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Global Classroom Lecture
Poverty Alleviation and Economic Growth in China
By
Geng XIAO
2
China’s Legacy and Reform Strategy
3
Legacy of the Chinese Civilizationand the China Puzzle
• 200 years ago, which country had the largest economy in the world? (UK? US? China?)
• What was China’s historical economic performance?– Compared to the Roman Empire 2000 years ago– Compared to Europe about 600 years ago
• China had a seven-fold increase in population from 1400 to 1950
• China’s lead in technological invention included:– Water mills, harnesses for horses, paper and porcelain (Han dynasty, 200 BC to 200
AD)– Printing, crossbow, iron, gunpowder, paper money (Tang dynasty, 600-900 AD)– Abacus (Song dynasty, 1000-1271 AD)– Irrigation, drainage, double cropping, seed selection, transplanting, use of manuals,
import of maize and potatoes from new world
• Why did China start to decline relative to the West about 500 years ago and end up in a state of extreme poverty for majority of its people for more than 100 years until Deng Xiaoping’s reform beginning in 1979?
Source: Angus Maddison, Monitoring the World Economy 1820-1992.
4
Explaining China Puzzle and European Miracle
• Domestically unchallengeable Chinese central power led to high-risk inward-looking policies
• In 1434, Ming Emperor destroyed China’s own internationally competitive fleet led by eunuch admiral Zheng He and lost the chances to discover the new world
• In 1793, Qing Emperor Qianlong closed the door for developing friendly trading relations with the rising Western Europe powers and led to China’s disastrous and humiliating loss in the Opium War in the mid-19th century
• For 500 years, the weakening Chinese dynasties spent monopolized military resources to deal with domestic rebellions and internal struggles with little outside competitive pressure on advancing technology until mid-19th century
• European modern civilization and economic miracle emerged from competition among new nation states– Emergence of nation-states stimulated competition and innovation
through trade, migration, and intellectual interchange– End of feudalism led to commercial, property, and financial
institutions protected by a non-discretionary legal systems separated from the state bureaucracy
– The Renaissance and the Enlightenment encouraged experimental sciences, technological innovation, and sciences education
5
Three Pillars of China’s Poverty Alleviation and Growth Strategy
• The leadership by the Party– The Chinese Communist Party was born and grew out of crisis and war
and gained its authority as the only leadership force for a population as large as 1.3 billion through internal competition and external pressure.
– Over a period of more than half a century, the party developed a sophisticated and resilient central and local organizational capacity for defining and enforcing its policies (right or wrong), including defining and protecting property rights during the reform period
– The Party has become an imperfect but working substitute for whatever modern institutions China lacks during its long process of modernization (institutions such as markets and free trade, social safety net, independent judiciary and rule of law, free press, and democracy)
• The open door policy– Opening up to international trade and foreign direct investment– Accession to the World Trade Organization– Acceptance of globalization
• The market-oriented reform– Restoration of family farming and abolishing of communes– Privatization of SOEs and entry of non-state enterprises– Free mobility of labor and free labor market– Development of capital markets and property rights infrastructures
6
Striking Similarity between Meiji Reform in 1867 and Deng Xiaoping’s Reform in 1979
• Traditional Japan: very isolated– Travel and study abroad prohibited, ships not larger than 75 tons,
trade only through a small depot in Nagasaki of the Dutch East India Company once a year
– In 1853, American navy opened Japan for trade concession to U.S. and then other Western powers
• In 1867, the new Meiji regime started sweeping reforms– Abolished feudalism and legal inequality across old classes– State taxes replaced feudal levies in kind – Free to choose occupation, free to produce any crop or
commodities, free to buy or sell land– Compulsory primary education, textbooks with western contents,
many students sent to study aboard– A national monetary and banking system established– Agricultural research and industrial development encouraged– A program of military modernization– A family planning habit to check population growth
Source: Angus Maddison, Monitoring the World Economy 1820-1992.
7
What Is Special about China?
