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The Ingredients and Challenges of Sustained Growth

The Ingredients and Challenges of Sustained Growth. Michael Spence Cape Town June 2007. Outline. Sustained High Growth Ingredients China and India Income inequality Comparative Advantage Leadership and political transitions Urbanization Demand Shock Resource rich economies.

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The Ingredients and Challenges of Sustained Growth

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  1. The Ingredients and Challenges of Sustained Growth Michael Spence Cape Town June 2007

  2. Outline • Sustained High Growth • Ingredients • China and India • Income inequality • Comparative Advantage • Leadership and political transitions • Urbanization • Demand Shock • Resource rich economies

  3. Sustained High Growth • Growth > 7% for twenty plus years • There are 11 cases • 8 in Asia • (Botswana, China, Hong Kong, Indonesia, Korea, Malaysia, Malta, Oman, Singapore, Taiwan and Thailand) • Japan was close - India is about to join in • All post WW II • All leverage the global economy

  4. Growth is a Recent Phenomenon 21st?

  5. Ingredients • Functioning market system • High levels of savings and investment • Public and private • Resource mobility • The microeconomic evolution of a rapidly growing economy • Leveraging the global economy • Demand • Comparative Advantage • Technology and know-how

  6. China and India • China has been in this high growth mode since 1978 • India is about to jump into the high growth category • India’s current five year plan (just started) has average growth over 9% accelerating to over 10% • There are formidable challenges for each country • They will have substantial and increasing impacts on their neighbors, other developing countries, and the global economy The two most populous countries, accounting for 40% of the world’s population, are the fastest growing economies in the world, one a complex democracy and the other a socialist market economy

  7. China: GDP per capita and Poverty Reduction

  8. Income Inequality

  9. Rural Populations Decline

  10. Saving and Investment

  11. Leveraging the Global Economy

  12. Trade Surplus

  13. In addition to lower prices, FDI drove rapid export growth in China Manufactured exports growth $ billion FDI backed exports Per cent of total exports • China 60.0 • China • India • India Source: CMIE, China Statistical Yearbook, McKinsey CII Report

  14. Public debt:China 24.4% of GDP (2005 est.) US$ bn China (LHS) US$50 bn over the next 3 years India (RHS) Source: The World Bank; Deutsche Bank; CMIE

  15. Deng Xiaoping’s biography in brief Secretary of Party under Mao Banished to a tractor factory in Cultural Revolution Returned under wing of Zhou Enlai Banished by Gang of Four Replace Hua Guofeng Left Hua in Central Committee (essentially for life)

  16. Challenges for China • Maintaining high growth is the overriding goal • Managing economic relations with the rest of the world • Managing Rural to Urban Migration – 13 to 15 Million People a Year • Absence of social insurance and services • Huge urban-rural productivity differentials • State Owned Enterprises – SOE’s • Government Ownership

  17. Capital Markets and Diversifying Sources of Growth • Capital Markets and investment efficiency • Capital markets are quite underdeveloped • Exchange Rate and External Imbalance • PBC (our Federal Reserve) accumulation of foreign reserves • Diversifying sources of growth • Manufacturing sectors • Service sector • Domestic Market • “China is several different economies at different stages of development”

  18. Capital Composition

  19. Aside: Global Capital Markets

  20. Gradual Appreciation of Currency is Likely • The continuing need for direct credit and other controls on investment • Response to interest rates unclear • Continuing capital controls are required to have a monetary policy targeted to inflation and growth and at the same time retain some control over the exchange rate. • In addition with immature capital markets, there is the risk of destructive volatility – without capital controls • Phasing these out at the proper rate as the capital markets develop is a key policy challenge • Building capital markets and increasing efficiency of investment is a high current priority

  21. Internal and External Balance China is at A in internal balance and way out of external balance The outside world says move to B China is likely to go gradually from A to D

  22. Reserves

  23. Recent Trends • In 2007 in China • GDP: $2.8 trillion • Forecast trade surplus: $250-$300 billion • Surplus/GDP 10% or more • Investment/GDP: 40-45% • Savings/GDP: 50-55% • Exports + Imports as percentage of GDP: 70% • Reserves at the end of 2006: $1.2 trillion • Likely reserve additions: $400 billion or more • Reserves at the end of 2007: $1.6 trillion

