Unbalanced growth in China --- understanding Chinese Success in a framework of political economy

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Unbalanced growth in China --- understanding Chinese Success in a

framework of political economy

Shen ， Ling

School of EconomicsShanghai University of Finance and Economics

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How to find me?

• http://se.shufe.edu.cn/

“people”

“Ling Shen”

“personal web page”

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Target

• Chinese economy grows very fast in last three decades. This should be understood systematically in order to share this experience with other developing countries.

• We focus on two main characteristics of Chinese growth, i.e., an authoritarian political institution and high income inequality.

• For each feature, we show firstly the facts, and then a theoretic model.

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• Briefly introduction of Chinese growth

• Understanding this growth in a framework of political economy

• Who enjoys this success

• Chinese financial system and its effect on growth

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1. A Brief Introduction of Chinese Success (All data without special notes are from Chinese Statistical Yearbook) 1978: 2007:Nominal GDP 364.5 Billion RMB 24953 Billion RMBGDP p.c. 381 Yuan RMB 18934 Yuan RMB

0

5000

10000

15000

20000

25000

30000

GDP(Bi l l i an RMB) GDP per capi ta

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Real GDP

0. 0

200. 0

400. 0

600. 0

800. 0

1000. 0

1200. 0

1400. 0

1600. 0

Real GDP I ndex 1978=100 Real GDP per Capi ta

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Real GDP Growth rate ( in RMB )Growth rate per year (1978-2007)

0. 0

2. 0

4. 0

6. 0

8. 0

10. 0

12. 0

14. 0

16. 0

GDP GDP per capi ta

9%

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WDI online GDP p.c. USD 2000

1970 1990 2008 Growth 70-90

Growth 90-08

 China 122 392 1963 5.8 8.9

 World 3324 4594 6024 1.6 1.5

 High income1294

52133

9 2869

6 2.5 1.6

 Low & middle income 637 957 1717 2.0 3.2

Rati o of Chi na to Worl d(%)

0. 0

5. 0

10. 0

15. 0

20. 0

25. 0

30. 0

35. 0

1970 1990 2008

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WDI online GDP p.c. USD 2000

1970 1990 2008 Growth 70-90

Growth 90-08

 China 122 392 1963 5.8 8.9

 Latin America & Caribbean

2678 3381 4767 1.2 1.9

 Sub-Saharan Africa 547 534 619 -0.1 0.8 Rati o of Chi na to Af ri ca(%)

0. 0

50. 0

100. 0

150. 0

200. 0

250. 0

300. 0

350. 0

1970 1990 2008

  Sub-Saharan Af ri ca

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WDI online GDP p.c. USD 2000

1970 1990 2008 Growth 70-90

Growth 90-08

 China 122 392 1963 5.8 8.9

 India 214 318 724 2.0 4.6

 Japan1734

53336

940481 3.3 1.1

 Korea, Rep. 1994 6895 15447 6.2 4.5

05000

1000015000200002500030000350004000045000

2008

  J apan   Chi na   Korea, Rep.

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2. Possible Reasons of Rapid Growth

LKNAfY ,,

GK , LH ,

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From Jiang, Ze-min (Journal of Shanghai Jiaotong Uni., 2008 42(3))

2.1 Nature resources

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2.2 Investment

Total i nvestment (Tr i l l i on RMB)

02468

10121416

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2.2 Investment

The Composi ti on of GDP

-100

1020304050607080

consumpti on i nvestment net export

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Infrastructure “ 要致富，先修路”

1 1 11. 42

2. 19

10. 23

0

2

4

6

8

10

12

Rai l way road Ai rl i nes

1980=1 2005

Railway Road Airlines Highway

1980 53.3 883.3 195.3 0.1*

2005 75.4 1930.5 1998.5 41

Units: 1,000KM *: Data in 1988.

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1 568. 0

39340. 6

35044. 5

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

移动电话年末用户 本地电话年末用户

1989 2005

1000pcs Mobile phone Telephone

1989 10 5,680

2005 393,406 350,445

Telephone( per 1000 persons) Mobile phone

1990 2000 2004 1990 2000 2004

World 98.96 161.32 191.43 2.13 122.47 279.43

China 6.03 114.7 241.05 0.02 67.52 258.32

USA 545.28 682.13 605.97 21.16 387.91 616.73

India 5.97 31.93 40.71 0.08 3.52 43.81

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2.3 Human Capital

The adult literacy rate

1990 2004

Middle-income countries

80.71 89.79

China 78.29 89.68

India 49.32 61.01

Russia 99.25 99.44

University Enrolment

rate2000 2004

World 19.5 24.8

Middle-income countries

16.3 26.5

China 7.6 19.1

India 10.2 11.8

Japan 47.4 54

USA 69.2 82.4

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2.4 Market-oriented reform: privatization and open-door policy

Empl oyees i n Pr i vate Enterpr i ses

0. 81 4. 50 6. 71 9. 56

24. 06

65. 86

91

10 9

30 29

0. 00

20. 00

40. 00

60. 00

80. 00

100. 00

1980 1985 1990 1995 2000 2006

Empl oyees i n Pr i vate Enterpr i ses(Mi l l i on) Annal growth rate(%)

• Is China already a market economy?

