A Model of China’sState Capitalism
HKUST
June 2012
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 1/47 State Capitalism!
State capitalism as alternative growth model
3 Li, Liu, Wang (HKUST) China’s State Capitalism June2012 2/47 State Capitalism Again!
US Congress blame SOE subsidies to POEs for China’s CA surplus
4
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 3/47 The labor income share in total GDP is persistently declining in the past two decades
Puzzling Facts about Fast-Growing China Economy
The State-Owned Enterprises (SOEs) have outperformed the private …rms in the past decade while the opposite was true in the 1990s, although the GDP growth rates were stably high during the whole period.
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 4/47 Puzzling Facts about Fast-Growing China Economy
The State-Owned Enterprises (SOEs) have outperformed the private …rms in the past decade while the opposite was true in the 1990s, although the GDP growth rates were stably high during the whole period. The labor income share in total GDP is persistently declining in the past two decades
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 4/47 Puzzling Fact 1: SOEs Outperformed POEs
Figure 1: Total pro…t to sales revenues of Chinese enterprises in the industrial sector. We use CEIC (Table CN.BF: Industrial Financial Data: By Enterprise Type) to obtain Total pro…t to Sales Revenue. In this table, CEIC categorizes industrial enterprises into: state owned & holding, private,Li, Liu, Wang HMT (HKUST) & foreign, collectiveChina’s State owned, Capitalism shareholding corporations,June2012 5/47 foreign funded, and Hong Kong, Macau & Taiwan funded. We divide all the industrial enterprises into state owned & holding and the rest. The right axis shows the ratio of export to GDP, also obtained from CEIC. Puzzling Fact 1: SOEs Outperformed POEs
Figure 2a: Average Pro…t per Industrial Enterprise (by Di¤erent Ownership Structure): 1998-2010
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 6/47 Puzzling Fact 1: SOEs Outperformed POEs
Figure 2b: Average Pro…t per Employee for Industrial Enterprise (by Di¤erent Ownership Structure): 1998-2010
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 7/47 Puzzling Fact 2: Low and Declining Labor Income Share
Figure 10: China’sLabor Income Share (replicated from Bai and Qian, 2010)
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 8/47 Dual Labor Market and Structural Change: a huge labor supply in the process of industrialization Trade Liberalization: entering WTO in 2001, export-promoted strategies
Key Characteristics of China’sState Capitalism
Vertical Structure: SOEs monopolize key upstream industries while the downstream industries are largely open for private competition
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 9/47 Trade Liberalization: entering WTO in 2001, export-promoted strategies
Key Characteristics of China’sState Capitalism
Vertical Structure: SOEs monopolize key upstream industries while the downstream industries are largely open for private competition Dual Labor Market and Structural Change: a huge labor supply in the process of industrialization
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 9/47 Key Characteristics of China’sState Capitalism
Vertical Structure: SOEs monopolize key upstream industries while the downstream industries are largely open for private competition Dual Labor Market and Structural Change: a huge labor supply in the process of industrialization Trade Liberalization: entering WTO in 2001, export-promoted strategies
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 9/47 Without Openness, SOEs in the downstream industries could not exit so fast; Demand for downstream goods and services would be small, hence the pro…ts of upstream SOEs would be small. Without Labor Abundance, wage will increase fast as export increases, which limits the room for the monopoly pricing charged by the upstream SOEs. Without Strong Government and Political Centralization, SOEs would not be able to maintain the monopoly position in the upstream industries for so long
Key Mechanisms
Key Story: Upstream SOEs extract monopoly rents from expanding downstream private sectors, especially after China’sentry to WTO in 2001.
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 10/47 Without Labor Abundance, wage will increase fast as export increases, which limits the room for the monopoly pricing charged by the upstream SOEs. Without Strong Government and Political Centralization, SOEs would not be able to maintain the monopoly position in the upstream industries for so long
Key Mechanisms
Key Story: Upstream SOEs extract monopoly rents from expanding downstream private sectors, especially after China’sentry to WTO in 2001. Without Openness, SOEs in the downstream industries could not exit so fast; Demand for downstream goods and services would be small, hence the pro…ts of upstream SOEs would be small.
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 10/47 Without Strong Government and Political Centralization, SOEs would not be able to maintain the monopoly position in the upstream industries for so long
Key Mechanisms
Key Story: Upstream SOEs extract monopoly rents from expanding downstream private sectors, especially after China’sentry to WTO in 2001. Without Openness, SOEs in the downstream industries could not exit so fast; Demand for downstream goods and services would be small, hence the pro…ts of upstream SOEs would be small. Without Labor Abundance, wage will increase fast as export increases, which limits the room for the monopoly pricing charged by the upstream SOEs.
