Why has China grown so fast for so long? Prospects for the future - PowerPoint PPT Presentation

Why has China grown so fast for so long? Prospects for the future Khalid Malik Special Adviser, UNDP Africa former UN Resident Coordinator China

Setting the stage Context  China has become a different country in just three decades  Traditional economic theory is insufficient to explain this stellar growth and development  „Development as transformation‟ perspective key to understanding China‟s success  What are the implications for China‟s future growth, and are there lessons for other developing countries? 2

Setting the stage China’s development results • Largest sustained GDP growth ever witnessed, outperforming the previous “Tigers” : over 9 percent annually in per capita GDP. • Share of world trade tripled since 1990 and still rising fast • Reaching per capita GDP of over $2000 means China is no longer a low income country • Alone responsible for the absolute reduction of global poverty • Not merely economic: HDI .75 in 2003 (up 43% from 1975) 3

Setting the stage …exceeding other “Tigers” GDP per capita, China vs. India and ASEAN-4 (1980=100) Source: IMF (2007) 900 800 700 600 500 400 300 200 100 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 8 8 8 8 9 9 9 9 9 0 0 0 0 9 9 9 9 9 9 9 9 9 9 0 0 0 0 1 1 1 1 1 1 1 1 1 1 2 2 2 2 4 China India ASEAN-4

Setting the stage Growth yielded massive poverty reduction Official and $1/day poverty headcount (%)  Official poverty fell from 15% Source: UN and LGOP in 1984 to 2% in 2006 70 $1/day PPP (exp)  $1/day poverty fell by 500 Official 60 million in 1981-2008 50  Excl. China, global poverty 40 actually increased by 29 million 30  Regardless of measure used, 20 the most dramatic poverty 10 reduction in known history 0 1981 1984 1987 1990 1993 1996 1999 2001 5

Setting the stage As a result, China is regaining its place China‟s share of world GDP, selected years 1500 -2003 (%) Source: Maddison (2006) 35% 30% 25% 20% 15% 10% 5% 0% 1500 1600 1700 1820 1870 1900 1950 1978 2003 6

Explaining China Economists struggle to understand  Neoclassical studies see growth and development as a „simple‟ problem of accumulating and allocating factors of production  The resulting emphasis is on rapidly creating „standard‟ policies and institutions regardless of country-specific context  Privatization, liberalization and market pricing are seen as key for accelerating growth  But China did not follow any of the standard prescriptions in the so called Washington Consensus  And yet the Chinese bumblebee continues to defy the laws of neoclassical gravity  Is this the beginning of a Beijing Consensus? 7

Transformation at work The role of Capacities Individual capacity  Human development achievements provided the foundation  Gave capability to respond to new incentives and opportunities  HD-growth linkages have been empirically established Institutional capacity  Early institutional transformation underpinned economic reform  Capacity upgrading has been a continuous priority  Strong results orientation and link to career development  Government a supportive agent more than an obstructive one  Large public inv. to open markets (incl. infrastructure) 8

1.. Investing in human development 9 Source: Wang & Yan (2001)

Transformation at work 2..Rejuvenating the bureaucracy, 1982-84 70 65  Deng saw need to revitalize the 60 55 bureaucracy as first step in reform 50  Produced distinct change in 45 officials age (top), tenure and 40 Ministers Governors Mayors / Dept Chiefs educational level (bottom) Before After  Resulted in both higher capacity 60 50 and better alignment with reform 40  Younger, better educated cadres 30 more supportive of reform process: 20 10 building constituencies for change 0 10 Ministers Governors Mayors / Dept Chiefs County / Div Heads Before After

Transformation at work 3..Social capital and cohesion Social capital:  Strong cohesion thanks to homogeneity and historic equality  Informal institutions counter market/institutional failures (viz. informal finance, guanxi, “friends first, business later” )  Trust systems offset absence of formal contract enforcement  Mindsets ready for change after previous system found lacking  Faith in central government and buy-in on new path forthcoming The above made society responsive to reform and new incentives Far outweighed market imperfections in promoting rapid growth 11

