Finance, Development and the Role of State: The “Entrepreneur in Chief” and China’s Entrepreneurial State as the Mirror Image of Austerity A Keynes- Schumpeter – Minsky Approach Leonardo Burlamaqui and Rainer Kattel Prepared for the BU Panel on Financial Instability, Austerity and Economic Progress: China as the Mirror Image of the Eurocrisis Boston,April, 2016

Key Propositions: In the present debate about the Eurozone ongoing crisis, China offers a very useful lesson on how to use Keynes-Minsky inspired policies in order to avoid a financial crisis ( and keep growing). “Keynesian China” provides a mirror image of “Austerian Europe”. The Eurozone has something to learn here.

Austerian World vs. Keynesian China GDP GROWTH SINCE Source: International Financial Statistics/IMF, 2013

Austerian Europe GDP PER CAPITA SINCE 2007, SELECTED EUROPEAN REGIONS (AVERAGES IN US$. 2007=100 ) Source: The Conference Board Total Economy Database™, January 2014.

Uncompetitive Southern Europe vs. Northern? REAL LABOUR PRODUCTIVITY PER HOUR WORKED, SELECTED EUROPEAN ECONOMIES, Source: Eurostat

Where the problem seems to reside?. GOVERNMENT EXPENDITURES (PERCENTAGES). Source: Eurostat Austerity is the killing element for the South

Keynesian- Schumpeterian China

THE ENTREPRENEURIAL STATE IN ACTION: GROWTH AND SOCIALIZATION OF INVESTMENT

Long-Term Growth

The Crisis ( What Crisis?)

Exports

Reserves : U$ Trillion Hedging Against External Vulnerability

SWFs : Foreign Public Investment Capacity (2013- US$ ~800 Billion)

At Work...

THE ENTREPRENEURIAL STATE IN ACTION: THE SCHUMPETERIAN STATE

Long Term Vision :

“magic seven” industries: (1) energy saving and environmental protection, (2) next- generation information technology, (3) biotechnology, (4) high-end manufacturing, (5) new energy, (6) new materials and (7) clean-energy vehicles. (1) Energy saving and environmental protection, (2) Next-generation information technology, (3) Biotechnology, (4) High-end manufacturing, (5) New energy, (6) New materials and (7) Clean-energy vehicles. 7 Strategic Industries :

R&D Spending (1)

Building Future Innovation Capabilities ( 1)

Long – Term Finance & Global Strategy THE ENTREPRENEURIAL STATE IN ACTION:

The Big Four : (Main activity: Development Banks) Industrial and Comercial Bank of China- (World#1). China Construction Bank - ~ (World #2). Agricultural Bank of China - (World #3) Bank of China - (World #4) Source: And the most strategic ……CDB (1.3 Trillion)

Some “Prominent Clients” Huawei Lenovo Haier ZTE (Telecom) Yingli (Solar panels) Sky Solar National Development Zones for High and New Technology Industries ( part of China 2030 strategy) Some “Prominent Clients” Huawei Lenovo Haier ZTE (Telecom) Yingli (Solar panels) Sky Solar National Development Zones for High and New Technology Industries ( part of China 2030 strategy) Tech: A Competitiveness Strategy

Global Infrastructure: The new Silk Road

CHINA, FINANCIAL BUBLLES AND MINSKY ”Stability is destabilizing” ”Over periods of prolonged prosperity, the economy transits from stable to unstable financial relations” (1992)

Minsky : stable growth creates fragile financial structures. China : Super growth certainly compounds that hypothesis.

Furthermore: Super growth creates ample opportunities for financial innovation (Eg: Shadow banking) and financial volatility. In addition: dropping from 10-12% GDP growth to % obviously reinforces financial fragility :

From a balance sheet perspective: ASSETS CAN PLUNGE, CASH FLOWS DECLINE WHILE DEBT STAYS… The KEY difference in China (so far): The (Big)Government has a very good grip on the (Big) banks: They are all public !…

… And there are no political (or theoretical) restrictions in case financial turmoil imposes a major banking recapitalization cum financial reestructing by the PBOC. It has happened before and “ Reform was strengthened as a result of the lessons learned from the Asian Financial Crisis in late Zhu Rongji, then premier, seized the moment to push a thorough recapitalization and repositioning of banks that the world at the time rightly viewed as more than technically bankrupt” (Walter and Howie, 2011).

Summing-up: the current “bubble” and shadow banking activities should be seen trough those lenses…. and not, mostly, as a big policy mistake. The big mistake would be opening up China’s capital account.

There seems to be a host of lessons for the Eurozone here…

THANK YOU