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 10/47 Key Mechanisms
Key Story: Upstream SOEs extract monopoly rents from expanding downstream private sectors, especially after China’sentry to WTO in 2001. Without Openness, SOEs in the downstream industries could not exit so fast; Demand for downstream goods and services would be small, hence the pro…ts of upstream SOEs would be small. Without Labor Abundance, wage will increase fast as export increases, which limits the room for the monopoly pricing charged by the upstream SOEs. Without Strong Government and Political Centralization, SOEs would not be able to maintain the monopoly position in the upstream industries for so long
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 10/47 Road Map
Documenting the vertical structure A Model of State Capitalism: Autarky, Trade Sustainability of this State Capitalism Emergence of State Capitalism Dynamic Extensions and Implicaitons on China’shigh saving rate and global imbalance
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 11/47 Facts about Vertical Structure [1]
Figure 5a: Share of state enterprises in industrial value-added.
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 12/47 Facts about Vertical Structure [2]
Figure 5b: Share of state enterprises in value-added as a percentage of its 1995 value.
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 13/47 Facts about Vertical Structure [3]
Figure 4: Investments in …xed assets in urban area by ownership for all sectors. The data are from the following tables of National Bureau of Statistics (NBS) of China: Investment in Urban Area by Sector, Source of Funds, Jurisdiction of Management and Registration Status. Note that NBS has changed the column title of state related ownership over time. Li, Liu,NBS Wang uses (HKUST) “state-ownedChina’s and Statestate-controlled” Capitalism in Table 6-14June2012 of 14/47 2004;“state-owned and state-holding” in Table 6-14 of 2005; “state-holding” in Table 6-14 of 2006; and “state-holding” in Table 5-14 of 2007-2009. Before Year 2004, data for the state enterprises is not available. Facts about Vertical Structure [4]
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 15/47 Facts about Vertical Structure [5]
Figure 3: Share of industrial output value from state enterprises in the industrial sector.
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 16/47 Model
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 17/47 1 one unit of labor produces one unit of numerare good n 2 di¤erentiated consumption good: α β 1 α β Fi (k, l, m) = Ak l m , i [0, 1] 8 2 γ 1 γ 3 Intermediate good: Fm (k, l) = Amk l
Preference
e 1 η e 1 η 1 η 1 e u(c) = cn + c(i) η di , e > 1, η > 1, e 1 20 1 3 Z0 6 7 4@ A 5 Technology
Autarky Environment
a continuum of households with measure unity: θ elite group, 1 θ grassroot.
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 18/47 1 one unit of labor produces one unit of numerare good n 2 di¤erentiated consumption good: α β 1 α β Fi (k, l, m) = Ak l m , i [0, 1] 8 2 γ 1 γ 3 Intermediate good: Fm (k, l) = Amk l
Technology
Autarky Environment
a continuum of households with measure unity: θ elite group, 1 θ grassroot. Preference
e 1 η e 1 η 1 η 1 e u(c) = cn + c(i) η di , e > 1, η > 1, e 1 20 1 3 Z0 6 7 4@ A 5
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 18/47 1 one unit of labor produces one unit of numerare good n 2 di¤erentiated consumption good: α β 1 α β Fi (k, l, m) = Ak l m , i [0, 1] 8 2 γ 1 γ 3 Intermediate good: Fm (k, l) = Amk l
Autarky Environment
a continuum of households with measure unity: θ elite group, 1 θ grassroot. Preference
e 1 η e 1 η 1 η 1 e u(c) = cn + c(i) η di , e > 1, η > 1, e 1 20 1 3 Z0 6 7 4@ A 5 Technology
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 18/47 2 di¤erentiated consumption good: α β 1 α β Fi (k, l, m) = Ak l m , i [0, 1] 8 2 γ 1 γ 3 Intermediate good: Fm (k, l) = Amk l
Autarky Environment
a continuum of households with measure unity: θ elite group, 1 θ grassroot. Preference
e 1 η e 1 η 1 η 1 e u(c) = cn + c(i) η di , e > 1, η > 1, e 1 20 1 3 Z0 6 7 4@ A 5 Technology
1 one unit of labor produces one unit of numerare good n
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 18/47 γ 1 γ 3 Intermediate good: Fm (k, l) = Amk l
Autarky Environment
a continuum of households with measure unity: θ elite group, 1 θ grassroot. Preference
e 1 η e 1 η 1 η 1 e u(c) = cn + c(i) η di , e > 1, η > 1, e 1 20 1 3 Z0 6 7 4@ A 5 Technology
1 one unit of labor produces one unit of numerare good n 2 di¤erentiated consumption good: F (k, l, m) = Akαl βm1 α β, i [0, 1] i 8 2
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 18/47 Autarky Environment
