ChineseEconomicMiracle (2)

The Chinese Economic Miracle:
Looking back and Looking Forward
Teachers as Scholars at King’s
Dr. Peter Ibbott
Associate Professor of Economics
King’s University College at the
University of Western Ontario
March 28, 2014
• “China 2030: Building a Modern, Harmonious, and
Creative High-Income Society”
published by the World Bank and available at
• “Is China Overinvesting and Does it Matter”
Published by the IMF and available at
• “Supersized cities: China’s 13 megalopolises “
published by the Economist and available at
Shanghai: Bund
Shanghai: Pudong
China and India Compared: GDP per Capita
Source: IMF
2011 Nominal GDP in US$ billions (Source: IMF)
Annual disposable income - urban and rural households
Some Development Indicators
Different Paths: India and China Compared
Development and Education
Development and Poverty
Development and Inequality: Kuznet’s Curve
China's energy generation, 1971-2005
Vehicle sales 2007-2012
Pork consumption
Pork has long been the most popular meat in China, but
consumption was traditionally limited by the weak spending
power of most of the population. As people's incomes have
risen strongly since the 1990s so the amount of pork
purchased has soared.
1990 310 million
2010 666.9 million
1990 85.4 million
2010 110.4 million
Basic Education
• 1950: 20% over age 15 are literate
• 2007: 93.3% over age 15 are literate while
99% of 15-24 year olds are literate
• 2009, PISA (Program for International Student
Assessment) international rankings of 15 year
olds placed Shanghai students first in the
world in mathematics, science and literacy
1949: Average Life Expectancy of 35 years
2012: Average Life Expectancy of 74.8 years
Life Expectancy and per capita GDP
But life expectancy would be much higher if
respiratory illnesses (cigarettes, air pollution)
could be reduced, water quality improved and
food safety increased.
• Improvements to public health should provide
huge gains in life expectancy.
Q: In what ways has China’s economic
miracle failed to improve society?
• Pollution
• Congestion
Pollution: Economic cost to the environment (2011)
100-km Chinese traffic jam enters Day 9
Last Updated: Monday, August 23, 2010 | 1:43 PM ET
CBC News
External Links
Xinhua: Highway jam enters its 9th day, spans 100km
(Note: CBC does not endorse and is not responsible for the content of external sites - links will open in new window)
(David Gray/Reuters)
A nine-day traffic jam in China is now more than 100 kilometres long and could last for
weeks, state media reported Monday. Thousands of trucks en route to Beijing from Huai'an
in the southeast have been backed up since Aug. 14, making the National Expressway 100
impassable, Xinhua News reported. A spokesman for the Beijing Traffic Management
Bureau reportedly told China's Global Times newspaper that the backup was due to
"insufficient traffic capacity … caused by maintenance construction.“ The construction is
scheduled to last until Sept. 13.Stranded drivers appear to have few options when it comes
to dealing with the jam. At least some drivers have complained that roadside vendors have
increased their prices to take advantage of the traffic jam. One truck driver said he bought
instant noodles from one vendor for four times the original price.
Q: In what ways has China’s economic
miracle failed to improve society?
• Corruption
• Consumerism
– Endless pursuit of status goods
– Rising Search for spiritual alternative (Christianity
is growing very fast)
– Vice (drugs, gambling, prostitution) is a rising
– Congestion
Q: In what ways has China’s economic
miracle failed to improve society?
• Growing need for political and legal reform.
– Tiananmen Square Protests of 1989
– Internet and press are subject to heavy handed
– Courts and police are corrupt and serve interests of
the party
– Despite this, the government is having difficulty
resisting change:
• Failure to introduce national history curriculum in Hong Kong
• Need for legal reform to sustain investment
• Inequality
– market socialism has failed to deliver distributive
Culture does not determine inequality.
Canada: Gini = 32.1
Korea: Gini = 31.4
Taiwan: Gini = 34.2
Peoples Republic of China: Gini = 41.5
Hong Kong: 53.3
Politics and economic policy matters!!!
Q: Does overpopulation prevent China
from overcoming its problems?
