China’s economic growth model and progress under Gaige Kaifang

David DollarSenior Fellow

Brookings InstitutionMarch 2014

Outline

• Key features of China’s reform• Some comparison with growth records of

Japan, South Korea, Taiwan• Economic and social outcomes• China’s reform 2.0

GDP per capita in China and East Asian neighbors (Penn version 8)

19601962

19641966

19681970

19721974

19761978

19801982

19841986

19881990

19921994

19961998

20002002

20042006

20082010

6

6.5

7

7.5

8

8.5

9

9.5

10

10.5

11

ChinaJapanKoreaTaiwan

Log GDP per capita

China’s economic reform

• Household responsibility system• Open up to foreign trade and investment

(join WTO in 2001)• Legalize the private sector• Ease up on migration restrictions

Followed the export-led model of Japan, Korea, and Taiwan – but with some differences

• Slower movement of labor out of agriculture• Even higher investment rate• Large trade surplus at an earlier stage• Very low household income and

consumption

China’s agricultural share of the labor force is high for its per capita GDP

5 6 7 8 9 10 11 120

10

20

30

40

50

60

70

f(x) = − 12.4898934373284 x + 133.501949966453R² = 0.601180805339347

GDP per capita (log scale)

China’s investment rate has risen to unprecedented levels

6 6.5 7 7.5 8 8.5 9 9.5 10 10.5 110

0.1

0.2

0.3

0.4

0.5

0.6

Log GDP per capita

I/Y

China developed trade surpluses at an earlier stage of development

6 6.5 7 7.5 8 8.5 9 9.5 10 10.5 11

-0.1

-0.08

-0.06

-0.04

-0.02

0

0.02

0.04

0.06

0.08

Log GDP per capita

(X-

M)/Y

China’s household consumption is very low

6 6.5 7 7.5 8 8.5 9 9.5 10 10.5 110

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

Log GDP per capita

C/Y

Followed the export-led model of Japan, Korea, and Taiwan – but with some differences

• Slower movement of labor out of agriculture• Even higher investment rate• Large trade surplus at an earlier stage• Very low household income and

consumption

China’s unusual institutional features

• Household registration (hukou)• Repressed financial system with

undervalued exchange rate• Open, competitive manufacturing but

closed, uncompetitive services (SOEs)• One-party rule

China’s exchange rate pegged to the dollar until 2005

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 201460

70

80

90

100

110

120

130

140

Nominal Effective Exchange Rate Indexes (2010 = 100)

ChinaU.S.

Good economic outcomes, but…

• Extraordinary growth and poverty reduction

• But rising inequality• Terrible air and water pollution• Increasing corruption• Old model economically and

environmentally unsustainable

Poverty has declined dramatically

1995 1996 2002 2005 2009

54%

36%

28%

16%

12%

Poverty Headcount Rate in China(World Bank $1.25 per day poverty line)

Inequality has risen

Average household Bottom 40% Bottom 20% Bottom 10%

6.5%

4.4%

3.3%

2.0%

China: Growth Rate of Household Income, 1990-2005

“Growth still is good for the poor” in a sample of 118 countries

• Correlation between average income growth and income growth in the Bottom 40% is robust over time– Slope ~1 in both time periods (1967-2000 and 2000-2011)

Growth still is good for the poor

• No worldwide trend in bottom 40% share – in either direction

• Change in inequality uncorrelated with growth• Growth explains 77% of the variation in income of

the bottom 40%• No institutional or policy variables are robustly

correlated with change in quintile share

China’s corruption is high for its level of income (World Bank Control of Corruption Index, 2011)

5 6 7 8 9 10 11 12

-2

-1.5

-1

-0.5

0

0.5

1

1.5

2

2.5

3

GDP per capita (log scale)

China: structural reforms to improve efficiency of investment, spur innovation

and encourage consumption

• Hukou reform• SOE privatization or commercialization• Financial liberalization• Opening up of services more generally• Incentives for local government

Premier Li Keqiang’s speech to the National People’s Congress, March 5, 2014

• 100 million urban registrations for migrants

• Financial liberalization• Opening up services to foreign investment• Broaden incentives for local government

Useful sources of data and information

• Brookings.edu (Thornton China Center)• Penn world tables version 8• World Development Indicators• World Governance Indicators