a continuum of households with measure unity: θ elite group, 1 θ grassroot. Preference
e 1 η e 1 η 1 η 1 e u(c) = cn + c(i) η di , e > 1, η > 1, e 1 20 1 3 Z0 6 7 4@ A 5 Technology
1 one unit of labor produces one unit of numerare good n 2 di¤erentiated consumption good: α β 1 α β Fi (k, l, m) = Ak l m , i [0, 1] 8 2 γ 1 γ 3 Intermediate good: Fm (k, l) = Amk l
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 18/47 1 Intermediate good market monopoly 2 all the other markets are perfectly competitive
1 Each household, elite or grass root, is endowment with L units of time (labor) and K units of capital. 2 The pro…ts of all the state-owned enterprises are equally shared by the elite class. 3 All the private …rms are owned by the grassroot. Market Structure:
Static Autarky Environment
Endowment:
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 19/47 1 Intermediate good market monopoly 2 all the other markets are perfectly competitive
2 The pro…ts of all the state-owned enterprises are equally shared by the elite class. 3 All the private …rms are owned by the grassroot. Market Structure:
Static Autarky Environment
Endowment:
1 Each household, elite or grass root, is endowment with L units of time (labor) and K units of capital.
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 19/47 1 Intermediate good market monopoly 2 all the other markets are perfectly competitive
3 All the private …rms are owned by the grassroot. Market Structure:
Static Autarky Environment
Endowment:
1 Each household, elite or grass root, is endowment with L units of time (labor) and K units of capital. 2 The pro…ts of all the state-owned enterprises are equally shared by the elite class.
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 19/47 1 Intermediate good market monopoly 2 all the other markets are perfectly competitive
Market Structure:
Static Autarky Environment
Endowment:
1 Each household, elite or grass root, is endowment with L units of time (labor) and K units of capital. 2 The pro…ts of all the state-owned enterprises are equally shared by the elite class. 3 All the private …rms are owned by the grassroot.
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 19/47 1 Intermediate good market monopoly 2 all the other markets are perfectly competitive
Static Autarky Environment
Endowment:
1 Each household, elite or grass root, is endowment with L units of time (labor) and K units of capital. 2 The pro…ts of all the state-owned enterprises are equally shared by the elite class. 3 All the private …rms are owned by the grassroot. Market Structure:
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 19/47 2 all the other markets are perfectly competitive
Static Autarky Environment
Endowment:
1 Each household, elite or grass root, is endowment with L units of time (labor) and K units of capital. 2 The pro…ts of all the state-owned enterprises are equally shared by the elite class. 3 All the private …rms are owned by the grassroot. Market Structure:
1 Intermediate good market monopoly
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 19/47 Static Autarky Environment
Endowment:
1 Each household, elite or grass root, is endowment with L units of time (labor) and K units of capital. 2 The pro…ts of all the state-owned enterprises are equally shared by the elite class. 3 All the private …rms are owned by the grassroot. Market Structure:
1 Intermediate good market monopoly 2 all the other markets are perfectly competitive
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 19/47 Autarky Equilibrium Characterization
Πm Household Wealth : Ie = WL + RK + ; Ig = WL + RK θ 1
BC : Wcn + p(i)c(i)di I , where I Ie , Ig 2 f g Z0 α β 1 α β R W pm Price : p(i) = ; β 1 α β Aααβ (1 α β) γ 1 γ R W Upstream SOE : Πm = maxDm (pm ) pm p γ 1 γ m " Am γ (1 γ) # γ 1 γ R W (1 α β)(e 1) + 1 pm = µ ; µ . γ 1 γ Am γ (1 γ) (1 α β)(e 1)
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 20/47 Autarky Equilibrium
Factor Markets Clear
γ 1 γ R W 1 ∂ γ 1 γ Am γ (1 γ) ∂p(i) L = Dm + D(i) di ∂W ∂W Z0 by producer of intermediate good m by producers of di¤erentiated goods | D {z } + n | {z } by producers of good n γ 1 γ R W 1 |{z}∂ γ 1 γ Am γ (1 γ) ∂p(i) K = Dm + D(i) di ∂R ∂R Z0 by producer of intermediate good m by producers of di¤erentiated goods | {z } | {z }
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 21/47 ∂pm < 0, ∂pm < 0, ∂pm > 0, ∂pm = 0. ∂K ∂Am ∂A ∂L ∂p(i) < 0, ∂p(i) < 0, ∂p(i) < 0, ∂p(i) = 0. ∂K ∂Am ∂A ∂L
Autarky Equilibrium
Lemma Suppose L is su¢ ciently large. The autarky model has a unique equilibrium, in which all the prices (R, pm, p(i), W ) are explicitly solved.
