Rudi Dornbusch Essays 1998/2001 Table of Contents August, 1998 China, a Beginner's Guide Should China Devalue US Recession - No Thank you October, 1998 Red Alert for the World Economy A Requiem for Chancellor Kohl Brazil's Policy Options of the 2nd Term Russian Meltdown Germany Economic Policy for a Dynamic Society Scenarios for Europe December. 1998 Lessons for East Europe from Asia and Brazil The Trouble with Oskar Cardoso and the IMF February, 1999 Policy Options for the BoJ The Target Zone Controversy Brazil Beyond Tropical Illusions The IMF Has Failed, Should Camdessus Leave? April, 1999 A Century of Unrivalled Prosperity The State The Economist in the 20th Century Angst 2000: Who is in Control? June, 1999 Ten Years of Transition Germany's Economic Future August, 1999 Private Market Responses to Financial Crises Should China Devalue? 1 October, 1999 Robert Mundell - Nobel Laureate in Economics The IMF and Russia European Restructuring The 1920s: Can It Happen Again? Korean Reforms in the Cross Fire December, 1999 The ECB & Europe's Upswing Déjà vu All Over Again? Mexico, the Sexennio and Beyond East Germany: 10 Years of Unification with a Vengeance US Inequality and Prosperity IMF v. World Bank: The Verdict February, 2000 Three Cheers for Emma Bonino What is Wrong With Italy? A Year of the Euro April, 2000 Are Stocks Overpriced? Where Does Public Finance Really Stand? The Washington IMF-World Bank Protests June, 2000 New Economy - No Requiem Yet The Fed, Stocks & Latin American Vulnerability Financial Crises, Exchange Rates and the IMF Reinventing Italy August, 2000 European Union Enlargement Two Lost Decades Book Review: Alan Murray, The Wealth of Choices, NY: Crown Governor Hayami's Very Bad Idea Mexico and President Fox October, 2000 No Berkeley, No Woodstock The ECB Credibility Deficit Argentina's Plight The Misaligned Euro Mexico's Democracy Needs Good Economics New Economy and US Social Performance 2 December, 2000 Turkey and the IMF The Chicago School in the 60's Latin America: Where is the Upside? Asian Balance Sheets Threaten World Stability Supply Side Obstacles The Art of Central Banking February, 2001 Fewer Monies, Better Monies Living Standards Compared A Primer on Emerging Market Crises. 3 August, 1998 CHINA: A BEGINNER’S GUIDE Napoleon said, “if China awakens, the world will tremble.” Well, China has. In all areas from possible devaluation to military issues, to WTO membership and the prospect of mega deals China is now part of the global economy and is increasingly so. With apologies to the China expert and my friends in China, here is a collection of information on the Chinese economy. It is obvious that because of the dynamism, complexity and awesome problems of the Chinese economy, we will spend more and more time learning about it and may hold our breath if things get tough. It is therefore useful to have a picture of key characteristics of this economy. The best way to get that is going there, but even then some perspective helps. Some History Over the past 40 years, China has gone from an extreme of autarchic non-market economics embodied in the great leap forward (see the film To Live) to get the flavor to an immensely ambitious scheme to transform the entire state enterprise sector in just a few years. The market is now the rule, the ownership question is unresolved, and the governance question up for grabs. The market is now so much the rule that the institutions must urgently be created to get governance or else the country loses stability. Table 10 Some History • 1958-60 The Great Leap Forward Disaster and Famine • 1966-69 The Cultural Revolution • 1976 Mao dies • 1978, 11th Party Central Committee Meeting condemns the cultural revolution. Deng in the ascent.”4 modernizations” program: agriculture, industry, science & technology, national defense. Family farming system replaces agricultural communes. • 1978-84. First stage of economic reform; emergence of town and village enterprises (TVEs) and coastal special economic zones. End of mandatory agricultural plans. • 1984-92 Shifting outright to the market economy. • 1989 Tiananmen Square. • 1992 Deng visits Southern China. “To get rich is glorious”. • 1997 15th Party Congress endorses reformist economic program and makes Deng’s pragmatist “theory” becomes part of the official catechism, along with Marx and Mao. • 1998 President Jiang Zemin (71) and Premier Zhu Rongji (69) commit to a radical reform of finance and state owned enterprises (SOEs). 