Professor Zhang Jun China Center for Economic Studies, Fudan University Politics and China’s Economic Growth from Below.

Professor Zhang JunChina Center for Economic Stu

dies, Fudan University

Politics and China’s Economic Growth from

Below

Mr. Rajiv Sikri, Special Secretary, Ministry of External Affairs, Governm

ent of India: “Firstly, the Indian economy has grown

within a democratic, federal framework that necessitates consensus and imposes many well-known constraints. Secondly, the indigenous private sector has played an important role in the growth of the economy and the process of economic reforms. Thirdly, the bulk of the resources for India’s economic development have been generated from within the country, not from FDI”

• Indian political system imposes constraints on economic transition and growth;

• Indian economic growth has been a result of globalization of its IT-enabled service, a dividend of its institutional assets (law, contracts and English speaking).

• Indian politics has not been helpful in reaping the opportunity of development; in generating strong momentum for faster growth, and in attracting FDIs.

Politics of Faster Growth

• While Indian politics hinders investment and growth, Chinese politics induces and facilitates the rapid process of capital formation in both infrastructure and manufacturing, which has been the source of fast growth in China.

Growth with Chinese Characteristics

• Rising trade dependence ratio, • Strong FDI-trade ties;• Increasing regional disparity;• Rising capital-output ratio;

Annual Growth of Exports and of Imports in China

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Evol uti on of Export/ GDP Rati o i n Chi na

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I nfl ux of FDI s to Chi na (USD bi l l i on)

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Figure 1: Share of China's Export related to Foreign investment

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Exports of FIEs

Exports of Processing and Assembling by Domestic Enterprises

Total

Regional Disparity

A Linkage

• China’s faster economic growth has largely been a result of globalization of its manufacturing since 1990s; That’s why China has enjoyed such higher export/GDP ratio since 1990s.

• However, the globalization of Chinese manufacturing was facilitated by influx of FDIs to China.

• The influx of FDIs, however, is attracted and promoted by politics rather than economics of Chinese economy: China enjoys much better quality of urban and inter-city infrastructure than India, not because both countries have different supply of factors of production (labor, financing and land), but because both have quite different politics.

Performance–Based Politics

• China has changed its politics without changing much of its political system, via (1) a process of successful government transformation; and (2) a build-up of effective political governance.

Quotations from Deng

• It doesn't matter whether the cat is black or white, as long as it catches mice;

• It is particularly essential at current stage of development to campaign against the leftist thoughts.

• We have to renovate our cadres system by replacing the elderly with those who are both young, professional, and knowledgeable.

Political Wisdom

• Pragmatism taking over orthodox;• Providing political safeguard and

legitimacy for pro-business and pro-market initiatives from below;

• Faster renovation of human capital of Chinese officials and bureaucrats.

Getting Incentive Right

• All the elements combined have quickly evolved into an unique political governance without change much of Chinese political system, a governance that combines both political control and market performance into the incentive structure for its officials;

• In terms of political governance, the big difference between Mao and Deng is: Mao buries markets, but Deng uses them.

Mao and his Colleagues

Growth from below

• The new politics drives officials and local governments to shift to pro-business policies and to initiate market-enhancing transformation, thus induces growth from below.

• China has only one government and 31 provincial competitors of each other, competing for better performance of investment and growth, while India has 27 different governments with too much divergent political interests.

• In order to attract FDIs and to promote investment in manufacturing, which has become a very important objective of political governance, Chinese local governments are committing to improving the quality of infrastructure;

• For a better participation of private sector in the build-up infrastructure, Chinese local governments have developed sustainable private-public sector alliances for financing and operation of infrastructure.

• Most local governments have done very well in commercializing the projects of infrastructure;

A Success of “Marketing the City”

Looking Ahead

• India is grappling with a more fundamental difficulty: how to raise investment rates, and China’s difficulty is how to raise efficiency of investment;

• China’s trouble is capital that costs zero, India’s is zero capital.

China has too much liquidity (average1994-2001)

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M2/GDP stock market capitalization/GDP FDI/GDP

• The investment rate of China today is much higher than that of Japan and US. It is also far higher than those of Hong Kong and Taiwan, whose investment rates between 1966 and 1998 were something like 25.4% and 23.7% respectively.

China's Nominal Investment/GDP Ratio(1980-2000）

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• The pattern of growth with Chinese style is somehow distorted by wrong pricing system;

• Faster growth in China has been generated within and by the political system which makes finance, land, and social welfare cheaper to accommodate investment and growth.

Getting Prices Right

• Given the setting of politics, China’ growth hinges on faster growth of investment and exports;

• To raise the efficiency of investment, getting prices right is the fundamental challenge facing China for the decades to come.

• China’s growth will eventually need to be based on right prices of physical, financial and human resources;

• In this regard China will have to accelerate the financial reform, social welfare reform, privatization, and land tenure reform, and so on, in order to generate more efficient and dynamic growth.

• But that does not mean China will need to revolutionize its political system. Given the flexibility of Chinese politics, China will continue to generate more growth and to respond to internal and external challenges, through marketisation, opening up, political governance, and careful grappling with regional disparity.

• Thank you