  24. China During Currency Crisis1997-1998 Japanese Yen Chinese Renminbi Taiwan $ Korean Won Thai Baht Jun 97 October 22, 2003 Source: Bloomberg

  25. Challenges (continued) • Environment Problems - these are huge • Energy efficiency and security • China plans to double its energy efficiency in the next decade • Economic growth will still cause energy consumption to rise • Rising Income Inequality • Overinvestment in infrastructure - underinvestment in higher education • Internal market fragmentation – developing the domestic market • Restoration of pension system and medical care – especially in the rural areas

  26. India Assets • Higher Education • Optimism and Sense of Momentum • IT/BPO Outsourcing • Projected growth is 30% per year and India is the dominant player • Financial Sector and Reserve Bank of India • Growth in Trade in Services Has Room to Grow • R&D • Medical Services • Political Speeches • Editing of newspapers • and TV • Grading exams

  27. But • This is not enough to produce and sustain high and inclusive growth • Doesn’t employ enough people • India needs an additional powerful productive employment-generating engine • This is very well understood by India’s leaders • Labor intensive manufacturing and exports • Add the China approach to the portfolio • Open up to FDI • Special Export Zones (400+)

  28. Investment and Policy Challenges Education Infrastructure

  29. Efficiency and Investment in Agriculture

  30. Impacts on Global Economy • Rapidly growing trade with each other • Very large regional impact in east and south Asia • Demand and imports from each other and more advanced neighbors • Intense competition for less developed neighbors • Competitive pressure on advanced economies • Europe in particular with less flexible labor markets and social safety nets that constrain competitive responses

  31. Demand for Energy and Commodities • Large incremental demand for raw materials and commodities with effects of prices (China’s equivalent of our interstate highway system is an example) • Potential scramble for energy security – because of the size of the demand shock • Increased influence in Africa and other parts of the world

  32. China’s Trade with Africa

  33. Magnitude of Impacts Becoming Material • In 1980 when China grew ten percent, the absolute increment to global GDP and global demand was insignificant. • Now the GDP is about 2.22 trillion $, and a ten percent increment is large in absolute terms • The rough equivalent (in terms of global demand) of about a 1.78% increment in US GDP growth

  34. Demonstration Effects India has been galvanized by China’s growth High growth is possible in a complex democracy Can other developing countries compete with China and India locating comparative advantage Quality of the economic policy debate

  35. The Latest Entrant: Vietnam Growth Rate 5.88%

  36. Developed Countries Middle income lag Protectionist sentiment Trade in services and globalization of some labor markets Impact of technology Developing Countries Rising inequality side effect of benign growth dynamics (China and India) “Inclusiveness” Unequal distribution of assets can retard growth Rising Income Inequality and Resistance to Globalization

  37. Gini Coefficients

  38. Global Warming • Decision making under extreme uncertainty • Very long time horizons • Large ranges in the estimates of climate impacts • These will decline over time as the science becomes more precise • The stocks and the flows of green house gases • The Kyoto impasse • How to allocate the emissions rights equitably

  39. Three Major Sets of Issues • 1. Mitigation • Allocation of emissions rights across countries • Efficiency – carbon trading market mechanisms • 2. Technology • Reduction of the costs of mitigation • Subsidies and rapid transfer globally • 3. Adaptation • Capacity to adapt to climate change that does occur • Poorer country problem • RESPONDING TO CLIMATE CHANGE IS A MAJOR TEST OF OUR COLLECTIVE CAPACITY FOR GLOBAL GOVERNANCE

  40. Demand for Energy and Commodities • Large incremental demand for raw materials, commodities, and energy with effects on prices (China’s construction of the equivalent of the US interstate highway system is an example) • For developing countries with commodity exports, the effect can be beneficial in the short run – but rising commodity prices is not a basis for sustained growth • Generally rising energy costs hurt poor countries more than richer ones • Potentially damaging scramble for energy security – because of the size of the demand shock – and the potential for supply problems in unstable regions

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