Development of China - An Economy in Transition. Introduction: Why do we look at China? Development – underdevelopment, less development, problems of.

Development of China

- An Economy in Transition

Introduction:Why do we look at China?

• Development – underdevelopment, less development, problems of underdevelopment

• China represents a large proportion of the world economy– Population (Mid-2001): 1.27 billion (20.7% of the world total)– Land: 3.70 million square miles (7.1% of the world total)– GDP (1999): US$ 989 Billion (3.2% of the world total)– GDP annual growth (1999): 7.05% (2.72 times of the world average)– GNI PPP[1] per capital (1999): US$ 3550 (53% of the world average)

• China is under transition and developing through a unique path. It may provide lessons or experiences for other developing countries or countries under transition.

[1] Gross National Income in Purchasing Power Parity (GNI PPP) per capital

Purposes of This Lecture

• Measure the development

• Determines of the development

• Outcomes the development process

• Policy for the development

Major Topics

(1) General theory

(2) Brief history of China’s development

(3) Models of development in China

(4) New Challenges

(5) Policy and new reforms

(1) General Theory

Production

Time

Out

put

Development Indicators

• Economic

• Demographic

• Social

• Infrastructure

• Geographic

• Human Development Index

Production Function

4 determinants of a country’s productivity

• Y = A F(L, K, H, N), or

• xY = A F(xL, xK, xH, xN), (if x >0) or

• Y/L = A F(1, K/L, H/L, N/L), (if x=1/L)

Long-run of Economic Growth- Selected Countries

Country Period Real GDP per Personat Beginning of

Perioda

Real GDP perPerson at End of

Perioda

Growth Rate(Per Year)

Japan 1890-1990 $1 149 $22 036 3.00%Brazil 1900-1987 595 4 664 2.39Canada 1870-1990 1 815 23 301 2.15W Germany 1870-1990 1 669 19 503 2.07United States 1870-1990 3 063 24 922 1.76China 1900-1987 547 2 386 1.71Mexico 1900-1987 886 3 640 1.64U K 1870-1990 3 676 18 549 1.36Argentina 1900-1987 1 753 4 507 1.09Indonesia 1900-1987 681 1 638 1.01Pakistan 1900-1987 564 1 208 0.88India 1900-1987 516 904 0.65Bangladesh 1900-1987 476 512 0.08

a Real GDP is measured in 1985 Canadian dollars.Source: Mankiw, N. Gregory, et. al., Principles of Marcroeconomics, First Canadian Edition, Dryden, HarcourtBrace & Company, Canada, p. 237.

(2) History of China’s Development • First Five-Year Plan (1953-1957)

– A new economic order modeled on the Soviet Union example, emphasizing the development of capital-intensive heavy industry

• Great Leap Forward (1958-1960)– The break away from the Soviet model and introduction of a new

program aimed at rapidly raising industrial and agricultural production

• Cultural Revolution (1966-1976)– The pursuit of Mao’s own development strategy of a self-reliant

economy and political struggle

• Economic Reforms (1978- )– To move the economy from a planned economy to one that is

more market-oriented

(3) Model of China Development

• #1: Socialist planned economy:– Government planning is basic means of allocating resources

– Production quotas: quantity rather than quality

– Suppress consumption to increase saving: invest in heavy industry

– Self-reliant and uninvolved in foreign economic relation

– Results:• Overuse of industrial equipment

• Shortage in supply: production and consumption goods

• Unstable economy growth

Model of China development (cont’d)

• #2: Socialist market economy:– Market is basic means of allocating resources

– State controls at the macroeconomic level

– Economic structural Reform

– Results:• Competition: establishment of the diversified ownership

• Efficient: profit maximization

• Open: involved in foreign economic relation

• Fast and stable economy growth

Economic Reforms:

• Rural reform– Increase of agricultural production and rural income

• Open-door policy– Turnaround from an inward-looking, self-reliant economy to one that

participates in the world economy (foreign trade, FDI, and SEZs)

• Industrial reform– Enterprise reform and price reform

• Financial reform– Company’s responsible for financial performance and borrow money

from banks; raise capital at the stock market

• SOEs reforms– Ownership restructuring

China (1952-1977)

0

5000

10000

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20000

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35000

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45000

1952

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GD

P

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GD

P p

er c

apit

a

GDP (USD million)

DPG per capita (USD)

China (1978-1998)

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200000

400000

600000

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1000000

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GDP (USD million)

DPG per capita (USD)

Comparison of Two Development Models

(4) New Challenges to China

• Three transitions

• Population and environmental pressures

• Employment insecurity

• Growing inequality and poverty

• Macroeconomic instability stemming from incomplete reforms

Three Transitions

• From a planned economy to a market-based one

• From a rural, agricultural society to an urban, industrial one

• From a non-WTO nation to a WTO one

Population and Environmental Pressures

• Large in number (1.27 billion)

• Low growth rate (1%)• Low urbanization

(30%)• Large number of

floating population (~100 million)

Population and Urbanization in China

0

20000

40000

60000

80000

100000

120000

140000

1952

1962

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1978

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1997

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rse

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Po

pu

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Population (year-end) (10 000 persons)

% of Urban

Employment Insecurity

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6

1978 1982 1985 1988 1991 1994 1997

UrbanUnemployment Rate

Growing Inequality Per Capita Annual Income of Urban and Rural Household and The Related

Index Per Capital Annual Net Income of

Rural Household Per Capital Annual Disposable Income of

Urban Households Year (USD) Index (1978=100) (USD) Index (1978=100) 1978 16.15 100.0 41.52 100.0 1980 23.13 139.0 57.75 127.0 1985 48.08 268.9 89.37 160.4 1986 51.25 277.6 108.78 182.5 1987 55.94 292.0 121.19 186.9 1988 65.89 310.7 142.85 182.5 1989 72.73 305.7 166.35 182.8 1990 82.99 311.2 182.61 198.1 1991 85.68 317.4 205.63 212.4 1992 94.80 336.2 245.05 232.9 1993 111.44 346.9 311.66 255.1 1994 147.64 364.4 422.76 276.8 1995 190.77 383.7 517.90 290.3 1996 232.90 418.2 585.11 301.6 1997 252.73 437.4 623.98 311.9 1998 261.43 456.8 656.00 329.9

(5) Policy and further reforms:

• The spread of market forces must be encouraged

• The government must begin serving markets (by building the legal, social physical, and institutional infrastructure)

• Integration with the world economy must be deepened – facing WTO

(6) Summary

• Economic prosperity varies substantially around the world - some countries are times richer than others

• Economic growth rates also very substantially - the relative position of countries can change over time

Summary (cont’d)

• The standard of living depends on the economy’s productivity

• Productivity depends on 4 determinants - physical capital, human capital, natural resource, and technological knowledge

Summary(cont’d)

• Government policies can influence the economy’s growth rate in many ways:– encouraging saving and investment

– encouraging investment from abroad

– fostering education

– maintaining property rights and political stability

– allowing free trade

– controlling population growth

– promoting the research and development of new technologies

Summary (cont’d)

• The accumulation of capital is subject to diminishing returns:– The more capital an economy has, the less additional output the

economy gets from an extra unit of capital,

– higher saving leads to higher growth for a period of time, but growth eventually slows down as the economy approaches a higher level of capital, productivity, and income,

– the return to capital is especially high in poor countries (catch-up effect).