∂R < 0, ∂R > 0, ∂R > 0, ∂R = 0. ∂K ∂Am ∂A ∂L
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 22/47 ∂p(i) < 0, ∂p(i) < 0, ∂p(i) < 0, ∂p(i) = 0. ∂K ∂Am ∂A ∂L
Autarky Equilibrium
Lemma Suppose L is su¢ ciently large. The autarky model has a unique equilibrium, in which all the prices (R, pm, p(i), W ) are explicitly solved.
∂R < 0, ∂R > 0, ∂R > 0, ∂R = 0. ∂K ∂Am ∂A ∂L ∂pm < 0, ∂pm < 0, ∂pm > 0, ∂pm = 0. ∂K ∂Am ∂A ∂L
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 22/47 Autarky Equilibrium
Lemma Suppose L is su¢ ciently large. The autarky model has a unique equilibrium, in which all the prices (R, pm, p(i), W ) are explicitly solved.
∂R < 0, ∂R > 0, ∂R > 0, ∂R = 0. ∂K ∂Am ∂A ∂L ∂pm < 0, ∂pm < 0, ∂pm > 0, ∂pm = 0. ∂K ∂Am ∂A ∂L ∂p(i) < 0, ∂p(i) < 0, ∂p(i) < 0, ∂p(i) = 0. ∂K ∂Am ∂A ∂L
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 22/47 Autarky Equilibrium
Lemma Suppose L µ γ(1 α β) αµ L A, A , K . In the autarky equilibrium, > (1 γ)(1 α β) +βµ ( m ) (1 α β)(µ 1) Πm = L(A, Am, K ), (1 γ) (1 α β) + βµ αµ + (1 α β)(γ + µ 1) Y = L + L(A, Am, K ) , (1 γ) (1 α β) + βµ L θL = , L αµ+(1 α β)(γ+µ 1) L A, A , K + (1 γ )(1 α β)+βµ ( m ) 1 (1 γ) (1 α β) + βµ 1+α(e 1)+γ(1 α β)(e 1) L(A, Am, K ) { γ (1 α β) + αµ e 1 α(e 1)+γ(1 α β)(e 1) (1 α β) 1+α(e 1)+γ (1 α β)(e 1) 1+α(e 1)+γ(1 α β)(e 1) Am A K h i Li, Liu, Wang (HKUST) China’s State Capitalism June2012 23/47 Autarky Equilibrium
Proposition Suppose L µ γ(1 α β) αµ L A, A , K . In the autarky equilibrium, > (1 γ)(1 α β) +βµ ( m ) ∂Πm > 0, ∂Πm > 0, ∂Πm > 0; ∂θL < 0, ∂θL < 0, ∂θL < 0. ∂A ∂Am ∂K ∂A ∂Am ∂K
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 24/47 Socially E¢ cient Allocation
Proposition In the social optimal equilibrium (liberalization of the upstream SOE), the wage is still equal to the numeraire good price, the rental price of capital becomes larger, both the intermediate good and the di¤erentiated goods become cheaper, the total non-numeraire employment and the GDP both become larger, and the labor income share becomes smaller.
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 25/47 Country F: L units of labor and same utility function All the …rms are private in country F, and have exclusive technology: F (l) = l,for i [0, 1]. i 8 2 One unit of foreign labor producing A units of numeraire good W p = , p(i) = W , i [0, 1]. n A 1 8 2 Assume L < so in the autarky equilibrium c = 0. A n
Open Economy
Country H is same as the static autarky.
