Chinas Economic Transformation: Myths and Realities Keyu Jin - PowerPoint PPT Presentation

China’s Economic Transformation: Myths and Realities Keyu Jin London School of Economics

Development Strategy 1 Urbanization 2 Industrialization 3 Globalization 4 Reform – “Reform is China’s Second Revolution”—Deng Xiaoping

Reforms, Reforms, Reforms • 1980s: Experimentation with Special Economic Zones • 1990s: Privatization • 2000s: Trade liberalization • Recent Third plenum reform package: credit and financial market imperfections

Myth 1: Investment-Driven Growth Model? • Output=F(Technology, Capital, Labor) • High investment rates in the 1990’s (over 30%) – Curse of diminishing returns ? – But...high rates of return (well above 20%) and increasing in the 1990’s.

China-Style Growth • Growth through reallocation of resources (labor) between 1978-2007: 1. Rural-Urban: share of labor in agriculture (70% to 30%) 2. State-private: share of state employment (in non-agriculture sectors) ( 52% to 13%)

• Productivity Growth between 1978-2007 – State sector (1.52% ) vs. Private (4.56%) – Reallocation of labor from state to private – Also, rapid productivity growth in private helped absorb labor transferred out of agriculture (420 million jobs) – Absent private sector productivity growth, GDP/per capita growth 3.79% lower annually – If not for the large capital misallocation, even larger gains.

The Next Big Thing • So far, there is significant misallocation of capital. In non-agriculture sectors: – State Employment Share : 13% – Investment Share: 53% – GDP share: less than 30%

The Next Big Thing • Next: winnowing distortions and reducing the misallocation of capital – Catching up with U.S. financial efficiency leads to a GDP increase of 60-100% – Eliminating differences in return to capital of firms can lead to productivity gain of 160-300%

source: Brandt and Zhu (2010) Bottom line: even reallocating existing resources can lead to high growth.

Putting Things into Perspective source: data from WDI

Myth 2: China’s High Saving Rate Households Savings Rate 30 25 20 15 10 5 0 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 2007 Advanced OECD United States China source: Song and Yang (2010)

• Why is it a puzzle? • How can we explain it? – Two criterion: levels and growth – Corporate vs. Households; Urban vs. Rural • Popular wisdom and challenges – Culture, social safety net, precautionary saving...

Exp 1: Gender Imbalance

And The Scramble for Wives source:Wei and Zhang (2009)

Gender Imbalance and Competitive Saving Source: Wei and Zhang (2009)

Solution: Outsourcing Mail-order brides source: tiboo

Exp. 2: The One Child policy Fertility (number of surviving children in an household) 3.5 3 2.5 2 1.5 1 0.5 Pre-one child policy period Progressive implementation of the policy One child policy 0 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 source: Choukmhane, Coeurdacier and Jin (2013)

Twin Experiment Household Saving Rate Only Child Twins Difference Average 21.3 12.8 8.5 Income Quintile (low to high) 1 6.4 -2.9 9.3 2 18.3 16.6 1.7 3 23.7 10.3 13.4 4 27.4 19.5 7.9 5 33.4 25.4 8 source: Choukmhane, Coeurdacier and Jin (2013)

The Transfer Effect Other Other sources, sources , 5.73% 4.92% Labor income, 12.90% Savings & Children, pension, 49.49% Family Pension/ 45.59% wealth support, income, 56.65% 24.72% C ensus 2005 - Main source of Charls 2011 - Expectations of old-age livelihood (65y+) support (45-65y) source: Choukmhane, Coeurdacier and Jin (2013)

One Child Policy By-product % of household expenditures 25% 20% 15% 10% 5% 0% 0 5 10 15 20 25 Age of child Education expenditures for singleton hh Unit education expenditures for twins hh source: Choukmhane, Coeurdacier and Jin (2013)

The Human Capital Dividend • Rapid human capital accumulation – Only child 40% more likely to pursue higher education – Human capital factor only 50% of US level • Rapid labor productivity growth – Between 2003-2009: on average 12% per year – Projected at least 9% until 2020, and 6.7% until 2030 • China ages before it riches: another myth? – 0.2% decline in labor force per year until 2020 – But... rapid labor productivity growth to compensate

Myth 3: What Imbalance? • The largest imbalance is between government and households. • Wage Suppression and Financial Repression – wages in manufacturing (7.6%) compared to labor productivity in manufacturing (17%) and real GDP per capita (over 10%) between 1997-2008. – Significant declines in labor share

Financial Repression 10 9 8 7 6 deposit rate 5 lending rate 4 3 2 1 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 average real return on bank deposits ≈ 0 source: author’s own calculations

China in the Global Economy Three Global Facts: 1 Saving Divergence 2 Global Imbalances 3 Declining interest rates

Figure : The Saving Divergence Households Savings Rate 30 25 20 15 10 5 0 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 2007 Advanced OECD United States China source: Coeurdacier, Guibaud, and Jin (2013)

Figure : Global Interest Rates 12.00 ¡ World ¡Long-­‑Term ¡Interest ¡Rate ¡ 10.00 ¡ 8.00 ¡ 6.00 ¡ 4.00 ¡ 2.00 ¡ 0.00 ¡ 1986-­‑01-­‑01 ¡1988-­‑01-­‑01 ¡1990-­‑01-­‑01 ¡1992-­‑01-­‑01 ¡1994-­‑01-­‑01 ¡1996-­‑01-­‑01 ¡1998-­‑01-­‑01 ¡2000-­‑01-­‑01 ¡2002-­‑01-­‑01 ¡2004-­‑01-­‑01 ¡2006-­‑01-­‑01 ¡2008-­‑01-­‑01 ¡2010-­‑01-­‑01 ¡ US ¡T-­‑Bill ¡Nominal ¡Rate ¡(maturity ¡10 ¡year) ¡ Mortgage ¡Nominal ¡Rate ¡(Fixed ¡Rate ¡30 ¡years) ¡ Source: ¡Saint ¡Louis ¡Fed ¡ source: Coeurdacier, Guibaud, and Jin (2013)

Figure : Global Imbalances 12 10 China 8 U.S. 6 4 2 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 -2 -4 -6 -8 Current Account (% GDP) source: Coeurdacier, Guibaud, and Jin (2013)

Heterogeneity in household debt Household Debt as a % of GDP 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% US and other Anglo Saxons ROW Emerging Asia 33 / 60 source: Coeurdacier, Guibaud, and Jin (2013)

Looking into the Future • From Cheap Labor to Cheap Capital • Third Plenum Reform Package – Removal of Distortions – Improving financial markets... • Redistribution of Wealth

Intellectual Property Rights Figure : The “Zhang Laffitte” Chateau source: 2013 Jens Schott Knudsen (CC BY-NC 2.0)

A Terrible Beauty is Born 1 Social Turmoil or Social decay? 2 Destruction of meritocracy, erosion of Confucian values, and the disruption of the social fabric 3 Proximate factors: (three lacks) legal constraint, religious restraint, and moral responsabilities