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Lecture 5

THE CHINESE ECONOMYGrowth and Structural Change

GROWTH in perspective

• Data and the measurement of Growth • Chinese numbers published are mutually contradictory or inconsistent with

external

• New data collection system in 1998 was a failure

• Official statistics do not adequately correct for the effects of inflation

• Hard to account for the expanding scope of the economy

• Data collection is intertwined with politics and the accuracy is reduced

• Growth in Comparative Perspective• Growth of per capita GDP above 6% for a long period of time

• Character is unique: affect more people; growth rate is still going strong after 27years; exports have grown more rapidly than GDP

• Instability• Exhibits significant instability

• Four periods of rapid growth along with retrenchments

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GDP Growth 1978 - 2005

Capital INVESTMENT

• Heavy investment on fixed capital formation• Factories, roads, housing which is fundamental to economic growth

• Surpassed 40% of GDP in 2005

• Major explanatory factor of rapid growth• Relationship between investment and growth is not so straightforward

• Technology development is also a decisive factor

• Consistency• Consistently high investment that appears to be the sustained by a gradual increase

in productivity performance of economy

• Productivity improvements are the ultimate source of growth

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Gross Capital Formation

Driven by STRUCTUAL CHANGE

• Productivity upgrade• Accumulation of new physical and human capital

• Long-term growth associates with structural change

• Agricultural economy to industrialized and diversified economy• Share of the labor force in the primary sector declines

• The process of industrialization gradually changes the structure of the economy

• Labor force• A very high and increasing share of the population is of working age

• Labor force moves alone with the economic structure change

• GDP• GDP reflects the process of a predominantly agricultural economy to rapid

industrialization

• Globalization• World factory

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Structural Change in Employment

CONCLUSION

• Today China is a vast diverse nation with an unusually largemanufacturing sector, highly developed urban centers, a laggingservice sector, and underdeveloped rural areas

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Composition of GDP

Composition of Indian GDP

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THE CHINESE ECONOMYPopulation Growth and the One-Child Family

CHINA DEMOGRAPHIC TRANSITION

• The world’s most population nation

• Transition• The process-from low through high to low population growth is called

demographic transition

• Great Leap Forward• The crisis caused about 30million excess death from starvation or disease condition

• Urban-rural difference• Large differences in fertility dynamics in cities and countryside

• Caused by target family size: modernization lead families to prefer smaller size (greater investment, productivity, wealth and smaller families)

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CHINA DEMOGRAPHIC TRANSITION

• One-child policy• Family planning

• Much more intense in urban areas

• Total fertility rates were cut in half

• Consequence• The most important side effects of the One-Child policy: preference for boys

• Unbalanced sex ratio and asymmetric investment in education

• Changing age structure of the population• Opportunity: China has the advantage of a young population with low dependency

• An age structure of this sort has both tangible and intangible benefits

• A “demographic dividend” 人口红利：abundance of labor

• Future aging is a serious issue

Vital Rates

GLF

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Comparative Fertility Decline

Dependency Rates (Children + Seniors)

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CONCLUSION

• The One-Child Policy forced China through the demographictransition at an accelerated pace and created an exceptionaldemographic window of opportunity for growth during the reformera.• At the same time, the One-Child Policy is responsible for theexceptional severity of problems that will challenge policy-makers inthe immediate future.

THE CHINESE ECONOMYLabor and Human Capital

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THE INSTITUTIONAL TRANSFORMATION OF CHINESE

LABOR• The Labor Force

• The number of employed persons in China was 752 million at the end of 2004

• China has an exceptionally young and economically active population

• Young work force has shown enormous adaptability to the changes brought by economic transition

• Employment: Ownership and Labor Mobility• No labor mobility in command economy system

• State ownership loomed large in the overall employment picture

• In mid-1990s this whole institutional setup changed dramatically

• China has now created a flexible, diversified employment system

• Employment, Unemployment, and State-Sector Downsizing• Socialism jobs were provided for all, but work was meaningless and poorly paid

• Millions of the “sent-down” (知青）youth returned to the city, caused high unemployment

• During the mid–1990s, SOE started to optimize the employment structure by laying off workers

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下岗（下海）

THE INSTITUTIONAL TRANSFORMATION OF CHINESE

LABOR• Emerging Dualism Within Urban Labor Markets

• A large proportion of laid-off workers found work in the urban informal sector （下岗，下海）

• The informal sector is broadly defined to include private, self-employed, and others

• Migrants and urban dwellers

• Rural Labor Markets• China’s rural labor markets showed a dramatic expansion in

nonagricultural employment through the 1990s

• Off-farm jobs were increasing

• A generation of rural residents is leaving the land, and the process appears to be accelerating （进城打工）

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Urban Labor Force

HOW WELL DO LABOR MARKETS FUNCTION IN

CHINA TODAY?• Returns to Education （教育回报率）

• The socialist system did a fairly good job of providing basic education

• But education did not significantly increase income

• The rate of return to education began to climb in the early 1990s

• Consistent with increasingly competitive labor markets

• During the 1990s market forces reshaped the way that workers were rewarded

• Drive China forward into an increasingly skill-intensive economy.

