China’s Economic Growth: Past, Present and FutureECON 6470 Economic Growth and Development: Spring Case Study 2015

Professor Dr. Darryl McLeod

Presented By:Chuan Shi, Ph.D. Economics Candidate 2016

1

2

Introduction: China Progression through comparative peers

Stage I – Initial Growth Phase & Absolute Convergence

Fiscal, monetary & socioeconomic reform measures

Historic political & institutional landscape

Reform implementation

TFP: - Regional cooperatives (Township & Village Enterprises)

- Infrastructure

- SEZ’s

- FDI & trade liberalization (export-reliance model)

3

Growth Factor Analysis – Steady State (Absolute Convergence)

Jones Chapter 3 Exercise 1-- Where are these economies headed? Page 75 d. U.S. savings rate

To add ctys: Y 9̂7 sk u n x A^90 sk^ X^ h^ (sk^/x^) y*(a) y*/y97 y*(b) y*/y97 y*(c) y*/y97 y*(d) y*/y97

USA 1.000 0.204 11.900 0.010 0.085 1.000 1.000 1.000 1.00 1.000 1.000 1.00 1.000 1.00 1.000 1.00 1.00 1.00

Singapore 0.895 0.348 11.900 6.72 6.795 1.078 1.706 79.941 1.00 0.147 0.158 0.16 0.147 0.16 0.158 0.18 1.08 1.20

India 0.102 0.143 4.52 1.980% 0.095 0.267 0.701 1.115 0.48 0.793 0.101 0.10 0.379 3.72 0.212 2.08 0.13 1.25

Brazil 0.298 0.165 4.45 1.740% 0.092 0.758 0.809 1.087 0.47 0.863 0.310 0.31 0.410 1.37 0.654 2.19 0.36 1.21

China 0.097 0.235 6.110 0.013 0.088 0.106 1.152 1.038 0.56 1.054 0.063 0.65 0.590 6.09 0.112 1.15 0.06 0.61

South Africa 0.227 0.151 6.03 2.280% 0.098 0.460 0.740 1.151 0.56 0.802 0.205 0.90 0.446 1.97 0.369 1.63 0.26 1.13

a. own TFP (A) b U.S. TFP (A) c. U.S. schooling-- u

Compute steady state y* assuming the country has:

Peer countries include BRICS, except for Russia (no data is available), Singapore and US as the base countries to compare

Among peer economies, China had the lowest GDP 0.097 in 1997 comparing to the USA’s GDP as 1

According to absolute convergence, China should have grown the fastest amongst peer countries

Using its own TFP (A) from 1990, China has 0.063 as steady state GDP, which is less than 0.097 GPD level of 1997. If China used its TFP level in 1990, it’d not grow during the 90’s.

4

Fiscal, monetary & socioeconomic reform measures1

Fiscal Reform

Collative farming system to household-responsibility system: increased TFP in agricultural sectors

Encourage private companies and non-state sectors to grow: increase TFP in non-agricultural sectors

Special Economic Zones

Monetary

Fixed exchange rate

High interest rate to encourage savings

Socioeconomic

Trade liberalization

5

Historic political & institutional landscape

After the death of Mao Zedong, cultural revolution ended. Deng XiaoPing came into power and began the policy of “reform and opening up”

Special Economic Zones

Foreign Direct Investment

Trade Liberalization

6

TFP: Regional cooperatives, infrastructure, SEZ’s, FDI & trade liberalization (export reliance model)

China’s overall TFP decreased in 2006-10 partially due to the decrease in capital input (ICT). Brazil, Russia, India, and South Africa, increased capital input (ICT) during this period

China increased capital input (non-ICT) in the period of 2006-10, which was a trend among all the peer economies

India increased TFP between 2006-10, while Russia had the deepest reduction in TFP

Source:

7

TFP: Regional cooperatives, infrastructure, SEZ’s, FDI & trade liberalization (export reliance model)

