Economy of China

Lecture 6

Economic Development: Case of China

- Kenny Zhang

 Why is development important? (Table 1)

 How does a country develop? o Is China a developing country? And why? . Measure, diversity & common characteristics o Has China been developing? And how did China achieve development? . Development models (theories) o Will China maintain its development? And how?

1 Country at a glance

Capital: Beijing Area: 9,600,000 km2 (3rd largest) Population: 1.3 billion (2000) (1st place) Population growth rate: 0.9 % (1999-2000) (1.5%) GNP per capita: US$860 (1997) GNP per capita (PPP): US$4,382 (1997) GNP per capital growth rate: 6.7% (1996-97) GDP per capital growth rate: 9.5% (1990-1999) Agriculture as share of GDP: 15.9% (2000) Exports as share of GDP: 24.5% (2000) Infant mortality rate: 30‰ (2000) Child malnutrition (underweight): 9% (1994-2000) Unemployment rate: 3.1% (urban-1999) Females as share of labor force: 45% (1997) Illiteracy rate (age 15+): Male 10%, Female 27% (1996) Poverty (population below national line): 5% (2000) Population below $1/day (PPP US$) 18.5% (1993) Human Development Index: 0.718 (rank 87) (1999)

2 1. Why is China a developing country?

a. Common Characteristics of Developing Nations (P.43-62)

i. Low levels of living: (China; less developed; developed)

 Low incomes (1999) GNI PPP per capita: $3,550; $3,210; $20,520 GDP PPP per capita: $3,617; $3,530; $22,020

 Inequality (1999) Gini: 40.3; 37.8 (India); 31.5 (Canada); 40.8 (USA) Income share (Rich 10%): 30.4; 33.5 (India); 23.8 (Canada); 30.5(USA) Income share (poor 10%): 2.4; 3.5 (I); 2.8 (C); 1.8 (U)

 Poor health (1999) Physicians (per 100,000 people): 162; 48 (I); 226 (C); 279 (U) Access to essential drugs (%): 85; 35 (I); 100 (C); 99 (U) Adequate sanitation facilities (%): 38; 31 (I); 100 (C); 100 (U)

 Inadequate education (1999) Adult literacy rate (%): 83.5; 56.5 (I); 64-99 (Developed)

ii. Low levels of productivity  GDP productivity: $1,317; 948 (low); 5,5916 (high); 39,681 (C)  Agriculture productivity: $316; 346 (low income); 34,922 (C)

iii. High rates of population growth and dependency burdens  Population annual growth rate (%): 1.3; 2.0 (I); 1.1 (C); 1.0 (U)

3  Population under age 15 (%): 25.3; 33.9 (I); 19.4 (C); 21.9 (U)  Population aged 65 and above (%): 6.7; 4.9 (I); 12.5 (C); 12.3 (U)  Total dependency: 32; 38.8 (I); 41.9 (C); 34.2 (U)

iv. High and rising levels of unemployment and underemployment  Unemployment rate: 3.1; 7.6 (C); 4.2 (U)  Un(der)employment in rural sector: high

v. Substantial dependence on agricultural production and primary-product exports  Agriculture as % of GDP: 18; 26 (low); 2 (C-1990)  Primary exports (%): 12; 22 (I); 27 (C); 13 (U)

vi. Prevalence of imperfect markets and limited information  Imperfect market: changing  Incomplete information:

vii. Dominance, dependence, and vulnerability in international relations  WTO  FDI (42 billion)  Brain Drain b. Conclusion: Some apply to China, and others don’t. Therefore, China is a developing country that has many differences from other developing countries

4 2. How did China achieve development?

a. Development periods (post-1949)

i. 3 year recovery (1949-1952): Consolidation of power, restoration of public order, and elimination of widespread unemployment and starvation

ii. Socialist planned economy:  1st Five-Year Plan (1953-1957): A new economic order modeled on the Soviet example, emphasizing the development of capital-intensive 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 whereby Mao was pitted against Liu and Deng. (inject ideology into economic planning, disrupt foreign trade, and shut down educational and training facilities)

iii. Socialist market economy:  Economic Reform (1978- ): To move the economy from a sluggish planned economy to one that is more market-oriented (raise personal income and consumption; introduce new productivity, incentive, and management system). a. Rural reform: (long-term leases on land, and permission for farmers to specialize in cash crops and to engage in nonagricultural activities) b. Open-door policy: (Turnaround from an inward-looking, self-reliant economy to one that actively participated the world economy, SEZs)

