China and the Global Economy

213 LuncheOn aDDRESS China and the Global Economy Justin Yifu Lin 1. introduction It is a great pleasure to be here with you today to discuss the role of Asia in the post-crisis global economy—that is, to the extent that the global economy is truly “post-crisis.” My focus will be on my home country—China is obviously the biggest story out of Asia in terms of economic growth in recent decades, and the growth in China has been a driving force for the recovery from the global crisis since 2009. As a Chinese economist and specialist on economic development, I have had the good fortune to witness and participate in the policy debate over this remarkable period since returning to China with a PhD in economics in 1987. I will organize my remarks around the following four themes: (i) China’s achievements since the initiation of economic reforms in 1979; (ii) prospects for China’s growth in the coming decades; (iii) challenges for China’s future growth; and (iv) the role of China in the multipolar growth world. 2. China’s achievements since the Reform and Opening in 1979 China started its reform and opening in 1979 and achieved an annual growth rate of 9 percent between 1979 and 1990. At the end of that period and even up to early 2000s, many scholars still believed that China could not continue that growth rate much longer due to the lack of fundamental reforms.1 However, China’s annual growth rate during the period 1990–2010 increased to 10.4 percent. On the global economic scene, China’s growth since the reform and opening started has been unprecedented. This was a dramatic contrast with the depressing performance of other transitional economies in Eastern Europe and the former Soviet Union. As a result of the extraordinary performance, there has been a dramatic change in China’s status in the global economy. When China embarked on its economic reform program in 1979, the world’s most populous country barely registered on the global economic scale, commanding a mere 1.8 percent of author’s note: I am grateful for David Rosenblatt’s help in preparing the paper. 214 ASIA ECONOMIC POLICY CONFERENCE ASIA’S ROLE IN THE POST-CRISIS GLOBAL ECONOMY global gross domestic product (GDP) (measured in current U.S. dollars). Today, it is the world’s second-largest economy and produces 9.3 percent of global GDP (Figure 1). China’s exports grew by 16 percent per year from 1979 to 2009. At the start of that period, China’s exports represented a mere 0.8 percent of global exports of goods and nonfactor services. Now China is the largest exporter of goods in the world, with 9.6 percent of the global share and an 8.4 percent share of goods and nonfactor services (Figure 2). In 1980, China was still a low-income country; in fact, its income per capita (measured in purchasing power parity or PPP) was only 30 percent of the level of the average sub-Saharan African country.2 Today, its income per capita of FIgurE 1 China’s share of World gDp (share measured in current USD) Percent 10 9 8 7 6 5 4 3 2 1 0 1979 2010 Source: World Development Indicators. FIgurE 2 China’s place in the World as an e xporter A China’s Share of World Exports of Goods and B Merchandise Exports, 2009 Nonfactor Services (share measured in current USD) (in trillions of USD) Percent 9 8 7 China 1.20 6 Germany 1.13 5 4 United States 1.06 3 2 Japan 0.58 1 0 1979 2009 Source: World Development Indicators. Lin | China and the G lobal Economy 215 $7,500 (in terms of PPP; $4,400 in current dollars) is over three times the level of sub-Saharan Africa, and China is well-established as a middle-income country (Figure 3). Behind this growth, there has been a dramatic structural transformation— in particular, rapid urbanization and industrialization. At the start of economic reforms in the 1980s, China was primarily an agrarian economy. Even in 1990, 73.6 percent of its population still lived in rural areas, and primary products composed 27.1 percent of GDP. These shares declined to 27.1 percent for the rural population and 11.3 percent for primary products composition of GDP in 2009. A similar change occurred in the composition of China’s exports. In 1984, primary products and chemicals composed an important share of merchandise exports (about 55 percent). Now, almost all of China’s exports are manufactures (Figure 4). Accompanying the change in the composition of China’s exports is the accu- mulation of foreign reserves. In 1990, China’s foreign reserves were $11.1 bil- lion USD, barely enough to cover 2.5 months of imports, and its reserves today exceed $3 trillion USD—the largest in the world. Globally, China’s economic performance was outstanding during the East Asian financial crisis (1998) and the current global crisis (2008) (Figure 5). China withstood the shocks and maintained dynamic growth in both crises. China’s decision to maintain the renminbi’s stability helped other East Asian economies avoid a competitive devaluation, which contributed tremendously to the quick recovery of the crisis-affected countries. China’s dynamic growth in the current global crisis has been a driving force for the global recovery. FIgurE 3 Ratio of China’s gDp per Capita Relative to sub-saharan africa (ratio measured in current PPP-adjusted dollars) 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0 1980 2010 Source: World Development Indicators. 