion RMB 24953 Billion RMB GDP p.c. 381 Yuan RMB 18934 Yuan RMB

12. Real GDP

13. Real GDP Growth rate ( in RMB ) 9%

17. 2. Possible Reasons of Rapid Growth

18. 2.1 Nature resources From Jiang, Ze-min (Journal of Shanghai Jiaotong Uni., 2008 42(3))

19. 2.2 Investment

20. 2.2 Investment

21. Infrastructure “要致富，先修路” Units: 1,000KM *: Data in 1988.

23. 2.3 Human Capital

24. 2.4 Market-oriented reform: privatization and open-door policy • Is China already a market economy?

26. 3. Economic growth in dictatorship • Most developing countries have dictatorial political institution. • Civil Liberty Index: from Freedom house • 1.0 --- 7.0 political environment of economic development.

27. Discussion in a political economy model • 3.1 Do we “need” a dictator? • 3.2 When will a dictator be “good”? • 3.3 When will democratization happen? • .

28. 3.1 Do we “need” a Dictator?

29. Some facts: • Democracy has higher growth rate on average • and quite stable --- less hope to catch up • Dictatorship is a risky project

30. Dictatorial countries: Index of civil liberties (1.0 - 7.0) bigger than 6.0 in 1972/74. All data from UN and Barro-Lee 1994.

31. Do we “need” a Dictator? • Barro (1996): “Democracy and growth”, Journal of economic growth(1),pp.1-27 • Tarares and Wacziarg (2001): “How democracy affects growth”, European Economic Review (45),pp.1341-1378 • Democracy: Advantage: more human capital investment, less inequality Disadvantage: less physical capital investment • Dictatorship: Advantage: more infrastructure (physical) investment Disadvantage: more corruption

32. Main features of the model • Utility function: • Production function:

33. Capital evolution functions: • Political institutions: dictatorship: the single ruler decides the tax rate and investment democracy: simple majority rule – the median voter

34. The optimality problem in democracy： Proposition 1： If there is no government, or government is democratic, the economy could have a zero growth rate – in a “poverty trap” -- under certain conditions.

35. The optimality problem in dictatorship： For individuals: • Proposition 2： If there is a selfish dictator, the incentive of private investment decreases.

36. For dictator：

37. Proposition 3： Under certain conditions, even a selfish dictator would lead the economy to leave the “poverty trap”, i.e., to achieve a positive growth rate.

38. 3.2 When will a dictator be “good”? • “Stability overrides everything.” ---- Deng, xiaoping 稳定压倒一切 －－－ 邓小平 • McGuire, M.C. and Olson, M. (1996) “The Economics of Autocracy and Majority rule”, Journal of Economic Literature 34, pp.72-96 • Timing: Expropriation Growth- enhancing policy Private Investment Production

39. Shen, ling (2007) “When will a dictator be good?” Economic Theory 31(2), pp. 343-366 • Endogenous life-time of dictatorship: • Political transition (Gun Model) Dictator: good policy or bad one? Dictator: represses or not? Parameters revealed Expropriation Citizens: revolution or not? Investment Production revolution

40. Dictator has incentive to transfer more to citizens if they have a lower incentive to invest. • Emphasize the trade off faced by the dictator: ---economic benefit in short term ---induce earlier revolution in long term • Stability does not necessarily lead to a better dictator.

41. 4. Who enjoys ? • Poverty level: <100 yuan p.c. in 1978 250 Million • <625 yuan p.c. in 2000 32 Million

42. In general, Gini coefficient of the income increases since 1985.

43. HH Income(RMB) in each province (2007) Beijing Shanghai Zhejiang

44. What is the effects of income inequality on economic growth? • Traditional ideas: • The saving rate increases in the income. • The rich saves more than the poor proportionally. • Hence, redistribution from the poor to the rich will increase the aggregate investment

45. What is the effects of income inequality on economic growth?

46. What is the effects of income inequality on economic growth? • Lucas Puzzle (1993) • South Korea and the Philippines were similar in the early 1960’s with respect to: GDP per capita, Population, urbanization, HC etc. • However, the growth rates in following 30 years are very different: 6% vs. 2%

48. From anecdotal to formal empirical evidence • Alesina and Rodrik (1994) • Persson and Tabellini (1994) • Perotti (1992,1994,1996) • Initial inequality is detrimental to long-run growth.

49. What are the effects of income inequality on economic growth? • Bénabou, Roland. (1996) “Inequality and Growth” in Ben S. Bernanke and Julio J. Rotemberg, eds., NBER macroeconomics annual 1996. Cambridge, MA: MIT Press, pp. 11-74. • Ling Shen (2009) “Urban-rural disparity: the demand analysis” The Journal of Developing Area 43(1) pp.87-107

50. Overview • Theories: • Imperfect capital markets • Political economy • Social conflict model