Source: Zhu, 2012, pg. 18 Source: Reuters, Goldman Sachs

8

Introduction: China Progression through comparative peers

Stage II – Intermediary Structural Transition Phase to Conditional Convergence

End of export reliant growth; Beginning of fiscal reallocation

SOE reform & new industry champions for higher value-added growth

Socioeconomic reform: social safety net creation

TFP:

- Population growth

- Savings

- “New normal”

9

Growth Factor Analysis – Steady State (Conditional Convergence)

Jones Chapter 3 Exercise 1-- Where are these economies headed? Page 75 d. U.S. savings rate

To add ctys: Y 9̂7 sk u n x A^90 sk^ X^ h^ (sk^/x^) y*(a) y*/y97 y*(b) y*/y97 y*(c) y*/y97 y*(d) y*/y97

USA 1.000 0.204 11.900 0.010 0.085 1.000 1.000 1.000 1.00 1.000 1.000 1.00 1.000 1.00 1.000 1.00 1.00 1.00

Singapore 0.895 0.348 11.900 6.72 6.795 1.078 1.706 79.941 1.00 0.147 0.158 0.16 0.147 0.16 0.158 0.18 1.08 1.20

India 0.102 0.143 4.52 1.980% 0.095 0.267 0.701 1.115 0.48 0.793 0.101 0.10 0.379 3.72 0.212 2.08 0.13 1.25

Brazil 0.298 0.165 4.45 1.740% 0.092 0.758 0.809 1.087 0.47 0.863 0.310 0.31 0.410 1.37 0.654 2.19 0.36 1.21

China 0.097 0.235 6.110 0.013 0.088 0.106 1.152 1.038 0.56 1.054 0.063 0.65 0.590 6.09 0.112 1.15 0.06 0.61

South Africa 0.227 0.151 6.03 2.280% 0.098 0.460 0.740 1.151 0.56 0.802 0.205 0.90 0.446 1.97 0.369 1.63 0.26 1.13

a. own TFP (A) b U.S. TFP (A) c. U.S. schooling-- u

Compute steady state y* assuming the country has:

With US TFP to recalculate China’s steady state GDP, China has the highest growth as 6.09 among all peer economies

With US schooling u as 11.9, instead of China’s schooling as 6.11, China has higher growth than that with its own schooling system

With US saving rate n as 0.01, instead of China’s saving rate as 0.013, China has slower growth than that with its own saving rate

To conclude, China needs to improve its schooling and TFP in order to have higher conditional convergence of growth

10

End of US export reliant growth

Chinese Exports to US as % of Total Chinese Exports

Source: Zero Hedge, Bloomberg

11

SOE reform & new industry champions for higher value-added growth

Private companies in China are gaining more profitable, while state owned enterprises (SOE’s) reinvest: SOE consolidation and asset injection

Source: Bruegel, Egawa.

12

Socioeconomic reform: social safety net creation

0

10

20

30

40

50

60

Gross National Savings

Brazil China India

Singapore South Africa United States

Source: IMF WEO 2014

China has the highest national savings among peer economies partially due to inefficient social safety net

Source: IMF WEO 2014

China has relatively low government expenditure in comparison to peer countries. To increase social safety net, government will need to continue to increase expenditure

13

TFP: From population growth & savings to “new normal”

Source: NBS,CITIC-CLSA Source: United Nations

…

14

Introduction: China Progression through comparative peers

Stage III – Future Steady State Growth Rate Normalization

TFP: - Consumption

- Education

- Technology

- Institutional expansion

Positive growth incidence curve

Negative growth incidence curve

TFP: Consumption, education, technology & regional & institutional expansion

15

0

100000

200000

300000

400000

500000

600000

700000

800000

1990 2000 2005 2006 2007 2008 2009 2010 2011 2012 2013

Patent Applications, resident

China Singapore South Africa

United States India Brazil

Source: World Development Indicators, World BankSource: Goldman Sachs

China had only 5,832 patent applications in 1990, while the United States had 90,634. China had 704,936 patent applications in 2013, while the United States had 287,831. China’s education and technology has positively contributed to TFP growth