216 ASIA ECONOMIC POLICY CONFERENCE ASIA’S ROLE IN THE POST-CRISIS GLOBAL ECONOMY FIgurE 4 The structural Transformation of China’s exportsa A 1984 Structure of Chinese Exports Machinery and Transport Equipment; 5.7% Manufactured Goods Miscellaneous Classified Chiefly Manufactured by Material; 19.3% Articles; 18.0% Chemicals; 5.2% Unclassified; 6.1% Animal and Vegetable Oils and Fats; 0.6% Food and Mineral Fuels, Lubricants, and Live Animals; 12.4% Related Materials; 23.0% Crude Materials, Inedible, except Fuels; 9.2% Beverages and Tobacco; 0.4% B 2009 Structure of Chinese Exports Miscellaneous Manufactured Articles; 26.8% Unclassified; 0.1% Machinery and Food and Live Animals; 2.7% Transport Equipment; 47.3% Beverages and Tobacco; 0.1% Crude Materials, Inedible, except Fuels; 0.7% Chemicals; 5.1% Mineral Fuels, Lubricants, and Related Materials; 1.7% Manufactured Goods Classified Chiefly Animal and Vegetable Oils and Fats; 0.0% by Material; 15.4% a Data are not available prior to 1984 for this classification. Source: WITS database. The reasons for China experiencing such remarkable growth over the past 30 years were 1 China adopted a dual-track approach and was able to achieve stability and dynamic transformation simultaneously. Lin | China and the G lobal Economy 217 FIgurE 5 China glides past Regional and global Financial Crises A GDP Growth during the Asian Crisis B GDP Growth during the Global Crisis Percent Percent 10 16 China 14 8 China 12 10 6 8 4 6 East Asia & Pacific World 4 2 1 0 0 –2 –2 –4 1997 1998 1999 2000 2001 2005 2006 2007 2008 2009 2010 Source: World Development Indicators. 2 China was a latecomer, developed according to its comparative advantage, and tapped into the potential advantage of backwardness.3 Many authors, myself included, have written extensively about the Chinese government’s pragmatic approach to reforms. The result was to achieve “tran- sition without tears.” This was no accident: It was based on the government’s recognition that big-bang reforms could be self-defeating. It was necessary to let private enterprises prosper wherever feasible, but to continue to support important state-owned enterprises while reforming them gradually. The second point is the latecomer advantage, as I wrote in my article “Chi- na’s Miracle Demystified”:4 A developing country such as China, which started its moderniza- tion drive in 1949, potentially has the advantage of backwardness in its pursuit of technological innovation and structural transformation (Gerschenkron 1962). In advanced high-income countries technological innovation and industrial upgrading require costly and risky investments in research and development, because their vanguard technologies and industries are located on the global frontier. Moreover, the institutional innovation required to accommodate the potential of new technology and industry often proceeds in a costly trial-and-error, path-dependent, evolutionary process (Fei and Ranis 1997). By contrast, a latecomer country aspiring to be at the global technological and industrial frontiers can borrow technology, industry, and institutions 218 ASIA ECONOMIC POLICY CONFERENCE ASIA’S ROLE IN THE POST-CRISIS GLOBAL ECONOMY from the advanced countries at low risk and costs. So if a developing country knows how to tap into the advantage of backwardness in technology, industry, and social and economic institutions, it can grow at an annual rate several times that of high-income countries for decades before closing its income gap with those countries. 3. prospects for China’s growth in the Coming 20 years Looking forward, China can still rely on the advantage of backwardness, and it has the potential to maintain dynamic growth for another 20 years or more because of the following reasons: 1 In 2008, China’s per capita income was 21 percent of U.S. per capita income measured in PPP.5 The income gap between China and the United States indicates that there is still a large technological gap between China and industrialized countries.

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