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 26/47 All the …rms are private in country F, and have exclusive technology: F (l) = l,for i [0, 1]. i 8 2 One unit of foreign labor producing A units of numeraire good W p = , p(i) = W , i [0, 1]. n A 1 8 2 Assume L < so in the autarky equilibrium c = 0. A n
Open Economy
Country H is same as the static autarky.
Country F: L units of labor and same utility function
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 26/47 One unit of foreign labor producing A units of numeraire good W p = , p(i) = W , i [0, 1]. n A 1 8 2 Assume L < so in the autarky equilibrium c = 0. A n
Open Economy
Country H is same as the static autarky.
Country F: L units of labor and same utility function All the …rms are private in country F, and have exclusive technology: F (l) = l,for i [0, 1]. i 8 2
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 26/47 W p = , p(i) = W , i [0, 1]. n A 1 8 2 Assume L < so in the autarky equilibrium c = 0. A n
Open Economy
Country H is same as the static autarky.
Country F: L units of labor and same utility function All the …rms are private in country F, and have exclusive technology: F (l) = l,for i [0, 1]. i 8 2 One unit of foreign labor producing A units of numeraire good
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 26/47 1 Assume L < so in the autarky equilibrium c = 0. A n
Open Economy
Country H is same as the static autarky.
Country F: L units of labor and same utility function All the …rms are private in country F, and have exclusive technology: F (l) = l,for i [0, 1]. i 8 2 One unit of foreign labor producing A units of numeraire good W pn = , p(i) = W , i [0, 1]. A 8 2
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 26/47 Open Economy
Country H is same as the static autarky.
Country F: L units of labor and same utility function All the …rms are private in country F, and have exclusive technology: F (l) = l,for i [0, 1]. i 8 2 One unit of foreign labor producing A units of numeraire good W p = , p(i) = W , i [0, 1]. n A 1 8 2 Assume L < so in the autarky equilibrium c = 0. A n
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 26/47 Trade Equilibrium
Assume
1 e µ A < L(A, Am, K ), 2 [(1 γ) (1 α β) + βµ] µ L(A, Am, K ) < LA, 2 [(1 γ) (1 α β) + βµ] and µ 2 γ (1 α β) αµ L > L(A, Am, K ), (1 γ) (1 α β) + βµ where L(A, Am, K ) is total employment in the non-numeraire sectors in country H. (e 3) (1 α β) + 1 < 0
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 27/47 Trade Equilibrium
Lemma In the free trade equilibrium,
(1 α β)(µ 1) Πm = L(A, Am, K )pn. (1 γ) (1 α β) + βµ αµ + (1 α β)(γ + µ 1) Y = L + L(A, Am, K ) pn (1 γ) (1 α β) + βµ L θL = , L αµ+(1 α β)(γ+µ 1) L A, A , K + (1 γ )(1 α β)+βµ ( m ) 1 1+α(e 1)+γ(1 α β)(e 1) L(A, Am, K ) 2 L(A, Am, K ).
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 28/47 Domestic Labor Market Integration ( ωL < L(A, Am, K ))
Trade Equilibrium Properties
Proposition The monopoly pro…t of the upstream SOE and the GDP in country H are larger in the free trade equilibrium than in the autarky, but the labor income share in total GDP is smaller in the trade equilibrium.
Export Promotion Policies
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 29/47 Trade Equilibrium Properties
Proposition The monopoly pro…t of the upstream SOE and the GDP in country H are larger in the free trade equilibrium than in the autarky, but the labor income share in total GDP is smaller in the trade equilibrium.
