Econ 196 The View from China 1 Probably the single most important event at the end of the 20th century China s rapid growth has had a direct dramatic impact on the living standards of a quarter of the world s population It implies far reaching changes in the balance of economic financial and political power It has major environmental impacts And drives food fuel and commodity prices globally It has a variety of important impacts on the world economy The increase in urban employment in China is equivalent to adding another middle sized industrial country to the world economy each year Raising the question of whether the rest of us have been handling this well 2 China to remind you has been the world s fastest growing economy since 1979 In the 30 years since China moved from having a per capita GDP equal to India s PPP corrected for the cognescetti to now having one twice as high 3 That growth has been accompanied by dramatic structural change The share of the labor force in agriculture has fallen from 70 to less than 50 per cent over the 30 year period The share of industrial output produced by StateOwned Enterprises SOEs has fallen from 80 to 30 Exports Imports as a share of GDP are up from essentially 0 in 1979 and only 10 in 1989 to 50 today Infant mortality has declined dramatically indicative of rising living standards 4 Standards of living have increased to the point where the World Bank no longer classifies China as a poor country The United Nations ranks it among countries with a medium level of human development The UN s Human Development Index looking at other measures of human welfare in addition to income China is second behind only US in value of its foreign trade It is now the single largest destination for foreign investment 5 What explains this outstanding economic performance Large question now with a gigantic literature We can usefully start with some basic facts 6 Fact 1 Chinese growth is driven by a combination of high investment and TFP growth as we would expect of a catch up economy But note how capital accumulation has been the most important contributor in the most recent period and the role of TFP has declined This is extensive growth with a vengeance 7 Fact 2 China s high investment is supported by extraordinarily high savings rates of GDP 55 49 8 45 32 2 35 26 8 25 0 20 6 25 10 4 15 5 5 CHINA SOUTH KOREA JAPAN INDIA EUROZONE UNITED STATES 8 These saving and investment are unusual even by the standards of other fast growers Here are some comparisons where everything here is expressed in takeoff time 9 Fact 3 Since productivity is higher in industry than agriculture structural change is especially important for growth 10 Comparisons help to shed light on China s performance Following its takeoff in 1979 China grew at the same rate as post 1955 Japan and the post1967 NIES newly industrializing East Asian states for a decade Just another catch up case But after that its experience seems to have diverged Other high growth latedeveloping economies slowed down but China did not Raising the question is China sui generis Or might a slowdown now be coming You will know from the readings that this is where I m heading 11 So we might usefully ask Can high saving and investment even if that investment is productive sustain high growth indefinitely What does the Solow growth model you discussed last time say about this Can so much saving be invested productively Does the decline in the share of growth accounted for by productivity growth portend bad news to come Can productivity advance through structural change continue as the shift is not from agriculture to manufacturing but from manufacturing to services 12 To better understand the future it may help to look to the past 13 Some Potted History Circa 1000 China probably had highest per capita income in the world Angus Maddison s estimates at right are indicative of this China developed gunpowder compasses clocks see right other modern technologies It was the technological leader in the period 1000 1400 It was first to develop a civil service based on competitive examinations It was first to have an efficient system of public finance Yet the country fell behind starting in the period of the Ming Dynasty 1368 1644 It was not able to move to sustained modern growth 14 So why did China fall behind Another grand question to which we can t really do justice here But the literature suggests two explanations depicted at right 15 So why did China fall behind One is that a centralized state was needed for large scale hydraulic and defense projects think of the Great Wall This was not conducive to a European style scientific revolution or to economic and technical innovation which became increasingly important to growth after 1750 How Europe differed Another explanation is that the state responded to foreign incursions by turning inward it dismantled the ocean sailing fleet of the great admiral Zheng He compared here to Columbus ships This contrasted with the industrial policies of Henry the Navigator the Portuguese prince who established a naval observatory sponsored navigational tables fostered the caravel 16 Of course China had outside help with its relative decline Renewed foreign incursions then disrupted the economy Opium Wars starting in 1839 Treaty Ports after defeat in 1842 Western military action in response to Boxer Rebellion of 1898 shown at right Japanese invasion and colonial conquest of part of the country etc In the course of a century China lost 2 wars with Japan was invaded 3 times by Britain and France and once by Russia and the U S It then suffered a debilitating civil war 17 Transition period Collapse of Qing Dynasty in 1911 12 Followed by a period of warlord domination Unification of the nation by the Nationalist Party in 1927 Invasion by Japan in 1937 This weakened the Nationalists as the Communists gained ground by using guerilla tactics against the Japanese Leading to the evacuation of the Nationalists under Chiang Kai Shek to Taiwan in 1949 18 This led to the Communist seizure of power Consolidation 1949 52 private enterprises were placed under government control Foreign enterprises were nationalized First 5 Year Plan 1953 57 Heavy dependence on cheap Soviet loans Construction of modern industrial facilities by Soviet experts who trained Chinese technicians to run them Great Leap Forward 1958 60 Designed to harness the country s abundant labor by making use of socialist ideology Mass mobilization