• Human Capital and Educational Attainment• Educational attainment in China has been increasing very rapidly

• From the mid1990s, the government began to place more emphasis on basic education but the ultimate outcome is not yet clear

• Total outlays for education in China were at 3% of GDP, still very low

• China’s educational structure overall is very much that of a developing country

• Migrants’ children and girls are the most vulnerable group

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Return on Education (one year schooling)

HOW WELL DO LABOR MARKETS FUNCTION IN

CHINA TODAY?• Other Attributes

• Communist Party members privilege

• Gender discrimination

• The Migration Decision• Migrants from rural to urban seek higher incomes

• Migrants may also fear losing their land-use rights

• Migrants often return to their place of origin

• Education is found to encourage the migration and increases social mobility

• Labor Markets Concluded• Labor markets in China appear to be increasingly competitive and more effective at

rewarding the productive characteristics of workers

• In both urban and rural areas there is evidence that the returns to education are increasing

• In both urban and rural areas there is evidence that the returns to education are increasing

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SOCIAL SECURITY

• Uneven and problems• Urban workers are accustomed to a pension system退休养老 (begun to change!)

• Enterprises operate in a competitive market and cannot disproportionately bear the burden of paying out pensions

• Population aging

• The financial base of the traditional social security system has been shrinking very rapidly

• young retired people

• National government attempted to unify provincial programs into a national social security• In September 2000, China’s State Council established a national social security

fund （社保）

• How about Hong Kong?（综援，ＭＰＦ）

• Demands on the system have been so much larger than anticipated

CONCLUSION

• Eliminated the privileged social status of state enterprise workers

• Opened up new sources of mobility

• Urban incomes have increased dramatically

• Increasing income diversity

• Creates new social challenges for China

• Expansion of universities and enrollment

• 7 million college graduate every year ~ jobs?

• College students over-supplied, while skilled workers are in short supply

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THE CHINESE ECONOMYLiving Standards: Incomes, Inequality, and Poverty

INCOME GROWTH

• Household income has grown rapidly

• Three period • From 1991 through 2004 urban household income grew at the extremely

rapid rate of 7.7%

• From 1985 through 1991, was a period of significantly slower growth

• Rural incomes soared between 1978 and 1985, in the wake of rural reforms, growing 15% per year

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POVERTY

• Rural Poverty• The Chinese official poverty line is very low, equal to 627RMB per person per

year in 2002, lower than global standard

• A large majority of Chinese farmers were below the $1 per day poverty standard in the early 1980s

• The Chinese government recognized the problem and set up a special Leading Group for Poverty Reduction in 1986扶贫（贫困户）

• Overall, China’s fiscal system does a poor job of providing fiscal resources to poor regions

• Urban Poverty• Urban inhabitants enjoyed stable social welfare conditions and extensive

government subsidies of basic needs

• Only 0.5% of the urban population was in poverty in 2001

Rural Poverty

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Change of Consuming Structure

消费结构的变化

� The Engel Coefficient of Chinese residents has been failing since Engel’s index is a measure of the proportion of people’s income spent on necessities versus that spent on non-necessities or the discretionary items. A higher Engel’s index means that people spend a greater proportion on food and other necessities, i.e., like those in a subsistence economy and developing country. A lower Engel’s index that people spent less on necessities proportionately and thus more on other

non-essential discretionary items such as entertainment and luxury products.� Proportionately Less on food , not in absolute amount

� The decrease of the Engel Coefficient from 0.8 to 0.35 indicates that the residents’ consuming level and quality are significantly improved.

� More on consumable products

� The decrease of the Engel Coefficient indicates that the residents’ ways of consumption changed significantly.恩格尔系数的下降，说明人民的生活方式发生了很大的变化� Entertainment, and travel� Some people post their spendings on the Internet

INEQUALITY

• Accounting for All Income Sources• Chinese society was dualistic but egalitarian

• Urban-rural gap

• Inequality has increased within each of the urban and rural area

• Corruption and privileged access to opportunities

• Uneven distribution of resource

• Gini coefficient calculation

• Inequality may have reached a peak in the mid–1990s and leveled off since after

• REALLY？

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GINI Coefficient

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PHYSICAL QUALITY OF LIFE INDICATORS

• PQLI• Most important PQLI is life expectancy at birth

• The steady improvement in life expectancy is encouraging

• Other Health-Related Indicators• Infant mortality equals the middle-income-country average

• Second health revolution, related to population aging and lifestyle issues

• Sexually transmitted diseases and obesity

• Education• Literacy and basic education are widespread in the population.

• Even though, there are 145 million illiterate adults in China

• Human Development Index• HDI is calculated by United Nation

• China’s HDI ranking has improved substantially during the past 23 years

• Faces continuing severe developmental challenges

CONCLUSION

• No single indicator can tell us how much economic growth in China has contributed to well-being

• China’s performance looks relatively good

• Future improvements in the quality of life will depend on the way in which growth policies are crafted to spread the benefits of growth as widely as possible to the whole society

• 国富民穷，（国进民退）？

• Disparity and instability:

• Alexis de Tocqueville on Democracy’s Guide (revolution at the peak of development?)

• Human development and institutional development

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Thank You!

Q & A