Export Promotion Policies
Domestic Labor Market Integration ( ωL < L(A, Am, K ))
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 29/47 Sustainability
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 30/47 Export Competition Change in External Demand
Sustainability Issues
Rise of Wage (due to capital accumulation or productivity increase)
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 31/47 Change in External Demand
Sustainability Issues
Rise of Wage (due to capital accumulation or productivity increase) Export Competition
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 31/47 Sustainability Issues
Rise of Wage (due to capital accumulation or productivity increase) Export Competition Change in External Demand
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 31/47 Rise of Wage
L < L(A, Am, K ), Proposition Suppose capital K in country H is moderately high. GDP in country H is
e 1 α(e 1)+γ(1 α β)(e 1) (e 1) γβ+(1 α)(1 γ) 1 α β e f g Y = B Am A K e L e pn, (1) where B is a constant. Moreover,
WL (1 γ)(1 α β) + βµ = , (2) Y µ RK γ (1 α β) + αµ = , Y µ Πm (µ 1)(1 α β) = . Y µ
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 32/47 ∂Πm > 0; ∂Πm > 0; ∂Πm > 0; ∂Πm > 0 ∂A ∂Am ∂L ∂K
Rise of Wage
∂W < 0; ∂W > 0; ∂W > 0; ∂W > 0. ∂L ∂A ∂Am ∂K
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 33/47 Rise of Wage
∂W < 0; ∂W > 0; ∂W > 0; ∂W > 0. ∂L ∂A ∂Am ∂K ∂Πm > 0; ∂Πm > 0; ∂Πm > 0; ∂Πm > 0 ∂A ∂Am ∂L ∂K
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 33/47 Further Rise of Wage
Proposition Suppose capital K is su¢ ciently high. H and F completely specializes. H consumes both while F only consumes the di¤erentiated goods. GDP of H is given by
1 Y = + 1 ALpn, (3) (µ µ)(1 α β)(e 1) and the factor income shares: e WL 1 γ = β + (1 α β) , Y µ RK γ = α + (1 α β) , Y µ e Πm µ 1 = (1 α β) , Y µ e
Li, Liu, Wang (HKUST) China’s State Capitalisme June2012 34/47 where µ, the markup, is uniquely determined. e
e 2 Markup µ has the following properties:
∂µ ∂µ ∂µ ∂µ ∂µ ∂µ e > 0; > 0; < 0; < 0; < 0; < 0. (4) ∂A ∂L ∂K ∂L ∂A ∂Am e e e e e e 3 The share of SOE pro…t in GDP in country H is larger than in the previous equilibrium, but it decreases when K, L, A or Am increases. 4 Labor income share in country H increases as domestic productivities or factor endowments increase.
Further Rise of Wage
1 GDP of country H now depends explicitly on foreign variables (A and L).
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 35/47 3 The share of SOE pro…t in GDP in country H is larger than in the previous equilibrium, but it decreases when K, L, A or Am increases. 4 Labor income share in country H increases as domestic productivities or factor endowments increase.
Further Rise of Wage
1 GDP of country H now depends explicitly on foreign variables (A and L). 2 Markup µ has the following properties:
∂µ ∂µ ∂µ ∂µ ∂µ ∂µ e > 0; > 0; < 0; < 0; < 0; < 0. (4) ∂A ∂L ∂K ∂L ∂A ∂Am e e e e e e
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 35/47 4 Labor income share in country H increases as domestic productivities or factor endowments increase.
Further Rise of Wage
1 GDP of country H now depends explicitly on foreign variables (A and L). 2 Markup µ has the following properties:
∂µ ∂µ ∂µ ∂µ ∂µ ∂µ e > 0; > 0; < 0; < 0; < 0; < 0. (4) ∂A ∂L ∂K ∂L ∂A ∂Am e e e e e e 3 The share of SOE pro…t in GDP in country H is larger than in the previous equilibrium, but it decreases when K, L, A or Am increases.
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 35/47 Further Rise of Wage
1 GDP of country H now depends explicitly on foreign variables (A and L). 2 Markup µ has the following properties:
∂µ ∂µ ∂µ ∂µ ∂µ ∂µ e > 0; > 0; < 0; < 0; < 0; < 0. (4) ∂A ∂L ∂K ∂L ∂A ∂Am e e e e e e 3 The share of SOE pro…t in GDP in country H is larger than in the previous equilibrium, but it decreases when K, L, A or Am increases. 4 Labor income share in country H increases as domestic productivities or factor endowments increase.
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 35/47 Export Competition
p(i) = Γ(µ) pn, i [0, 1], 8 2 where function Γ( ) satis…es 1 [α+γ(1 α β)] (1 γ)(1 α β)+β (1 α β) e Γ(v) ∝ Am A K e L e . (5) h iΓ(µ) = T . (6) Proposition b When T pn, the price of the di¤erentiated goods charged by a potential competitor, is su¢ ciently high (T > Γ(µ)), the upstream industry in country H charges monopoly price markup equal to µ; When T [Γ(1), Γ(µ)), the SOE lowers the price makeup to µ, determined by 2 (6); When T < Γ(1), the upstream SOE in country H has to improve its productivity Am if it wants to maintain its internationalb competitiveness of the di¤erentiated goods.
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 36/47 Change in External Demand
A decline in A (or L) leads to
∂Πm a decrease in both the monopoly pro…t Πm and GDP (i.e., > 0 ∂A and ∂Y > 0; ∂Πm > 0 and ∂Y > 0). ∂A ∂L ∂L an increase in labor income share, mainly due to the shrinkage of GDP, even though the wage also decreases.