• One child policy introduced in 1978 (Deng Xiaoping)
• Less impact on growth than is commonly believed and
has caused a number of unintended consequences of
enormous importance:
– Increased the proportion of males to females
– Encouraged the state to use its power to violently
intervene in the most important decisions made by
ordinary families.
– Has caused China to have a rapidly aging population which
will soon increase the dependency ratio and further
weaken the already weak social safety net
– Will put increasing pressure on the health care industry
and further reduce access to primary health care for most
ordinary Chinese families.
Population and Population Growth Rate
Population and Population Growth Rate
2 AD: 86,000,000
1000: 87,000,000
1500: 110,000,000
1800: 260,000,000
1900: 400,000,000
1950: 546,815,000
1982: 1,008,065,000 (reaches 1 billion)
2010: 1,337,825,000 (almost 1 in 5 people live in China)
2020: 1,387,792,000
2030: 1,393,076,000
2040: 1,360,906,000
2050: 1,295,604,000
Q: Where do all these people live?
Population Density
Q: Where do all these people live?
Overpopulation: Rural-urban migration is dramatically
reshaping China
• Urban growth was slow rising from According to the 1953 and 1982
censuses, the urban population as a percentage of total population
increased from 13.3 in the 1953 census to 20.6 percent in the 1982
• From 1982 to 1986, the urban population increased dramatically to 37
percent of the total population as rural agricultural workers left the land in
the largest rural urban-migration in human history.
• By 2000 this had risen to 50% of the total population (650 million)
• Between 2010 and 2025 an additional 300 million people are expected to
leave the countryside and move to the cities taking the urban population
to 75%.
Rural urban migration has caused the rise of super-megalopolises
• Guangzhou: ≈ 41 million
• Beijing-Tianjin : ≈ 30 million
• Shanghai: ≈ 25 million
Number of Cities in China with 1 million people or more
34 in 2000, 102 in 2012, 221 in 2025
Q: What do all these people want?
• Middle class lifestyle:
– Car (already world’s largest automobile market)
– TV, Internet, Music, Movies, Mobile phones
– Consumer goods
• Global brands are coveted
– Status recreational activities
– Quality Education in the Arts and Science
– Home ownership
Q: What Caused the Chinese Economic Miracle?
Mao’s Revolution and Stagnation
1949-58: Mao consolidates power
• encourages families to have more children
• introduces China’s first five year plan based on the
Soviet model
• the “Commanding Heights” of the economy are to be
seized by large state monopoly firms pursuing heavy
industrial development.
Mao’s Revolution and Stagnation
1958-61: Mao abandons the soviet industrial
development model for “The Great Leap Forward” to
“grass-roots” or agrarian socialism. Policy turns away
from the commanding heights towards rural
• Small rural agricultural collectives were merged into
large, rural “People’s Communes” in order to better
exploit the gains from the division of labor.
• The People’s Communes:
– Banned all private holdings/gardens
– Introduced new farming techniques that would turn China
into a grain exporter
– Accelerated the construction of state infrastructure,
– Increased steel production by using backyard furnaces.
Mao’s Revolution and Stagnation
1959-61: “The Great Leap Forward” begat the “Great
Chinese Famine” where between 18 - 45 million died of
starvation, while 200 million suffered from serious
malnutrition. During this time, China exported grain.
1961-65: The failure of the Great Leap Forward causes
the party to force Mao into a ceremonial role within the
• Leadership of Economic Policy is assumed by Liu Shaoqi
and Deng Xiaoping.
• They reversed the Great Leap Forward by breaking up
the People’s Communes.
• Deng famously argues that "It doesn't matter whether
it's a white cat or a black, I think; a cat that catches
mice is a good cat."
Mao’s Revolution and Stagnation
1966-76: Mao encourages the Cultural Revolution and uses
it to purge Liu Shaoqi, Deng Xiaoping, and other leaders of
the CPC who had earlier opposed him.
• The Red Guards are placed at the vanguard of class
struggle against “right leaning elements” who had resisted
agrarian socialism.