Transformation at work The role of Policies  Policies did not conform to standard western paradigm, but were in alignment with the context and capacities  Sequencing policy vs. institutional reform needs further study  But detailed policies seem initially of secondary importance as the more fundamental transformation mattered more  As the institutional framework is refined, getting policies right is now of increasing importance  Capacities must also be aligned to respond to the new policies 12

…partly thanks to lower population growth Population growth (%) Source: Penn World Tables (2005) 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 5 7 9 1 3 5 7 9 1 3 5 7 9 1 3 5 7 9 6 6 6 7 7 7 7 7 8 8 8 8 8 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 China India 13

New challenges However there are also challenges • Substantial rise in income and P.c. income urban/rural residents, 1990-2003 non-income inequality Source: UNDP • Rural population increasingly elderly, female and vulnerable • Rural-urban and other gaps are reducing social cohesion • Migrant workers unprotected in the cities they build • Ageing population creating steep future pensions challenge • Signs that the poorest no longer take part in growth 14

New challenges The poor may even be sliding backwards Per capita income growth by decile, 2001-03; preliminary analysis Source: World Bank (2006) based on 2001 and 2003 NBS household surveys 20.0% 16.3% 14.4% 15.0% 12.4% 10.9% 10.0% 8.9% 10.0% 8.1% 6.3% 4.0% 5.0% 0.0% -2.4% -5.0% Population grouped by per-capita income decile: Poorest Richest from poorest 10% to richest 10% 10% 10% Source: World Bank estimates from 2001 and 2003 NBS household survey data 15

New challenges The fiscal burden is heavy on local levels Fiscal revenue and expenditure p.c. (yuan)  Fiscal mechanisms, decentralisation Source: Bahl & Vasquez-Martinez (2003) once stimulated incentives, now 60 Revenues limit equal access to public services Expenditures 50 • Local government increasingly 40 burdened by unfunded mandates • Fiscal pressures spawn unwanted 30 tactics in search of revenue 20 • Local government legitimacy 10 weakened, increasingly seen as 0 hindering balanced development 1993 2004 1993 2004 Central govt Counties 16

Can the Chinese model go further? Much potential for growth remains…  High growth will continue, for several reasons:  Many inefficiencies remain to be addressed  New institutions further adapted to the needs of the current phase will deliver better results  Unification of the rural and urban economies will bring many benefits of scale and efficiency for a time to come  Structurally, increasing marketization is making traditional economic factors and institutions more important  Given the strong economic fundamentals that have evolved, if realignment succeeds this may only be the beginning 17

Can the Chinese model go further? … if the transformation continues  As China develops the next stage of reforms, some features key to previous success should be revisited  Policies have already moved in the right direction (Xiaokang, the five balances, New Socialist Countryside)  The challenge is how to effectively implement them  China too large & complex to manage easily, so strengthening rule of law and scientific development is now key  The Chinese reforms show the importance of alternative approaches to development, beyond Washington consensus  Towards a Beijing consensus? 18

Will China keep on growing? • Holz (2005): By 2010 (in PPP) • Maddison (2007): By 2030 and 2015(in PPP) • Keidel(2008): By 2030 • Fogel(2006): By 2030 19 19

Can the Chinese model go further? Potential lessons for other countries  Ownership at all levels of society cannot be overemphasized  Public policy is vital in creating the individual and social capacities to generate and sustain reform and growth  Perfect classical policies and institutions not immediately necessary: home-grown solutions may work better  Encouraging grassroots unorthodoxy and scaling up initiatives that work is better than top-down formulaic programming  Long-term commitment to reform and development by leaders and ruling class is critical  Building constituencies for reform and paying off losers reduces social disruption, ensures sustained progress  Per capita improvements require managing population growth 20

Thank you