– China is big• Labor force is larger than the sum of all developed economies• GDP at PPP is second only to U.S.• Global market share of many manufacturing products about 50%-80%
– China is young• China’s population profile is similar to Japan’s but about 25 years younger,
with working age population now among the highest in the world at about 70%
• With one-child policy China’s aging is likely to be quicker than Japan
– China is very open• OECD capital is moving to China, competing not with China but with other
OECD investors through unprecedented inflows of FDI• Hong Kong and western economic institutions are replicated in China with
help from large numbers of returning overseas students
– China is doing all the successful things Japan and other Asian dragons have done before while having unlimited supply of labor for the last 30 years and at least for next 15 to 20 years
8
China’s Achievements in Poverty Alleviation and Growth
9
China Achieved an Impressive Average Growth Rate of 10% during the 30 Years of Reform
Source: Barry Naughton, The Chinese Economy, Figure 6.1 on page 144, 2007.
Annual GDP Growth, 1978-2006
0%
2%
4%
6%
8%
10%
12%
14%
16%
1978
1979
1980
1981
1982
1983
1984
1985
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1991
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2006
An
nu
al P
erc
en
tag
e In
cre
ase
10
Both Rural and Urban Income Grew Rapidly with Significant Rise in Living Standard for Every Chinese
Source: Barry Naughton, The Chinese Economy, Table 9.1 on page 210, 2007.
Growth of Real Per Capita Household Income
Rural Net Household Income Urban Disposable Income
Income in Constant 2004 Prices (RMB)
1978 (About 500) 1,701
1985 1,343 2,728
1991 1,585 3,612
2004 2,936 9,422
Average Annual Growth Rate (percent)
1978-1985 (About 15%) 7.0%
1985-1991 2.8% 4.8%
1991-2004 4.9% 7.7%
In 2004, one RMB was worth $0.12 at the official exchange rate, or $0.55 at PPP.
11
Rural Poverty as Defined by the World Bank Declined from more than 65% to about 10% Lifting Several Hundred Million
Chinese Out of Extreme Poverty in Less than 30 Years
Source: Barry Naughton, The Chinese Economy, Figure 9.1 on page 213, 2007.
Incidence of Rural Poverty in China
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
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Pe
rce
nt
of
Ru
ral P
op
ula
tio
n
Chinese Official Estimates
Ravallion and Chen (World Bank) Estimates
12
China Achieved Dramatic Improvementin Human Development Index
(Life expectancy, Literacy, Education, and GDP per capita)
Source: Barry Naughton, The Chinese Economy, Edited from Table 9.2 on page 224, 2007.
Comparison of Human Development Index 2003
Chinese Provinces Nations
Shanghai 0.91 Hong Kong 0.92
Shandong, Hebei, Jilin 0.77-0.78 Thailand 0.78
Shanxi, Hunan, Chongqing China 2003 0.75
China 1999 0.72
Guizhou 0.64
China 1990 0.63
India 0.60
Tibet 0.59
Myanmar 0.58
China 1980 0.56
Pakistan 0.53
13
The Role of Public Investment in China’s Growth
14
China’s Green Revolution Started Long before Deng’s Reform and Never Stopped since 1949
Source: Barry Naughton, The Chinese Economy, Figure 11.5 on 259, 2007.
Fertilizer and Irrigated Area
0
5
10
15
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25
30
35
40
45
50
1952
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2004
Mill
ion
To
ns
(F
ert
ilize
r)
0
10
20
30
40
50
60
Mill
ion
He
cta
res
(Irr
iga
ted
Are
a(
Irrigated Area
Fertilizer
15
The Central and Local Governments Led Massive Investment in Infrastructure Which Laid Foundation for
the Take-Off of the Private Business
Source: Barry Naughton, The Chinese Economy, Figure 14.3 on page 346, 2007.
Physical Infrastructure Investment
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
1981
1982
1983
1984
1985
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1991
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1997
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2003
2004
2005
2006
Per
cen
t o
f G
DP
Transportation
Post & Telecommunications
Electricity
16
China’s Cheap Talents Are Fuelling its Industrial Productivity Catching Up
Source: Barry Naughton, The Chinese Economy, Figure 15.3 on page 362, 2007.
Graduates of College and Technical School
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Millio
n
Total
Science and Engineering
17
Massive Laid-off from SOEs Did Not Lead to Social Instability due to Protection Measures Valued Much
Higher than Real Wages of Migrant Workers
Source: Barry Naughton, The Chinese Economy, Figure 8.2 on page 187, 2007.