• Grass-roots revolutionaries go on a campaign to identify
and purge perceived enemies of the new order through
campaigns of forced self criticisms and re-education
through labor.
• The aims of the cultural revolution expanded to shift
power out of the cities to the grass-roots people’s
• Works of historical and cultural value are destroyed
because they were thought to be at the root of "old ways
of thinking".
An Economic Revolution Begins
• Mao dies in 1976. Hua Guofeng is Mao’s anointed
successor. He takes power and moves quickly to
marginalize extremist elements within the party.
The Gang of Four are arrested and the cultural
revolution ends.
• 1976-80: Deng Xiaoping consolidates his power in
the party and quietly pushes Hua Guofeng into
retirement. The transition is peaceful.
• 1978: Deng introduces significant economic
reforms aimed at introducing “market socialism”
under a new banner “Socialism with Chinese
The Chinese Economic Miracle
Economic Revolution: Stage 1 (1978-84)
• De-collectivization of agriculture, and the introduction
of the “household responsibility system”. Farmers are
granted long term leases and allowed to privately farm
and sell their produce in new private markets.
• Agricultural output growth dramatically accelerated to
8.2% a year, agricultural prices fell, meat and vegetable
production rose dramatically.
• Special Economic Zones were created that permitted
foreign investment and encouraged local
entrepreneurs to start up businesses.
• But: most industry remained state-owned.
The Chinese Economic Miracle
Economic Revolution: Stage 2 (1985-2010)
• the privatization and contracting out of much
state-owned industry
• lifting of price controls, protectionist policies, and
• But: state monopolies in sectors such as banking
and petroleum remained.
• But: The conservative Hu Jintao
Administration more heavily regulated and
controlled the economy after 2005, reversing
some reforms.
The Chinese Economic Miracle
Impact of Economic Reforms
• Overall the reforms unleashed economic growth
that is unprecedented in human history
– GDP Growth rate of 9.5% a year
– China's economy became the second largest after
the United States.
– More than 500 million people lifted out of poverty
– Now the world’s largest exporter and manufacturer
– In transition from middle-income to high-income
The Chinese Economic Miracle
Why did the economic reforms work?
• The sources of economic growth are:
– Growth in the Labour Supply
– Growth in Capital
– Growth in Productivity
• Growth in GDP per capita requires
– Capital Deepening (K has to grow faster than L)
– Total Factor Productivity has to rise
• The reforms to agriculture and the introduction of private
enterprise increased the productivity early in the process
• Later reforms encouraged a high savings rate while
encouraging private investment by domestic and foreign
The Chinese Economic Miracle
Will the miracle of high growth continue?
• As the process continues, limits to growth begin to
assert themselves
• Labour growth will decline because of the a stagnant
population and the reduced flow of rural migrants to
the cities.
• Productivity growth will begin to slow as technology in
China catches up to leading economies.
– The Law of Convergence.
• Capital growth has fueled the last 15 years of growth,
and this is not sustainable.
The Chinese Economic Miracle
Why are high levels of investment unsustainable?
• Micro studies of firms show evidence of over-investment by
State Owned Enterprises (SOE’s) and many private enterprises.
• China’s banking system is biased towards SOE’s and many of
these are very vulnerable to defaulting on their debt if there is a
downturn in demand.
• Much of China’s investment has been directed at the housing
sector and there is considerable evidence of a speculative
bubble in prices and over-supply in the housing stock.
• Over the last 10 years, the capital-output ratio has risen faster
and higher than levels seen in other developing countries. At
the same time there has been a fall in the return to capital.
Eventually a tipping point will be reached. A rapid adjustment
could cause confidence to collapse triggering a financial crisis,
recession and a potentially very hard landing.
Two questions:
1. Can China’s growth rate still be among the highest in the
world even if it slows from its current pace?
2. Can it maintain this rapid growth with little disruption to
the world, the environment, and the fabric of its own
The World Bank report answers both questions in the
affirmative, i.e., by 2030, China has the potential to be a
modern, harmonious, and creative high-income society.
Achievable but neither certain nor easy.
What are the risks and challenges?