4 From a distance, it is hard to understand how China functions without clearly identified property regimes. On the spot the issue is handled more pragmatically; somehow it seems to work, mostly. From Mao to Zhu, China has moved by a century in just 20 years. Today the talented young people in China like America and want to study finance; they speak English and have access to the Internet. At the same time, the communist party remains in charge even though the membership amounts to only 5 percent of the population. Somewhere along the line some form of democracy will come, presumably first at the local level and then, almost inconsequentially at the national level. If China is lucky; the economic restructuring is accomplished before the full political liberalization comes. In the meantime, integration in the world economy is seen as part and parcel of the restructuring process of the state sector. How Large is China? There is much discussion of China overtaking the US by 20000 and become the largest economy in the world. Others argue it will break up before it gets there, or it will break down. In any event, don’t rush; China has a huge population but is very poor. Much of the spectacle of the coastal region is not shared by the rural population, which still accounts for more than half of the total. Using GDP in dollars, converted at current official exchange rates (and thus we do not measure standards of living), China is one tenth of the US economy today. It is a third or so smaller in dollar GDP than the UK or Italy but significantly larger than say Canada and at least twice Korea. Any discussion of China bypassing the US is not a story of dollar GDP but rather PPP-GDP, which measures the purchasing power of income, i.e. haircuts in China at international prices. On that basis, per capita GDP today is about 11 percent of the US standard of living. But because China’s population is so much larger the total GDP in “international dollars” comes out to half that of the United States. Since China will grow at a far higher rate than the US, GDP in international dollars will exceed the US level sometime in the next 10 or 15 years. Which measure is more relevant, dollar GDP or GDP in international dollars (the standard of living measure)? For most trade issues straight dollar measures are right. On that basis, China is still only a 2 percent share of world trade, far away from the US, Japan or Germany. When it comes to the domestic market it becomes more interesting to argue that China has a middle class of the size of France, but not quite the same middle class income. But it is getting there and, at the current pace. A decade will make a huge difference. In terms of regional comparisons, China is, of course, very poor even using the standard of living-adjusted PPP measures. (See Figure) It is behind Indonesia, far behind Malaysia and Thailand and a huge distance from Korea or Hong Kong. That comparison suffers, in part, because of the huge regional differences with China. Clearly the urban-coastal regions are much richer than the rest, but even so the comparisons stand. 5 PPP PER CAPITA GDP (1995 International Dollars, US=100) 90 80 70 60 50 40 30 20 10 0 China Korea Malaysia Indonesia Thailand Hong Kong China is clearly one of the 5 big emerging markets in the world today. (The term was coined before Indonesia tanked). The accompanying table shows key characteristics. Table 11 The 5 Big Emerging Markets China India Indonesia Brazil Russia Population 1,200 929 193 159 148 GDP Per Capita 10.8 5.2 14.1 20.0 16.6 (PPP, US=100) Growth 1985-95 6.3 3.2 6.0 -0.8 -5.1 (per capita) Trade/PPP GDP 7.1 4.5 13.6 10.2 19.8 Source: World Bank World Development Report and World Development Indicators 6 Structure of the Chinese Economy The accompanying table shows a number of summary statistics on where people work, what is the form of ownership and what is produced: In terms of broad generalizations, we have the following: • Agriculture accounts for only one fifth of GDP but more than half of the labor force. • State owned enterprises account a third of industrial output, half of fixed assets and nearly 65 percent of urban employment. • Collective-owned forms are an ideological in between that got started in the 1980s, has typically smaller scale than SOEs (but still into the thousands) and accounts for more than one-third of industrial output. Collectives include the famous town and village enterprises (TVEs). • Exports of goods and services account for 21 percent of GDP. Export trade is predominantly in manufacturing. Exports have a very significant import content, estimated upward of 50 percent. 7 Table 12 China: Structure of the Economy and Employment Share of GDP Share of Industry Output Share of Labor Force Agriculture 20.6 SOEs 34.0 Agriculture 52.9 Industry 48.4 Collective-Owned 36.6 Industry 23.0 Services 31.0 Individual-Owned 12.9 Services 24.1 Other 16.6 Share of GDP Consumption 58.0 Share of Labor Force Share of Total Employment Investment 40.5 Rural 72.2 SOEs 18.0 Net Exports 1.5 Urban Staff & Workers 24.5 Urban Collectives 5.0 Urban Individual Workers 3.3 Other 1.4 Share of Exports Primary Goods 14.4 Share of Fixed Assets Share of Urban Employment Manufactures 85.6 SOEs 54.4 SOEs 64.9 Collective 16.4 Urban Collectives 18.2 Share of GDP Individual 12.8 Indiv.