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FDI (Bi l l i on USD)

0. 0010. 0020. 0030. 0040. 0050. 0060. 0070. 0080. 00

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Share of FDI rel at i ve to Total I nvestment (%)

02468

1012141618

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

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3. Economic growth in dictatorship• Most developing countries have dictatorial political institution.

Sample（ 157）

GDP per capita[USD] Average

growth rate

[% p.a.]

Civil Liberty Index

1972-741970 2004

Developing 113 300 2370 4.78 4.56

Developed 44 2446 28550 6.66 2.81

• Civil Liberty Index: from Freedom house

1.0 --- 7.0 political environment of economic development.

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• Discussion in a political economy model

3.1 Do we “need” a dictator? 3.2 When will a dictator be “good”?

3.3 When will democratization happen?

.

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3.1 Do we “need” a Dictator?

0. 010. 020. 030. 040. 050. 060. 070. 080. 090. 0

pri vate consumpti on publ i c consumpti on

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Some facts:• Democracy

has higher growth rate on average

• and quite stable --- less hope to catch up

• Dictatorship is a risky project

C.L.Sample

157

Civil Liberty Index

1972-74

Average growth

rate[% p.a.]

Variance of growth

rate

7~6 42 6.38 4.37 8.03

5.9~5 27 5.22 4.46 6.28

4.9~4 18 4.28 4.44 5.49

3.9~3 23 3.26 6.00 4.32

2.9~2 28 2.08 6.07 5.51

1.9~1 19 1.02 7.46 0.89

Ave 4.07 5.84 6.62

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Dictatorial countries: Index of civil liberties (1.0 - 7.0) bigger than 6.0 in 1972/74. All data from UN and Barro-Lee 1994.

real GDP p.c. of some dictatorial countries 1970-2000

0

2000

4000

6000

8000

10000

12000

14000

Congo(democratic rep.) Gabon Guinea-BissauMali Mozambique UgandaChina Korea(South) Oman

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• Do we “need” a Dictator?• Barro (1996): “Democracy and growth”, Journal of economic

growth(1),pp.1-27

• Tarares and Wacziarg (2001): “How democracy affects growth”, European Economic Review (45),pp.1341-1378

• Democracy: Advantage: more human capital investment, less inequality Disadvantage: less physical capital investment

• Dictatorship: Advantage: more infrastructure (physical) investment Disadvantage: more corruption

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Main features of the model1. Utility function:

2. Production function:

tt

tt

NAkY

Aky

0,10,,

)ln()1(ln

gpi

bCU ii

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3. Capital evolution functions:

4. Political institutions:

dictatorship: the single ruler decides the tax rate and

investment

democracy: simple majority rule – the median voter

gt

ptt

tt

bbb

kbkk

0010

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• The optimality problem in democracy ：

Proposition 1 ： If there is no government, or government is democratic,

the economy could have a zero growth rate – in a “poverty trap” -- under certain conditions.

bcyts

bcUb

..

ln1lnmax

11

10

01

1

yify

yif

b

bbydb

dU

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• The optimality problem in dictatorship ： For individuals:

• Proposition 2 ： If there is a selfish dictator, the incentive of private

investment decreases.

Nbbb

bcyts

bcU

gp

pp

pp

b p

/

1..

ln1lnmax

)1)(1(

)/()/()1(1

)1)(1(

)/(0

NbyifNby

Nbyif

bg

g

g

p

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gp

gg

gg

b

bNbb

bcNyts

bcUg

..

ln1lnmax

N

NbyifNbNy

N

Nbyif

bp

p

p

g

)1(

)()(1

)1(

)(0

For dictator：

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• Proposition 3 ： Under certain conditions, even a selfish dictator would

lead the economy to leave the “poverty trap”, i.e., to achieve a positive growth rate.

1)1( 00 AkyN

0** pb

01 0 Nybg

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3.2 When will a dictator be “good”?

• “Stability overrides everything.” ---- Deng, xiaoping

稳定压倒一切 －－－ 邓小平 • McGuire, M.C. and Olson, M. (1996) “The Economics

of Autocracy and Majority rule”, Journal of Economic

Literature 34, pp.72-96

• Timing:

Private Investment

Production

Expropriation

Growth- enhancing policy

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• Shen, ling (2007) “When will a dictator be good?” Economic Theory 31(2), pp. 343-366

• Endogenous life-time of dictatorship:

• Political transition (Gun Model)

Parameters revealed

Citizens:

revolution or not?

Dictator: good policy or bad one?

Investment Production

Expropriation

Dictator: represses or not?

revolution

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• Dictator has incentive to transfer more to

citizens if they have a lower incentive to invest.

