1. Interpreting Chinas Performance With a Russian Perspective Yukon Huang Carnegie Endowment

2. 2 Similarities RussiaChina Transition from planned economy YES SizeLargest land massLargest population Large Trade Surplus$ 200 billion (2011)$180 billion (2012 E) Exports as % of GDP (recent averages) 35% Labor productivity (VA per worker 2005) $7000 Massive Internal Migration East to WestWest to East Inequality (Gini coefficient) Rose from 25 to 45

3. 3 Differences RussiaChina Agrarian labor share of total 10%40% Source of growthCapacity utilization and energy prices Investment and industrial expansion Resource based share of exports 80%3% Manufactures share of exports 15%90% Investment as % of GDP (2011) 22%47% GDP Growth (%)Past Decade: 5% Future: 3-4% Past Decade: 10% Future: 7-8%

4. Three Key Policy Differences Agglomeration and manufactures trade Innovation and productivity increases Vested interests and state capture 4

5. 5 (1) Economic activity is concentrated in Asia

6. 66 Massive migration of labor to the coast spurs concentration

7. 7 China – location of globalized industries

8. 8 China – location of domestic oriented industries

9. 99 High investment rates coupled with spatial agglomeration effects increased labor productivity

10. China and Russia – Comparison of World Banks Business Environment Rankings CHINARUSSIA Ease of doing business91120 Starting a business151111 Construction permits179178 Registering property4045 Getting credit6798 Protecting investors97111 Paying taxes122105 Trading across borders60160 Enforcing contracts1613 Resolving insolvency7560

11. 11 Investment climate: administrative and transactions costs as a percent of sales RussiaChina Bribes1.52.0 Infrastructure problems 6.52.5 Security, theft protection 3.51.5 Supply delays1.01.5 Total12.57.5

12. Regional Trade – specialized components, strong logistics and scale economies 12

13. Processing trade drives Chinas trade surplus 13

14. 14 Russia and China – relations with global community Differing productive structures limits growth prospects for Russia but provides flexibility for China. China will continue to shape global market for manufactures – more in terms of variety than in just lower costs. Russia will continue to be largely an energy/mineral supplier and vulnerable to price fluctuations. This has political implications for how they will relate to the international community. China needs good relationships given its dependency on the broader global market for its goods. Russia sees itself as an energy exporter to captive markets and thus less dependent on favorable relationships.

15. (2) Innovation must drive Chinas future growth Future growth should come more from innovation. But innovation needs to be private sector driven in comparison with the past state led investment approach. By 2030, China will have 200 million college graduates, more than the entire workforce in US but skills are deficient. R&D spending is rising rapidly but reliance on government support is a concern. Patents are soaring but value unclear. Some firms are getting closer to the technological frontier but overall production mix is still not technologically advanced. Big question can China leapfrog beyond its natural position and develop more indigenous technology? 15

16. 16 China and East Asian economies are innovating no more than comparators at similar income levels (ranking)

17. But China really stands out in terms of adoption of technology 17

18. Global R&D Landscape 18

19. (3) Vested Interests and State Capture Russia – state capture by financial-industrial groups and a dominant leader. Influenced by dutch disease and resource rich governance vulnerabilities. China – shifting from a broad coalition of growth advocates to state capture by the Party/State Banks/SOEs. State led rapid growth has generated abundant rent-seeking opportunities. 19