The State of the Chinese Economy-A Development Economist’s Perspective

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The State of the Chinese Economy-A Development Economist’s Perspective
　　Deepak Bhattasali1

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　　It is interesting to assess the state of the Chinese economy in 2001.The slowdown in economic growth during the closing years of the last century,unlike previous downturns,sparked intense speculation about the long-term prospects of the Chinese economy.Would improvements in living standards be as spectacular in the future as in the past two decades?Were the human,ecological,and organizational problems of the economy—surmounted so far by high levels of new investment and large increases in productivity—going to intensify to the point where they would choke-off growth?Was the buildup of problems in the rural economy,state enterprises,and financial sector hollowing out the core of the great Chinese production machine and diverting resources to investments that would do little for future economic growth?Were there time-bombs planted deep in Chinese society—the massive retrenchment of workers,stagnation of rural incomes,emerging gaps in social safety nets and basic human services,rising income inequalities—that would lead to a social explosion?

　　It is not possible to come up with unequivocal answers to any of these questions.However,there is a need to address them in a forthright manner if we are to understand the challenges and prospects for the economic development of China.To start with,therefore,we will describe the context in which the Chinese economy is operating today,and explain the criteria we will apply in making our assessment.

　　Context

　　China has the most people,the second-largest output (when measured in terms of purchasing power),and the third largest land area in the world.Events in China are,therefore,of global significance.Chief among these has been its emergence as a manufacturing force in the world economy,albeit at the lower-end of the price/quality spectrum.It has also been an area of economic and social stability,in sharp contrast to the wrenching crises that have affected many developing transition and market economies in recent years.Conversely,while economic developments in the rest of the world are important—for example,the rate of growth of world trade—they are not central to the growth and prosperity of the Chinese economy.China’s vast domestic market is.As many observers have remarked,the greatest competitive advantage China benefits from is “economies of scale”—the reduction in unit costs of additional production—that comes from servicing a market of 1.3billion domestic consumers.

　　Domestically,China has undergone four major transformations.Each of these has influenced its growth and shaped the pattern and efficiency of resource use in significant ways.None of the transformations is complete.The focus of policymaking today is to cope with their effects,while improving the prospects for future economic development.They are:

　　Y-From a command economy to one that is increasingly based on market signals,which is accompanied by a sharply declining share of the public sector in investment and production and in the ability to influence decisions regarding resource use.

　　Y-From an agricultural economy to one based on manufacturing and services,seen in the decline since 1980in agriculture’s share of output from 30percent to 18percent,and its share of employment from 69percent to 50percent.An associated phenomenon is the rising number of people living and working in urban and suburban areas,which provide most new jobs today.

　　Y-From an economy with high-fertility and low-longevity to one with a low-fertility and high-longevity demographic profile,and this has complex effects on education,health care,and social protection policy.China’s population is increasing at about the rate found in more developed countries (it fell from 1.2percent in 1980to 0.9percent in 2000)and life expectancy has risen to OECD levels (from 67years to 70years).

　　There has been a decline in the number of children (from 35.5percent to 24.9percent),and an increase in the share of those 65years or more (from 4.7percent to an estimated 6.7percent).

　　Y-From a closed to an open economy,with further openness to trade and investment expected following accession to the WTO.We see this,for example,in the number of importers/exporters (up from 10-16firms in the 1980s to well over 200,000direct traders today).China has a low weighted average tariff rate of 18percent,and the share of trade in total output has gone from 13percent in 1980to 45percent today.

　　Moreover,with on-shore foreign currency deposits of more than US$130billion,convertibility on the current account,and annual foreign direct investment of US$35-40billion,the economy is more open than generally believed.

　　Any one of the above could be expected to result in significant resource movements in an economy.In China,they are occurring at the same time,causing not only economic disruption and uncertainty,but also exacerbating the control and coordination problems that face the economic managers of this vast economy.Despite this,the economy is able to generate 5.5to 6.5million new jobs per year,even as there is massive retrenchment in the manufacturing sector.

　　How should a development economist evaluate China today?It would be misleading to claim that we have a common yardstick to evaluate the development performance of China or,for that matter,of any other developing country.But,we would not be too wrong in saying that,after over 50years of development dialogue and experience,the different viewpoints are converging.What is contained in this emerging view of development?