• Emphasize the trade off faced by the dictator:

---economic benefit in short term

---induce earlier revolution in long term

• Stability does not necessarily lead to a better

dictator.

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4. Who enjoys ?

• Poverty level: <100 yuan p.c. in 1978 250 Million• <625 yuan p.c. in 2000 32 Million

Poverty Rati o(%)

0

5

10

15

20

25

30

35

1978 1984 1985 1986 1987 1988 1989 1990 1992 1994 1995 1997 1998 1999 2000

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• In general, Gini coefficient of the income increases since 1985.

Rel at i ve i ncome of the rural to the urban

0. 00

0. 10

0. 20

0. 30

0. 40

0. 50

0. 60

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HH Income(RMB) in each province (2007)

0

5000

10000

15000

20000

25000

30000Shanghai

Zhejiang

Beijing

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What is the effects of income inequality on economic growth?

• Traditional ideas:

– The saving rate increases in the income.

– The rich saves more than the poor proportionally.

– Hence, redistribution from the poor to the rich will increase the aggregate investment

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What is the effects of income inequality on economic growth?

The poor The rich Aggregate

Income 400 400 800

Saving rate 30% 30% 30%

Save 120 120 240

Income 200 600 800

Saving rate 10% 50% 40%

Save 20 300 320

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• Lucas Puzzle (1993)

– South Korea and the Philippines were similar in the early 1960’s with respect to: GDP per capita, Population, urbanization, HC etc.

– However, the growth rates in following 30 years are very different: 6% vs. 2%

What is the effects of income inequality on economic growth?

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Gini

(%)

Q1 Q2 Q3 Q4 Q5 Q3+Q4

Q5/Q1 Q5/

(Q1+Q2)

1965

Korea 34.34 5.8 13.54 15.53 23.32 41.81 38.85 7.21 2.16

Philippines

51.32 3.5 12.5 8 20 56 20.5 16 3.5

1988

Korea 33.64 7.39 12.29 16.27 21.81 42.24 38.08 5.72 2.15

Philippines

45.73 5.2 9.1 13.3 19.9 52.5 33.2 10.1 3.67

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• From anecdotal to formal empirical evidence– Alesina and Rodrik (1994)– Persson and Tabellini (1994)– Perotti (1992,1994,1996)

• Initial inequality is detrimental to long-run growth.

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What are the effects of income inequality on economic growth?

• Bénabou, Roland. (1996) “Inequality and Growth” in Ben S. Bernanke and Julio J. Rotemberg, eds., NBER macroeconomics annual 1996. Cambridge, MA: MIT Press, pp. 11-74.

• Ling Shen (2009) “Urban-rural disparity: the demand analysis” The Journal of Developing Area 43(1) pp.87-107

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Overview

• Theories:

– Imperfect capital markets– Political economy– Social conflict model

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4.1 Imperfect capital markets

input

output

Production function

100

100

<100

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• What is this kind of output?

– Human Capital

– The poor guy can achieve more human capital than the rich when both of them get 1 Dollar additionally.

– If there is a perfect capital market

– The poor can borrow from the rich

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– However, the capital market in reality is imperfect.

– Hence, redistribution from the rich to the poor is good for the economic growth.

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4.2 Democracy

• The poor is majority.

• They choose a higher income tax to expropriate the rich.

• The rich expect such expropriation.

• Hence, they invest less.

• Lower economic growth

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4.3. Social conflict and Property rights

Good Bad

Good 40, 60 10 , 70

Bad 50, 30 20, 40

• A prison’s dilemma with capital accumulation

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5. Unbalanced economy in China: capital market

• Literature: Growing like China (Song 2009)

• Some stylized facts:

– High saving rates and huge investment

– What should we expect with this fact?

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– high return rate of capital

– What should we expect with this fact?

– huge foreign reserves

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• A theory with two sectors: SOE & DPE

– SOE is less efficient

DPE is more efficient

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• A theory with two sectors: SOE & DPE

– However, Chinese banks are SOE, too.

– Hence, it is much easier for SOE to get loans from financial markets.

– DPEs have to save for themselves.

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• A theory with two sectors: SOE & DPE

– Starting from huge investment

– Although both sectors have a decreasing tendency of the return rate, the share of DPE increases.

– It leads to a moderate decreasing return to capital in China.

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A theory with two sectors: SOE & DPE

T T+1

Share of GDP(%)

The return of

capital(%)

Share of GDP(%)

The return of

capital(%)

SOE 80 20 20 15

DPE 20 40 80 30

Total 24 27

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• A theory with two sectors: SOE & DPE

– China is an open economy

– Growing income and saving

VS.

decreasing SOE share

– huge foreign reserves

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• A theory with two sectors: SOE & DPE– The Evolution of the economy

Saving Banks

Foreign countries SOE DPE

x

Saving Banks

Foreign countries DPE