1. Internal Risks and Challenges
• depletable resources
• demand-pull and supply-push inflation
• demography, aging population
• pace of human capital accumulation
2. External Risks and Challenges
• global economic slowdown
• high resource prices
• new emerging competitors
What does China need to do?
Implement a NEW long term strategy for the next
phase of development. The 12th Five Year Plan an
excellent place to start. The IMF Report recommends
that China seek to implement policies that:
1. Complete the transition to a market economy
2. Accelerate the pace of open innovation
3. Go green
4. Expand Individual Opportunities and Improve
Social Services
5. Fiscal Reform
6. Become a responsible Global Player
1. Complete the transition to a market economy
• Implement structural reforms,
• Strengthen the foundations for a market-based economy,
• Redefine the role of government its relationship to markets and
the private sector,
• Reform and restructuring state enterprises, developing the
private sector,
• Promote competition,
• Provide more intangible public goods and services like systems,
• Introduce modern corporate governance practices, e.g.,
separating ownership from management
Financial sector reform:
Allow commercializing the banking system,
Allow interest rates to be set by market forces,
Deepening the capital market,
Developing the legal and supervisory
infrastructure to ensure financial stability,
• Build the credible foundations for the
internationalization of China’s financial sector.
Labor market reform:
• Ensure workers can move in response to market
• Introduce measures to increase labor force
participation rates, and
• Use social security instruments (pensions, health,
and unemployment insurance).
Land reform:
• Increase efficiency of land use,
• Reform policies for acquisition of rural land for
urban use, and
• Reduce local government dependency on landrelated revenues.
2. Accelerating the pace of open innovation
Needed: An open innovation system that fosters both
Product and Process innovation
How? Increasing Chinese domestic R&D
1. By participating in global R&D
2. By establishing a research and development
infrastructure via:
a) increase the technical and cognitive skills of
university graduates,
b) build a few world-class research universities with
strong links to industry, and
c) foster research parks, innovative cities.
3. Go green
Why ?
Increased efficiency,
Improve the level of well-being,
Sustain comparative advantage,
Achieve and sustain economies of scale, and
Sustain rapid growth.
How ?
Public education and awareness,
market incentives,
Public investments,
Industrial policy, and
Institutional development.
4. Expand Individual Opportunities and
Improve Social Services
• Expand opportunities and promote social security,
• Facilitate equal access to jobs, finance, quality social
services, and portable social security,
• Help households manage employment, health, and agerelated risks,
• Increase labor mobility,
• Manage the large rural-urban differences in access to jobs,
key public services, and social protection.
4. Expand Individual Opportunities and
Improve Social Services
• Deliver more and better quality public services to underserved rural areas and migrant,
• Restructure social security systems to ensure secure social
safety nets
• Mobilize all segments of society, public and private,
government and social organizations, to share
responsibilities in financing, delivering and monitoring the
delivery of social services.
5. Fiscal Reform
Three key dimensions:
1. Mobilize additional fiscal resources to meet rising
budgetary demands,
2. Reallocate spending toward social and
environmental objectives
3. Ensure that budgetary resources available at
different levels of government.
Note: fiscal reform as an essential prerequisite for
many of the other reforms
6. Becoming a Global Player
1. Seek mutually beneficial relations with the world,
2. Use multilateral institutions and frameworks and open regionalism,
3. Intensify trade, investment, and financial links with the global
4. Seize the benefit from further specialization, and diversification,
5. Integrate into the global financial system, which will involve opening
the capital account,
6. Take steps toward internationalizing the RMB as a global reserve
7. Help shape the global governance agenda such as:
climate change,
global financial stability,
effective international aid structure,
development in poor nations.
Substantial hurdles ahead:
• The risk of a hard landing in the short term,
• Challenges posed by an ageing and shrinking
• Rising inequality,
• Environmental stresses, and
• External imbalances and shocks.
The Chinese Economic Miracle:
Looking back and Looking Forward
Teachers as Scholars at King’s
Dr. Peter Ibbott
Associate Professor of Economics
King’s University College at the
University of Western Ontario
March 28, 2014

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