　　We in the World Bank espouse the view that development is about improving the quality of people’s lives,expanding their ability to shape their own futures.We believe that economic growth,that is,raising average income per person,is essential.However,we believe that development involves much more than a rise in per capita income.It involves equitable education and job opportunities.Greater gender equality.Better health and nutrition.A cleaner,sustainable natural environment.An impartial judicial and legal system.Broader civil and political freedoms.A richer cultural life.We also know that,as average incomes rise,some of these aspects of development improve,in varying degrees and over different timeframes,but others do not.In addition,following from this observation,while natural and market forces can help determine some outcomes,the achievement of others requires intelligent government intervention.Finally,we also know that the various elements of development often interact positively,reinforcing each other.[The Quality of Growth,World Bank,2000]

　　Rapid economic growth is essential for development.Growth creates opportunities for employment,which then generates income,which in turn makes it possible for people to consume the goods and services they need to support their desired standard of living.This may seem to be a simple proposition,but it is remarkable that it is still being debated,especially by some of the forces that seem to be aligning against globalization.It is less of an issue in Chinese development debates,as the effect of growth on standards of living in China is clearly visible.

　　We can go even further.There is sufficient evidence to suggest that,on average,growth even improves the living conditions of the poorest groups in society.For example,the bottom ten or twenty percent of the income distribution,or the people living below a defined poverty line.The incidence of absolute poverty tends to fall with economic growth.A set of estimates from the World Bank suggests that a one percent per year increase in the average living standard reduces the poverty rate by 0.6percent to 3.5percent.This is certainly an important achievement from the point of view of development.China has been especially successful in this regard,reducing the number of people living in absolute poverty by as much as 150million during the 8th and 9th Five-Year Plans.

　　The recent performance of China with respect to the growth of output,consumption,and poverty reduction is captured by Figure 1.Very clearly,economic growth has resulted not just in an increase in the welfare of the representative individual in China,it has also improved the condition of a large number of the least fortunate individuals in Chinese society.

　　Insert Figure 1:Growth rates of GDP and consumption per capita,and the number of poor (1980-2000)This leads to the next point.Despite rapid economic growth,China is a developing country,with average income per person in 2000amounting to US$840,or just 5percent of the average income of the developed countries.If we adjust the income measure for differences in purchasing power between China and the developed countries,the gap is still significant—average income is just 14percent of the developed country average.Moreover,there is still widespread poverty in China.If the World Bank’s measure is used to estimate the number of poor people in China (that is,consumption per day of just over US$1.08),there are still over 200million poor people in China today.Given this situation,it is easy to see that economic growth is vital.Therefore,the rest of this assessment focuses on the factors that could influence growth prospects.

　　Sustaining Rapid Growth

　　Although better data and improved measuring techniques may change the story,it is generally believed that between 42percent and 70percent of China’s growth since 1978may have come from increases in labor and capital inputs.Crudely put,using more people and more machines accounted for a large part of the increase in economic growth.In most studies,they account for over half of the increase.

　　Conversely,improvements in productivity account for 30to 58percent of the recent growth.By improvements in productivity we mean the use of better technology and improved techniques in existing and new production,combined with the transfer of resources from low productivity to high productivity uses.In other words,productivity improvements account for a significant proportion of the dramatic increase seen over the past 20years in the standard of living of the typical Chinese resident.Both the annual increase in productivity and its contribution to growth over a sustained period are among the highest in the world,including the developed countries.

　　This issue of productivity lies at the heart of the debate about the sustainability of China’s growth,hence its future development.With reasonable accuracy,we can project into the future what we have learned from the past about the potential increase in the labor force.There are uncertainties attached to the resulting projections,but given the small measured contribution of labor inputs to growth,reasonable margins of error can be tolerated.There more uncertainty attached to capital inputs.This is because developments in investment tend to be sensitive to a host of factors,many of which can be expected to change radically until China’s transition from a closed,centrally planned,agriculture-dependent economy is completed.

　　But,our greatest ignorance is associated with developments in productivity.It is estimated as a residual,and some say it is really a measure of our ignorance.But,given the size of this residual in China’s past economic growth,we need to be reasonably sure of the assumptions we make about productivity for the future.This observation becomes even more important when we consider two other issues.

　　Y-First,the fact that the increase in labor and capital inputs depend themselves on the effects of productivity change,and are not exogenous to technological improvement.Y-Second,the likelihood that both labor and capital inputs will grow slower in the future than in the past,putting a heavier burden on increases in productivity if the growth rate is to be sustained.

