Development of China - An Economy in Transition

Introduction: Why do we look at China? Development – underdevelopment, less development, problems of underdevelopment China represents a large proportion of the world economy –Population (Mid-2001): 1.27 billion (20.7% of the world total) –Land: 3.70 million square miles (7.1% of the world total) –GDP (1999): US$ 989 Billion (3.2% of the world total) –GDP annual growth (1999): 7.05% (2.72 times of the world average) –GNI PPP[1] per capital (1999): US$ 3550 (53% of the world average)[1] China is under transition and developing through a unique path. It may provide lessons or experiences for other developing countries or countries under transition. [1][1] Gross National Income in Purchasing Power Parity (GNI PPP) per capital

Purposes of This Lecture Measure the development Determines of the development Outcomes the development process Policy for the development

Major Topics (1) General theory (2) Brief history of China’s development (3) Models of development in China (4) New Challenges (5) Policy and new reforms

(1) General Theory

Development Indicators Economic Demographic Social Infrastructure Geographic Human Development Index

Production Function 4 determinants of a country’s productivity Y = A F(L, K, H, N), or xY = A F(xL, xK, xH, xN), (if x >0) or Y/L = A F(1, K/L, H/L, N/L), (if x=1/L)

Long-run of Economic Growth - Selected Countries

(2) History of China’s Development First Five-Year Plan ( ) –A new economic order modeled on the Soviet Union example, emphasizing the development of capital-intensive heavy industry Great Leap Forward ( ) –The break away from the Soviet model and introduction of a new program aimed at rapidly raising industrial and agricultural production Cultural Revolution ( ) –The pursuit of Mao’s own development strategy of a self-reliant economy and political struggle Economic Reforms (1978- ) –To move the economy from a planned economy to one that is more market-oriented

(3) Model of China Development #1: Socialist planned economy: –Government planning is basic means of allocating resources –Production quotas: quantity rather than quality –Suppress consumption to increase saving: invest in heavy industry –Self-reliant and uninvolved in foreign economic relation –Results: Overuse of industrial equipment Shortage in supply: production and consumption goods Unstable economy growth

Model of China development (cont’d) #2: Socialist market economy: –Market is basic means of allocating resources –State controls at the macroeconomic level –Economic structural Reform –Results: Competition: establishment of the diversified ownership Efficient: profit maximization Open: involved in foreign economic relation Fast and stable economy growth

Economic Reforms: Rural reform –Increase of agricultural production and rural income Open-door policy –Turnaround from an inward-looking, self-reliant economy to one that participates in the world economy (foreign trade, FDI, and SEZs) Industrial reform –Enterprise reform and price reform Financial reform –Company’s responsible for financial performance and borrow money from banks; raise capital at the stock market SOEs reforms –Ownership restructuring

Comparison of Two Development Models

(4) New Challenges to China Three transitions Population and environmental pressures Employment insecurity Growing inequality and poverty Macroeconomic instability stemming from incomplete reforms

Three Transitions From a planned economy to a market-based one From a rural, agricultural society to an urban, industrial one From a non-WTO nation to a WTO one

Population and Environmental Pressures Large in number (1.27 billion) Low growth rate (1%) Low urbanization (30%) Large number of floating population (~100 million)

Employment Insecurity

Growing Inequality Per Capita Annual Income of Urban and Rural Household and The Related Index

(5) Policy and further reforms: The spread of market forces must be encouraged The government must begin serving markets (by building the legal, social physical, and institutional infrastructure) Integration with the world economy must be deepened – facing WTO

(6) Summary Economic prosperity varies substantially around the world - some countries are times richer than others Economic growth rates also very substantially - the relative position of countries can change over time

Summary (cont’d) The standard of living depends on the economy’s productivity Productivity depends on 4 determinants - physical capital, human capital, natural resource, and technological knowledge

Summary(cont’d) Government policies can influence the economy’s growth rate in many ways: –encouraging saving and investment –encouraging investment from abroad –fostering education –maintaining property rights and political stability –allowing free trade –controlling population growth –promoting the research and development of new technologies

Summary (cont’d) The accumulation of capital is subject to diminishing returns: –The more capital an economy has, the less additional output the economy gets from an extra unit of capital, –higher saving leads to higher growth for a period of time, but growth eventually slows down as the economy approaches a higher level of capital, productivity, and income, –the return to capital is especially high in poor countries (catch-up effect).