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 37/47 Change in External Demand
Figure 1: Total pro…t to sales revenues of Chinese enterprises in the industrial sector. We use CEIC (Table CN.BF: Industrial Financial Data: By Enterprise Type) to obtain Total pro…t to Sales Revenue. In this table, CEIC categorizes industrial enterprises into: state owned & holding, private,Li, Liu, Wang HMT (HKUST) & foreign, collectiveChina’s State owned, Capitalism shareholding corporations,June2012 38/47 foreign funded, and Hong Kong, Macau & Taiwan funded. We divide all the industrial enterprises into state owned & holding and the rest. The right axis shows the ratio of export to GDP, also obtained from CEIC. Change in External Demand
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 39/47 SOEs and non-SOEs are engaged in perfect competition in each liberalized industry in the downstream. Each of the rest 1 φ fraction of the industries is monopolized by one state …rm.
A = Ap if private, and A = As if state. As < Ap . Key Result: When Ap is su¢ ciently large, the total pro…t of SOEs is As maximized when φ = 1. To compete with private …rms in the liberalized industries, an downstream SOE needs a subsidy equal to α β 1 α β R W pm 1 1 per unit of output. α β 1 α β A A α β (1 α β) s p
Emergence of China’sState Capitalism
φ : the fraction of downstream industries that are liberalized (φ = 0 at the beginning)
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 40/47 Each of the rest 1 φ fraction of the industries is monopolized by one state …rm.
A = Ap if private, and A = As if state. As < Ap . Key Result: When Ap is su¢ ciently large, the total pro…t of SOEs is As maximized when φ = 1. To compete with private …rms in the liberalized industries, an downstream SOE needs a subsidy equal to α β 1 α β R W pm 1 1 per unit of output. α β 1 α β A A α β (1 α β) s p
Emergence of China’sState Capitalism
φ : the fraction of downstream industries that are liberalized (φ = 0 at the beginning) SOEs and non-SOEs are engaged in perfect competition in each liberalized industry in the downstream.
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 40/47 A = Ap if private, and A = As if state. As < Ap . Key Result: When Ap is su¢ ciently large, the total pro…t of SOEs is As maximized when φ = 1. To compete with private …rms in the liberalized industries, an downstream SOE needs a subsidy equal to α β 1 α β R W pm 1 1 per unit of output. α β 1 α β A A α β (1 α β) s p
Emergence of China’sState Capitalism
φ : the fraction of downstream industries that are liberalized (φ = 0 at the beginning) SOEs and non-SOEs are engaged in perfect competition in each liberalized industry in the downstream. Each of the rest 1 φ fraction of the industries is monopolized by one state …rm.
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 40/47 Key Result: When Ap is su¢ ciently large, the total pro…t of SOEs is As maximized when φ = 1. To compete with private …rms in the liberalized industries, an downstream SOE needs a subsidy equal to α β 1 α β R W pm 1 1 per unit of output. α β 1 α β A A α β (1 α β) s p
Emergence of China’sState Capitalism
φ : the fraction of downstream industries that are liberalized (φ = 0 at the beginning) SOEs and non-SOEs are engaged in perfect competition in each liberalized industry in the downstream. Each of the rest 1 φ fraction of the industries is monopolized by one state …rm.
A = Ap if private, and A = As if state. As < Ap .
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 40/47 To compete with private …rms in the liberalized industries, an downstream SOE needs a subsidy equal to α β 1 α β R W pm 1 1 per unit of output. α β 1 α β A A α β (1 α β) s p
Emergence of China’sState Capitalism
φ : the fraction of downstream industries that are liberalized (φ = 0 at the beginning) SOEs and non-SOEs are engaged in perfect competition in each liberalized industry in the downstream. Each of the rest 1 φ fraction of the industries is monopolized by one state …rm.
A = Ap if private, and A = As if state. As < Ap . Key Result: When Ap is su¢ ciently large, the total pro…t of SOEs is As maximized when φ = 1.
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 40/47 Emergence of China’sState Capitalism
φ : the fraction of downstream industries that are liberalized (φ = 0 at the beginning) SOEs and non-SOEs are engaged in perfect competition in each liberalized industry in the downstream. Each of the rest 1 φ fraction of the industries is monopolized by one state …rm.