Laid-off and Unemployed Workers
0
2
4
6
8
10
12
14
16
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Mil
lio
n
Laid-off (Xiagang) Workers
Registered Unemployed
Newly Laid-off During Year
18
Demographic Gifts to East Asian Miracle
Source: Jeffrey G. Williamson, Demographic Shocks and Global Factor Flows
19
China Enjoyed Two Decades of Demographic Dividends Which May Last for Another Two Decades
Source: Barry Naughton, The Chinese Economy, Figure 7.3 on page 173, 2007.
Dependency Rates
0
10
20
30
40
50
60
70
80
90
1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065 2070 2075 2080
Perc
ent
of
Work
ing A
ge P
opula
tion
Total
Children
Seniors
20
China’s Open-Door Policy
21
Trade Liberalization Fuelled both Export and Import but Created Large Trade Surplus in Recent Years
Source: Barry Naughton, The Chinese Economy, Figure 16.1 on page 378, 2007.
Figure 16.1 Exports and Imports (Share of GDP)
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%1978
1980
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Pe
rc
en
t o
f G
DP
Exports
Imports
22
China and its Asian Neighbours:Gaining Export Market
1990 2000 Gain/Loss
World 100.0% 100.0%
Developed countries 80.4% 69.4% -11.0%
Developing countries 17.5% 27.4% 9.9%
Asia 12.6% 19.9% 7.3%
China 1.9% 4.7% 2.8%
Asia-Six* 9.1% 12.2% 3.1%
Other Asia 1.6% 2.9% 1.3%
Source: WTO; *Asia six: Taiwan, Hong Kong, Korea, Malaysia, Singapore, and Thailand; Significant re-exports excluded.
Share in World Exports of Manufactures 1990 and 2000
23
Foreign Invested Enterprises Are Driving China’s Exports
Source: Barry Naughton, The Chinese Economy, Figure 16.2 on page 388, 2007.
Share of Exports from export-process regime and foreign-invested enterprises
0%
10%
20%
30%
40%
50%
60%
1985
1986
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1990
1991
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2007 H
1
Pe
rce
nt
of
tota
l ex
po
rts
Export-processing regime
Produced by foreign-invested enterprises
24
More than Half of China’s Imports Are for Re-Exports Relating to International Supply Chain
Source: Barry Naughton, The Chinese Economy, Figure 16.3 on page 392, 2007.
Figure 16.3 Openness Measures of Chinese Economy
0%
5%
10%
15%
20%
25%
30%
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DP
Ordinary Trade Imports
Export Processing and Other Imports
f
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China’s Trade and FDI: Concentratedin Nine Coastal Provinces
Region Population
(%) GDP (%) FDI (%) Trade (%)
GDP per capita (US$)
China Total 100.0 100.0 100.0 100.0 1,008
Top 9 Provinces by FDI 31.7 51.8 84.6 89.4 1,647
E.China (Shanghai, Zhejiang, Jiangsu) 10.6 19.9 28.9 29.2 1,882 S.China (Guangdong, Fujian) 8.8 14.0 34.2 40.9 1,600 N.China (Beijing, Tianjin, Liaoning, Shandong) 12.2 17.9 21.4 19.2 1,477
Middle 12 Provinces by FDI 49.9 37.4 13.6 7.7 756 Bottom 10 Provinces by FDI 17.7 10.8 1.8 2.9 614
Concentration of Trade and FDI in China's Coastal Provinces
Source: Statistical Yearbook of China, 2002.
26
At the Start of Reform, China Allowed Wholly Foreign Owned Enterprises and Created Favourable Legal and
Tax Environments for Foreign Invested Enterprises
Source: Barry Naughton, The Chinese Economy, Figure 17.3 on page 412, 2007.
Modes of FDI in China
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
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79
-82
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H1
Pe
rce
nta
ge
of
Re
aliz
ed
Inv
es
tme
nt
Equity Joint Venture
Joint Development
Wholly Foreign Owned
Contractual JV
27
Hong Kong Provided Mainland China not just Money and Management but also Knowledge of Market Institutions and
their Working
Source: Barry Naughton, The Chinese Economy, Figure 17.1 on page 403, 2007.
Main Sources of FDI in China
0
5
10
15
20
25
30
35
40
45
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Billio
n U
S D
ollars
Hong Kong, Taiwan, Macau & Tax Havens
Industrialized Triad: US, EU, Japan
Other East Asia: Korea, ASEAN-5
Other
28
China’s Market-Oriented Reform Policy
29
Rural Reform Released Rural Surplus Labour and Made It Possible for the Decline of Agricultural Employment
from 70% in 1978 to 40% in 2007
Source: Barry Naughton, The Chinese Economy, Figure 6.3 on page 151, 2007.