China’s consumption has not increased proportionally to GDP growth. Simulating domestic consumption will contribute to economic growth

China will transition to domestic consumption; India to export-led; Brazil & Russia regress and continue commodity dependency due to institutional erosion

Technology, innovation and highly skilled labor key to conditional convergence for China; Infrastructure and basic education for India

16

Positive growth incidence curve

Sustainable reforms (albeit slower than expected)

China – clean energy Less pollution

Economic transformation plan

India – Infrastructure investment / favorable Gini curve impact

Institutional regional and global transformation

AIIB – Asian Investment Infrastructure Bank (China): Global liquidity & risk reduction

Regional Co-integration Source: US News

17

Negative growth incidence curve

Pollution: Kuznet Curve impact from rising pollution may impact growth for India & China

How much growth will be sacrificed for better health in India & China?

Russian – Geopolitical tensions; Brazil – Lack of fiscal austerity and inflation;

Corruption

Source: http://g.foolcdn.com/editorial/images/26223/kuznets-curve-china_032213_large.png, Kuznets

18

Negative growth incidence curve (cont.)

Aging Population: China & Russia face major Gini deficiency in working age population

Will India emerge as the dominant force of global growth?

19

Conclusions

High TPF growth due to education and science, and economic system improvement

Domestic consumption needs to further grow

Inequality has increased

Social safety net is needed to address inequality and domestic consumption

20

Sources

1. Zhu, Xiaodong. “Understanding China’s Growth: Past, Present, and Future”. Journal of Economic Perspectives, Volume 26, Fall 2012, page 103-124. http://homes.chass.utoronto.ca/~xzhu/paper/JEP2012.pdf

2. Rodrik, Dani. “What’s So Special About China’s Exports” . Jan 2006,, Harvard University. https://www.sss.ias.edu/files/pdfs/Rodrik/Research/Whats-special-China-exports.pdf

3. IMF World Economic Outlook (WEO) update: http://www.imf.org/external/pubs/ft/weo/2015/update/01/

4. World Development Indicators (World Bank ): http://data.worldbank.org/data-catalog/world-development-indicators

5. Egawa, Akio Decoded BRIC, “The Old emerging economies and their “new” attractiveness as the centre of consumption power”, 8 th January 2014: http://g.foolcdn.com/editorial/images/26223/kuznets-curve-china_032213_large.png

6. UNCTAD, World Investment Report, 2012, http://unctad.org/en/Pages/DIAE/World%20Investment%20Report/WIR2012_WebFlyer.aspx

7. Durden, Tyler, “Watch Out For Falling Objects: US Share Of Total Chinese Exports Plunges To All Time Low “, 9/2013, http://www.zerohedge.com/news/2013-03-09/watch-out-falling-objects-us-share-total-chinese-exports-plunges-all-time-low

8. Keohane, David,” SOE this is what passes for reform”, /2014 http://ftalphaville.ft.com/2014/04/14/1828032/soe-this-is-what-passes-for-reform/

9. Murphy, David – Zhang, Nancy – Zhang, Xiao, “ Mr. & Mrs. China dare to dream”, CITIC/CLSA, 2013 (Unpublished Bank Research)

10. UN Population Division Database: http://www.un.org/en/development/desa/population/theme/trends/index.shtml

11. Goldman Sachs Report, Global Sherpa, ”Globalization, Sustainable Development and Social Impact in World Rankings, Countries and Cities”, http://www.globalsherpa.org/bric-countries-brics

12. Magill, Bobby, “ World’s Most Polluting County Leads in Clean Energy Investment”, 2014, Bloomberg http://www.bloomberg.com/news/2014-04-04/world-s-most-polluting-country-leads-in-clean-energy-investment.html

13. Kuznets, Simon, “Economic Growth and Income Inequality”, The American Economic Review, March – 1955, Vol. XLV.

14. Scrutinio, Vincenzo, “ A Gray Future for the BRIC’s, 2013, http://www.openpop.org/?p=661