A = Ap if private, and A = As if state. As < Ap . Key Result: When Ap is su¢ ciently large, the total pro…t of SOEs is As maximized when φ = 1. To compete with private …rms in the liberalized industries, an downstream SOE needs a subsidy equal to α β 1 α β R W pm 1 1 per unit of output. α β 1 α β A A α β (1 α β) s p
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 40/47 Summary
We provide a simple model of China’sstate capitalism that highlights a vertical structure, internatioanl trade, and industrialization. We explain why SOEs outperformed POEs in the last decade while the opposite was true in the 1990s. Our framework also explains the persistently low and declining labor income share in China’sGDP in the past two decades Our theory points to the incompleteness of the market-oriented reforms as a plausible fundamental cause for the recent unusual prosperity of China’sSOEs. We show how this development model of state capitalism emerges and why it may not be sustainable.
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 41/47 Dynamic Extensions
Dynamic Autarky: Investment demand increases demand for the downstream goods and hence increases upstream SOE pro…t Dynamic Balanced Trade: Dynamic Unbalanced Trade: International lending to foreign consumers more exporting upstream SOEs bene…t most ) )
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 42/47 Puzzling Fact 3: Low Consumption GDP Ratio
China’s state capitalism and the extreme & unsustainable imbalance China's Labor Income Share & Consumption / GDP 0.6500
0.6000
0.5500
0.5000
0.4500
0.4000
0.3500 1978 1982 1986 1990 1994 1998 2002 2006 Labor Income Share in GDP Labor Income Share in GDP net of indirect tax Consumption/GPD 18
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 43/47 Poor people’spurchase power is low while the rich people have a higher investment propensity, which contributes to a high saving and low private consumption Comparative disadvantages in the …nancial institutions plus weak domestic consumption demand lead to capital out‡ow, exacerbating external imbalance
Weak domestic private consumption demand implies a high dependence on foreign demand and government investment, but exports will widen the income disparity even further. Vicious cycle: export income inequality weak domestic private consumption have) to export and invest more) )
Possible Explanation
Income Inequality increases between the Elite group and the grassroot group
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 44/47 Comparative disadvantages in the …nancial institutions plus weak domestic consumption demand lead to capital out‡ow, exacerbating external imbalance
Weak domestic private consumption demand implies a high dependence on foreign demand and government investment, but exports will widen the income disparity even further. Vicious cycle: export income inequality weak domestic private consumption have) to export and invest more) )
Possible Explanation
Income Inequality increases between the Elite group and the grassroot group Poor people’spurchase power is low while the rich people have a higher investment propensity, which contributes to a high saving and low private consumption
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 44/47 Weak domestic private consumption demand implies a high dependence on foreign demand and government investment, but exports will widen the income disparity even further. Vicious cycle: export income inequality weak domestic private consumption have) to export and invest more) )
Possible Explanation
Income Inequality increases between the Elite group and the grassroot group Poor people’spurchase power is low while the rich people have a higher investment propensity, which contributes to a high saving and low private consumption Comparative disadvantages in the …nancial institutions plus weak domestic consumption demand lead to capital out‡ow, exacerbating external imbalance
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 44/47 Vicious cycle: export income inequality weak domestic private consumption have) to export and invest more) )
Possible Explanation
Income Inequality increases between the Elite group and the grassroot group Poor people’spurchase power is low while the rich people have a higher investment propensity, which contributes to a high saving and low private consumption Comparative disadvantages in the …nancial institutions plus weak domestic consumption demand lead to capital out‡ow, exacerbating external imbalance
Weak domestic private consumption demand implies a high dependence on foreign demand and government investment, but exports will widen the income disparity even further.
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 44/47 Possible Explanation
Income Inequality increases between the Elite group and the grassroot group Poor people’spurchase power is low while the rich people have a higher investment propensity, which contributes to a high saving and low private consumption Comparative disadvantages in the …nancial institutions plus weak domestic consumption demand lead to capital out‡ow, exacerbating external imbalance
Weak domestic private consumption demand implies a high dependence on foreign demand and government investment, but exports will widen the income disparity even further. Vicious cycle: export income inequality weak domestic private consumption have) to export and invest more) )
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 44/47 China’sHigh Saving Rate
Figure: Source: Yang, Zhang, Zhou (2011)
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 45/47 Composition of China’sSaving
Figure: Source: Yang, Zhang, Zhou (2011)
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 46/47 Trade Surplus
Source: Huang et al (2010); Units: Billion USD
Li, Liu, Wang (HKUST) China’s State Capitalism June2012 47/47