Chapter 1: Introduction: The Chinese Economy in Context PDF

Economics 2128 Economics of China Sunghoon Cho Western University (Based on Naughton, Barry, The Chinese Economy: Adaptation and Growth, 2e) Chapter 1 Introduction: The Chinese Economy in Context The Chinese...

Economics 2128 Economics of China Sunghoon Cho Western University (Based on Naughton, Barry, The Chinese Economy: Adaptation and Growth, 2e) Chapter 1 Introduction: The Chinese Economy in Context The Chinese Economy in Context For the past 35 years, China has been the best-performing economy in the world. China’s gross domestic product (GDP) has grown faster for longer than that of any other country in history. In 1978: China's GDP was 293.6 billion USD. India's GDP was 292.2 billion USD. USA's GDP was 6.3 trillion USD. In 2018: China's GDP was 10.8 trillion USD. India's GDP was 2.8 trillion USD. USA's GDP was 17.8 trillion USD.  China’s Real GDP (1952 – 2019) (Billions 2015USD) $16,000 $15,000 $14,000 Real GDP (1978 vs. 2019): 65.7 times higher $13,000 $12,000 $11,000 $10,000 $9,000 $8,000 Market-Based Reforms $7,000 (since 1978) $6,000 $5,000 $4,000 $3,000 $2,000 Socialist Period $1,000 $0 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 ECO2174F - Economics of China 3  China’s Real GDP per Capita (1952 – 2019) (2015USD) $11,000 $10,000 Real GDP per Capita (1978 vs. 2019): $9,000 44.9 times higher $8,000 $7,000 $6,000 Market-Based Reforms $5,000 (since 1978) $4,000 $3,000 $2,000 $1,000 Socialist Period $0 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 ECO2174F - Economics of China 4 The Chinese Economy in Context China’s Global Merchandise Trade: 1979 2018 ($ billions) China is now a driver of the $2,800 world economy, in part $2,600 Exports because it has benefited $2,400 Imports enormously from the wave $2,200 $2,000 of globalization that has $1,800 washed over the world in $1,600 the past three decades. $1,400 In 2012, China surpassed $1,200 the US as the world’s $1,000 $800 largest merchandise $600 trading economy (exports + $400 imports). $200 $0 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 How has China achieved economic success? China is not an obvious candidate for prosperity, in the way that the United States and other “lucky countries” are. China has faced development problems that today’s rich countries never had to face. Bringing its massive population out of poverty required China to overcome daunting geographic and resource limitations. China has forged its own development strategy in a way that no country has ever done before, independent of prescriptions of orthodox economics. Challenges China faced Decades of socialism lead to ideas and institutions unsuited for market reforms. No experience with market forces and private businesses. Decision making authority in urban enterprises. Collectivization of farming – no profit motive Prevailing prices were meaningless. Profit considered a “dirty” word. Used to sacrificing for the collective good. Two Fundamental Processes of Economic Development Structural Change Refers to real changes in the distribution of resources and activity. Institutional Change Refers to changes in the organization, information, and incentives that guide economic decision-makers. These processes may lead to economic growth (development) if they result in improving productivity. With these transformations, the Chinese economy witnessed so-called “miracle growth" during these decades. Enabling Conditions 1. Strong entrepreneurial drive and desire for education - Extraordinary human resources 2. Concurrent opening of global trade 3. Enormous catch-up potential 4. Adaptable government with capacity to learn. Enabling Conditions Growth and Development Level By 2015, China was the world’s second-largest GDP after the United States. Adjusted for purchasing power parity, China’s GDP surpasses that of the United States. China’s PPP-adjusted GDP per capital is still below the global mean, but its growth rate is well above the global rate Growth Miracles The Four Asian Tigers (South Growth in per capita GDP: The four East Asian “tigers” (1960 and 2014) Korea, Singapore, Hong Kong and Taiwan) Attributed to export-oriented and strong development policies. Unique to these economies were the sustained rapid growth and high levels of equal income distribution. A World Bank report suggests two development policies among others as sources for the Asian miracle: factor accumulation and macroeconomic management. Growth Miracles Common features of East Asian growth miracle economies: 1. Rapid labor-force growth. 2. Rapid structural change. 3. High investment rates. 4. An open economic policy that allows rapid growth of export-oriented manufacturing. Growth Miracles Which path will China follow? Some of economies (such as Japan and South Korea) became high income, but their growth miracles ended "abruptly". Others (such as Thailand, Philippines, and Indonesia) got "stuck" at middle income. These growth miracle economies (including China) share four common features according to Naughton. Growth Miracles – Can It Continue? Growth miracles cannot go on forever: Catch-up growth and high-return investment opportunities eventually get exhausted. Labor-force growth starts to slow down. Structural change from workers moving out of low-productivity agriculture is exhausted when all young workers have left the farm. As the costs of labor-intensive manufactures rise, exporters lose competitiveness. Growth Miracles – Can It Continue? Over the past decade and a half, the Chinese economy started to show signs of the end of its growth miracle stage: After 2010 growth rates began a steady, gradual decline from 10.6% to 6 in 2019. Labor force growth went into reverse after 2011. Rural-to-urban migration started to drop in the 2010-2015 period and continues to fall. The share of manufacturing and investment in GDP started to decline. From being one of the world's largest host countries for inward FDI China now resembles a developed country with balanced inward and outward FDI flows. Income inequality seems to have peaked and started to decline. Growth Miracles – Can It Continue? Now, new approaches and policies are necessary to sidestep crisis and disruption to sustain moderately rapid growth. Chinese policy-makers seem to be aware of this and have already started with some policies aiming to tackle this challenge. Moving from the One-Child Policy to a two-child policy in 2016. Moving from taxing farmers to subsidizing agriculture. Rebuilding a social safety net, including health insurance and universal education. Introduce a series of activist industrial policies designed to foster the emergence of so- called “strategic emerging industries,” industrial automation, and internet-based services. At the same time, government investments in infrastructure and R&D have been increased. The last two points mark a difference between the Chinese approach and that of Japan and South Korea when it comes to the government’s role in the post growth miracle stage.