　　Let us examine each of these briefly.Few serious development economists believe today that increases in labor or capital inputs happen on their own,that is,they are unrelated to fundamental economic processes in the economy.In fact,much of the increase or decrease in the supply of such factors of production results directly from the effects of technological change and improvements in techniques,by changing the relative costs and returns to inputs.For example,technical change can raise the return to human capital,thus motivating more spending on education.The size of the population and the labor force are both affected by decisions households make on questions such as whether both spouses should work outside their homes and how many children they should have.The level of wages,the cost of raising children (especially the “high quality”children that will be needed in the future to cope with the technological changes in society),and other such factors are important determinants.The sectoral composition of the labor force is also affected by technical change,which affects different economic activities differently,thus resulting in different supply-demand dynamics.However,the sectoral allocation of,say,labor,is a vital determinant of total factor productivity,as seen in China,where large gains have occurred from shifting labor out of agriculture and state-owned enterprises.The implication of all of this is that,going forward,we need to focus more strongly on productivity improvements,if China is to sustain its high growth rate.

　　As mentioned earlier,the other reason for the heightened importance of productivity is the expected slowdown in contribution from labor and capital inputs.With regard to labor,the sharp decline in fertility rates during the 1960s and the effect of the single-child policy (which was largely felt in urban areas)is expected to result in a sharp decline in the 19-28year-old population,starting about now.In addition,labor participation rates in China—about 85percent today—are exceptionally high,and are unlikely to rise,so this dip in the population growth rate will be translated into a dip in the labor force.Although it is likely that human capital will deepen in the years ahead,the process is expected to be slow,given that several provinces are yet to achieve even the 9years of basic education objective.And,given the serious quality problems in the Chinese educational system,while the number of years of schooling will undoubtedly rise,the effective labor contribution of these extra years may be small.

　　Concerning capital inputs,the main factor here is the investment rate,and that in turn depends on domestic and foreign savings.It is difficult to see how much higher the savings rate can go,given that it has been hovering at 40percent over a sustained period.In fact,many policy measures today are oriented toward boosting consumption,rather than savings.However,structural improvements in the operation of financial markets,social insurance,taxation,and capital movement will likely improve returns and the incentive for savings.The current situation with respect to foreign savings (that is,the current account deficit in the balance of payments)is unlikely to change radically.If at all a change occurs,it is likely to be a reduction in foreign savings,as export growth falls during the current global slowdown,and imports rise because of increased openness (for example,that resulting from accession to the WTO).Also,so far there is little evidence that structural reforms in the economy have proceeded to the extent of converting a higher proportion of fixed capital formation into productive investment.For this to happen,levels of waste in investment,especially at sub-national levels,will need to be tackled decisively.

　　Thus,we come back to productivity.What are some of the likely scenarios here?The basic questions revolve around the length of time it will take China to catch up with the middle and higher income countries,and the effect different policy regimes will have on raising productivity.If China still has a lot of catching up to do on standards of living—and it does—it is possible during the catching-up period to experience the current high rates of productivity increase (that is,2.5to 4percent per year).Compare this to the best estimates for the United States (1.5percent per year)and leading developing countries such as Korea (2percent per year).Even if it is unable to achieve such high rates through inertia,it is conceivable that an economy experiencing massive changes in policy regimes may see brief,but still important,spurts in productivity.This is patent in China’s recent experience,where the implementation of agricultural reforms in 1978-84,the reallocation of surplus rural labor to manufacturing,and the shedding of state enterprise workers have all been given credit for improvements in total factor productivity.Now,with the coming of WTO accession and increased openness,it is conceivable that such increases in productivity may happen.

　　However,it is important to be modest about the outcome,given our lack of understanding of the productivity process.One caution,for example,arises from likely developments in the structure of economic activity following increased openness.Consider,for example a situation where the post-WTO accession period is characterized by a rapid increase in employment and output in the services sector.Despite high growth,we know that the services sector has lower levels of value added per worker,not just in China but around the world.In China,valued added per worker in agriculture is US$300per year,in manufacturing it is US$3,000per year,while in services it is US$900per year.The reallocation of labor towards the services industry is likely to depress the rate of measured productivity growth rather than raise it,especially in the initial period.

