the china conundrum - world...
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1818 Society Presentation
The China Conundrum
Yukon Huang
Senior Associate Carnegie Endowment
Former World Bank Director for China
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Views on ChinaAsk five economists for their prognosis on China’s economy and you will get ten different answers.
At the two extremes, China is seen as:
• A irrepressible economic power that will soon overtake the US
or
• A house of cards, built on financial shenanigans, that will collapse on a mountain of wasteful investments
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Perceptions shaped by political and social values
• China is not a democracy yet it is doing so well economically
• China’s institutions are weak yet implementation is so strong
• China’s prices and incentives are distorted yet its products are so competitive
• China’s income distribution is deteriorating rapidly yet 500 million have escaped poverty
• China’s creative energies are being repressed yet the arts are flourishing and patents issued soaring
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The West is fixated on three contentious issues
• Is China’s unbalanced growth a source of strength or a vulnerability?
• Can China moderate its trade surplus to reduce global trade tensions?
• Will China challenge or work with the West in moving up the innovation/technology ladder?
Answers lie in understanding China’s growth process
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Deng Xiaoping’s intellectual godfathers
• W. Arthur Lewis, Nobel Laureate for his model on economic development with unlimited supplies of labor.
• Paul Krugman, Nobel Laureate for his model integrating economic geography and trade.
• The World Bank for its operational model in using preferential access to resources to spur investment and outward looking growth policies.
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China rolled out incentives along the coast and border areas to spur trade
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Increased share of investment in favor of the coastal region
0%
10%
20%
30%
40%
50%
60%
70%
coast inland
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Concentrated infrastructure investment along the coast but now moving inland
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Massive migration of labor to the coast
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GDP growth – spurred by regional divergence but now converging
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%GDP Growth Rates - national and regional
China East Central West
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1111
Globalized industries are concentrated along the coast
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Other industries are more widespread
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High investment rates coupled with spatial agglomeration effects increased labor productivity
-8
-6
-4
-2
0
2
4
6
8
10
10 15 20 25 30 35 40
Labor Productivity Growth (%), 1980-2005
Investment to Output Ratio (%)
China
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But China has suffered from increasing inequalities
1.5
2
2.5
3
3.5
Inco
me
(GD
P) p
er c
apita
ratio
0
5
10
15
20
25
30
35
40
45
50
Gin
i
urban to rural income coastal to inland GDP per capita Gini (unadjusted)
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Processing trade drives China’s trade surplus
-40
-30
-20
-10
0
10
20
30
40
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Processing trade
Normal trade
Trade balance (RMB bn)
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The Basic Income Equation
• Y = C + I + G + (X-M)
GDP is sum of consumption, investment, government expenditures and trade balance (exports minus imports)
• 1 = C + I + G + (X-M) Y Y Y Y
.35 .45 .17 .03 (Illustrative shares for China)
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Investment and Private Consumption(Percent of GDP)
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Composition of National Saving(Percent of GDP)
0
10
20
30
40
50
60
Household savings Corporate savings Government savings Total
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China’s view of the West has changed because of the U.S. financial crisis
Crisis shattered a 30-year-old presumption that the US model was the best and that China should emulate it.
Crisis elicited a strong stimulus response in China, which succeeded in insulating China.
Leadership concluded that having a strong government working within a managed market economy is superior to a U.S. style system .
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Shifting Development Strategies
Deng’s Strategy – high input, high output
Hu-Wen Administration - develop a “harmonious” society with a stronger technological basis and environmentally more sustainable
- More emphasis on indigenous innovation, green growth technologies and human capital
- Greater urgency in dealing with social and economic disparities and unbalanced development process
- Recalibrate Deng Xiaoping’s advice that China should refrain from becoming active global policy player.
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Global sensitivities are being raised by China’s:
Indigenous innovation policies that create friction with foreign partners and technology providers.
Continued trade penetration that may affect other developing countries and not just the US/EU
Potential for influencing the rules of the game regarding: climate change, the international financial architecture and security arrangements
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