5 c. Industrial reform: (self-management rights, introduction of greater competition in the marketplace, i.e. price mechanism, ease tax burden on nongovernmental enterprises) d. Financial reform (Companies made responsible for their own financial performance; had to borrow money from banks or raise capital at the stock market) e. SOEs reform (downsizing SOEs, bankruptcy law, etc.) b. Outcomes of development: Comparison of Two Development Models (Diagram 1) c. Conclusions:

i. Socialist planned economy: Linear-stages growth  Traditional society  Pre-condition for take off into self-sustaining  Take-off  Drive to maturity  Age of high mass consumption  Investment -> saving: GDP = S + C Failure

ii. Socialist market economy: Neoclassical market-friendly approach  Government intervention at macro level  Magic of marketplace at micro level  Great success

6 3. How will China maintain its development?

a. New Challenges: i. Employment insecurity ii. Growing inequality iii. Stubborn poverty iv. Mounting environmental pressures v. Rising costs of food self-sufficiency vi. Macroeconomic instability stemming from incomplete reform vii. WTO and structure change

b. Strengths: (Endogenous growth) i. Relative stability – pre-condition ii. High savings rate – investment iii. Strong record of pragmatic reforms – free-market iv. Disciplined and literate labor force – human capital v. Supportive Chinese Diaspora – FDI & Technology vi. Growing administrative capacity – efficiency in government intervention

c. Conclusion: China can meet these challenges and sustain rapid growth.

7 Population and Urbanization in China 140000 35 Population (year-end) (10 000 persons) % of Urban

120000 30 n o i t a l

100000 25 u p o P n

i 80000 20 a t a b l r u U

60000 15 f o o

P e g a

40000 10 t n e s r

20000 5 e P

2 2 0 8 5 7 9 1 3 5 7 5 6 7 7 8 8 8 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 1 1 1 1 1 1 1 1 1 1 1

Urban Unemployment Rate

0 1978 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999

8 Diagram 1: Comparison of Two Development Models

China (1978-1998) China (1952-1977) 1200000 900 45000 45 800 GDP (USD million) GDP (USD million) 40000 40 1000000 DPG per capita (USD) DPG per capita (USD) 700 35000 35 800000 600 a

30000 30 t i p a t 500 a i c P

p r D 25000 25 a 600000 e c P G

D 400 e P G p D 20000 20 P G

D 400000 300 15000 15 G 200 10000 10 200000 100 5000 5 0 0 0 2 4 6 8 0 2 4 6 8 8 8 8 8 8 8 9 9 9 9 9 0 0 7 9 9 9 9 9 9 9 9 9 9 9 2 4 6 8 0 2 4 6 8 0 2 4 6 1 1 1 1 1 1 1 1 1 1 1 5 5 5 6 6 6 6 6 7 7 7 7 5 9 9 9 9 9 9 9 9 9 9 9 9 9 1 1 1 1 1 1 1 1 1 1 1 1 1

9 Table 1: Long-run of Economic Growth - Selected Countries

Country Period Real GDP per Person Real GDP per Growth Rate at Beginning of Person at End of (Per Year) Perioda Perioda Japan 1890-1990 $1 149 $22 036 3.00% Brazil 1900-1987 595 4 664 2.39 Canada 1870-1990 1 815 23 301 2.15 W Germany 1870-1990 1 669 19 503 2.07 United States 1870-1990 3 063 24 922 1.76 China 1900-1987 547 2 386 1.71 Mexico 1900-1987 886 3 640 1.64 U K 1870-1990 3 676 18 549 1.36 Argentina 1900-1987 1 753 4 507 1.09 Indonesia 1900-1987 681 1 638 1.01 Pakistan 1900-1987 564 1 208 0.88 India 1900-1987 516 904 0.65 Bangladesh 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, Harcourt Brace & Company, Canada, p. 237.