　　The Quality of Growth

　　We have described,so far,the importance of rapid economic growth in sustaining China’s economic development.The likelihood of China being able to maintain its high growth rate depends crucially on developments in productivity.Several factors,including catch-up momentum and government policies,may be effective in providing spurts of productivity increases above world norms.

　　Now,we turn to the issue of whether such increases in productivity can be maintained.Here,the new development economics offers several important insights that can be usefully applied to make an assessment of China’s prospects.These are especially helpful at the start of the Tenth 5-Year Plan,which has begun the process of focusing closer attention on the “quality of growth”in China.

　　As discussed earlier,although the measured contribution to economic growth of increases in labor inputs is judged to have been small over the past 20years,the contribution of capital has,arguably,been at least as large as that of growth in total factor productivity,if not higher.This is not uncommon among rapidly growing developing countries,where physical capital—and the closely associated financial capital—have played a central role in development planning and outcomes.However,the evidence suggests that the rate of growth on average declines with increases in the stock of physical capital,for any given level of human and natural capital.In fact,the benefits that could come from economies of scale or technological spillovers do not seem to be sufficient,by themselves,to offset the adverse effects of the decline in the productivity of physical capital as the capital stock increases.

　　Conversely,human capital on average has a stimulative effect on growth and,most important,as human capital increases the positive link to economic growth becomes larger.The incremental effect of the stock of human capital on economic growth seems always to be increasing.With regard to natural capital,the evidence we have suggests that when a country’s natural capital stock is large,the degradation of natural capital does not seem to have too much of an effect on the productivity of physical capital.But,after natural resources fall below certain thresholds,further degradation could reduce the productivity of physical capital.For example,the finest machinery in the world cannot help when the topsoil in agricultural areas is depleted.Finally,concerning one other lesson from the evidence,we also find that for sustained economic growth,human capital can to some extent substitute for the absence of natural capital,but physical capital may not.The growth rate of countries with high levels of human capital is much less sensitive to losses of natural capital.But that of countries with low levels of human capital—that is,those who need their natural capital to sustain growth—such losses can be devastating.In China,for example,Shanghai and Beijing have been able to sustain high rates of growth despite severe depletion of their natural capital.This is not the case,for example,in Jilin,Heilongjiang or Liaoning,where human capital stocks are lower.

　　Thus,while we have generally accepted that physical capital contributes to development through economic growth,human and natural capital do so also,and through the same channel.They contribute through raising returns to physical capital,and helping sustain those returns over time.A better balance in the accumulation of all three assets is needed,therefore,to sustain economic growth.

　　However,it is the process through which such a balance is achieved that is of primary importance to development policy.Policy distortions,for example subsidies for investment,have played a significant role in accelerating growth through the rapid accumulation of physical capital.This is as true of China as it is for other countries.But the relative neglect of human and natural capital that has accompanied such policy distortions is a serious constraint today on the sustainability of China’s development path.A significant part of the developmental effort in China today is directed at correcting the effects of past distortions,as is reflected in the Tenth 5-Year Plan’s focus on developing human capital and safeguarding and augmenting natural capital.This is the new balanced growth doctrine,and one with lasting and sustainable development impact.

　　Clearly,the focus on all assets,physical,human and natural capital is the starting point for sustainable growth.But,even more interesting,there are several complementary measures that not only accelerate the achievement of sustainable growth,they also help achieve the outcomes in terms of development that were mentioned at the beginning of this assessment.

　　The two elements that are key in this regard are attention to the distributional effects of growth,and an emphasis on the institutional framework for good governance.Greater equity in the distribution of human capital,land,and other productive assets results in a better distribution of earning opportunities and improves the chances that people can take advantage of technological change and generate incomes.Similarly,the institutional structures of good governance underpin both growth and development.The evidence is reasonably strong,although people argue strongly on both sides of these issues,that the effective functioning of bureaucracies,regulatory frameworks,civil liberties,and transparent and accountable public institutions based on the rule of law and broader participation have crucial effects on the effectiveness,efficiency,and sustainability of good development processes.In this sense,and in conclusion,it should be noted that China’s policymakers are ahead in the game.They realize not only the need for balanced asset accumulation to sustain and improve China’s economic development record,and for the complementary distributional and institutional reforms,they are also doing something about it!

　　1The author is the Chief of the Economics Unit and Lead Economist for China at the World Bank’s Office in Beijing.

　　
原文在此：http://www.worldbank.org.cn/Chinese/content/chineseeconomy.pdf