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

2

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?

Setting the stage

3

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)

Setting the stage

4

…exceeding other “Tigers”

GDP per capita, China vs. India and ASEAN-4 (1980=100)

Source: IMF (2007)

100 200 300 400 500 600 700 800 900 1 9 8 1 9 8 2 1 9 8 4 1 9 8 6 1 9 8 8 1 9 9 1 9 9 2 1 9 9 4 1 9 9 6 1 9 9 8 2 2 2 2 4 2 6 China India ASEAN-4

Setting the stage

5

Growth yielded massive poverty reduction

Official and $1/day poverty headcount (%)

Source: UN and LGOP

10 20 30 40 50 60 70 1981 1984 1987 1990 1993 1996 1999 2001 $1/day PPP (exp) Official

• Official poverty fell from 15%

in 1984 to 2% in 2006

• $1/day poverty fell by 500

million in 1981-2008

• Excl. China, global poverty

actually increased by 29 million

• Regardless of measure used,

the most dramatic poverty reduction in known history

Setting the stage

6

As a result, China is regaining its place

China‟s share of world GDP, selected years 1500-2003 (%)

Source: Maddison (2006)

Setting the stage

0% 5% 10% 15% 20% 25% 30% 35% 1500 1600 1700 1820 1870 1900 1950 1978 2003

7

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?

Explaining China

8

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)

Transformation at work

9

1.. Investing in human development

Source: Wang & Yan (2001)

10

2..Rejuvenating the bureaucracy, 1982-84

40 45 50 55 60 65 70 Ministers Governors Mayors / Dept Chiefs Before After

10 20 30 40 50 60 Ministers Governors Mayors / Dept Chiefs County / Div Heads Before After

• Deng saw need to revitalize the

bureaucracy as first step in reform

• Produced distinct change in
• fficials age (top), tenure and

educational level (bottom)

• Resulted in both higher capacity

and better alignment with reform

• Younger, better educated cadres

more supportive of reform process: building constituencies for change

Transformation at work

11

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

Transformation at work

12

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

Transformation at work

13

…partly thanks to lower population growth

Population growth (%)

Source: Penn World Tables (2005)

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 1 9 6 5 1 9 6 7 1 9 6 9 1 9 7 1 1 9 7 3 1 9 7 5 1 9 7 7 1 9 7 9 1 9 8 1 1 9 8 3 1 9 8 5 1 9 8 7 1 9 8 9 1 9 9 1 1 9 9 3 1 9 9 5 1 9 9 7 1 9 9 9 China India

14

However there are also challenges

P.c. income urban/rural residents, 1990-2003

Source: UNDP

• Substantial rise in income and

non-income inequality

• 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

New challenges

15

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

Source: World Bank estimates from 2001 and 2003 NBS household survey data

• 2.4%

4.0% 6.3% 8.1% 8.9% 10.0% 10.9% 12.4% 14.4% 16.3%

• 5.0%

0.0% 5.0% 10.0% 15.0% 20.0% Poorest 10% Richest 10% Population grouped by per-capita income decile: from poorest 10% to richest 10%

New challenges

16

The fiscal burden is heavy on local levels

• Fiscal mechanisms, decentralisation
• nce stimulated incentives, now

limit equal access to public services

• Local government increasingly

burdened by unfunded mandates

• Fiscal pressures spawn unwanted

tactics in search of revenue

• Local government legitimacy

weakened, increasingly seen as hindering balanced development

New challenges

10 20 30 40 50 60 1993 2004 1993 2004 Central govt Counties Revenues Expenditures

Fiscal revenue and expenditure p.c. (yuan)

Source: Bahl & Vasquez-Martinez (2003)

17

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

Can the Chinese model go further?

18

…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?

Can the Chinese model go further?

Will China keep on growing?

19

• Holz (2005): By 2010 (in PPP)
• Maddison (2007): By 2030 and 2015(in PPP)
• Keidel(2008): By 2030
• Fogel(2006): By 2030

19

20

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

Can the Chinese model go further?

Thank you