Structural Change in Employment
0
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30
40
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80
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Pe
rce
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To
tal E
mp
loy
ed
Pe
rso
ns
Primary (Agricultural) Sector
Secondary (Industrial) Sector
Tertiary (Service) Sector
30
Migration and Floating Rural Population Are Driving Rapid Urbanization in China
Source: Barry Naughton, The Chinese Economy, Figure 5.1 on page 127, 2007.
Urban Share of Total Population
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
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01
20
03
20
05
Living in Urban Areas
"Non-Agricultural" = Urban Residence Permit Holders
31
Good Infrastructure and Relaxation on Labour Mobility Created Probably the Greatest Waves of Rural-Urban
Migration in the World’s History
Source: Barry Naughton, The Chinese Economy, Figure 5.2 on page 130, 2007.
The Long-distance "Floating Population" in China's Census
0
10
20
30
40
50
60
70
80
90
1982 1990 2000
Mill
ion Interprovincial
Within Province
32
Booming Non-State Sector in the Cities Absorbed Massive Rural Surplus Labour
Source: Barry Naughton, The Chinese Economy, Figure 8.3 on page 190, 2007.
Urban Labor Force
0
50
100
150
200
250
300
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Mill
ion
Government and Official Non-Profit
State-Owned Enterprise
Collective Enterprise
New Corporate
Foreign-Invested
Private
Self-Employed
Other
33
What Happened to China’s SOEs?Privatization of the small to get rid of state liabilities
Centralization of the large to secure state monopoly profits
Source: Barry Naughton, The Chinese Economy, Figure 13.1 on 305, 2007.
State Industrial Enterprise Profit
0%
2%
4%
6%
8%
10%
12%
14%
16%
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Per
cent
of G
DP
34
Rapid Privatization of SOEs during 1995-2005
Number of SOEs in Large and Medium-sized Industrial Enterprises
Source: National Bureau of Statistics.
35
Ownership No. of Firms
Profits Assets Employees Taxes Return on Assets
State 69.8 87.94 93.63 89.32 92.69 1.40
Collective 5.80 2.22 4.15 2.35 1.67 0.80
Private 17.8 7.08 1.73 7.00 3.94 6.08
Foreign 6.6 2.76 0.48 1.33 1.70 8.48
Structure and Performance by Ownership of Top 500 Chinese Enterprises in 2006 （ %）
Return on Assets （ %）
Return on Equity (%）
Top 500 Chinese Enterprises 1.82 10.07
Fortune 500 Companies 1.79 16.13
SOEs Performed Worse than NSEsbut Still Dominated in Large Enterprises
and in Monopoly Sectors
Source: China’s Top 500 Enterprises, 2007.
36
Reading List
1. Sach, D. Jeffrey. “China: catching up after half a millennium,” chapter 8 in The End of Poverty, 2005.
2. Sachs, D. Jeffrey and Wing Thye Woo. “Structural Factors in the Economic Reforms of China, Eastern Europe, and the Former Soviet Union” Economic Policy, Vol. 9, No. 18 (Apr., 1994), pp. 101-145.
3. Dollar, David. “Poverty, inequality and social disparities during China’s economic reform.” Policy Research Working Paper, WPS4253, The World Bank, 2007.http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2007/06/13/000016406_20070613095018/Rendered/PDF/wps4253.pdf
4. Cheong, Young-rok and Geng Xiao. “Global Capital Flows and the Position of China: Structural and Institutional Factors and their Implications,” Chapter 8 in China’s Role in Asia and the World Economy - Fostering Stability and Growth, Forum on Debt and Development, December 2003.http://www.fondad.org/publications/china
5. Xiao, Geng. “Reforming the Governance Structure of China's State Owned Enterprises.” Public Administration and Development, No. 18, 273-280, 1998.
6. Woo, Wing Thye and Geng Xiao. “Facing Protectionism Generated by Trade Disputes: China’s Post-WTO Blues,” In Garnaut, R. and L. Song (eds.) China: Linking Markets for Growth, 2007.
7. Naughton, Barry. The Chinese Economy: Transitions and Growth, The MIT Press, 2007.