Interpreting China’s Performance With a Russian Perspective

Yukon Huang Carnegie Endowment

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SimilaritiesRussia China

Transition from planned economy

YES YES

Size Largest land mass Largest population

Large Trade Surplus $ 200 billion (2011) $180 billion (2012 E)

Exports as % of GDP(recent averages)

35% 35%

Labor productivity (VA per worker 2005)

$7000 $7000

Massive Internal Migration

East to West West to East

Inequality (Gini coefficient)

Rose from 25 to 45 Rose from 25 to 45

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DifferencesRussia China

Agrarian labor share of total

10% 40%

Source of growth Capacity 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%

Three Key Policy Differences

• Agglomeration and manufactures trade

• Innovation and productivity increases

• Vested interests and state capture

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(1) Economic activity is concentrated in Asia

66

Massive migration of labor to the coast spurs concentration

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China – location of globalized industries

8

China – location of domestic oriented industries

99

High investment rates coupled with spatial agglomeration effects increased labor productivity

-8

-6

-4

-2

0

2

4

6

8

10

10 15 20 25 30 35 40

Labor Productivity Growth (%), 1980-2005

Investment to Output Ratio (%)

China

China and Russia – Comparison of World Bank’s Business Environment Rankings

CHINA RUSSIA

Ease of doing business 91 120

Starting a business 151 111

Construction permits 179 178

Registering property 40 45

Getting credit 67 98

Protecting investors 97 111

Paying taxes 122 105

Trading across borders 60 160

Enforcing contracts 16 13

Resolving insolvency 75 60

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Investment climate: administrative and transactions costs as a percent of sales

Russia China

Bribes 1.5 2.0

Infrastructure problems

6.5 2.5

Security, theft protection

3.5 1.5

Supply delays 1.0 1.5

Total 12.5 7.5

Regional Trade – specialized components, strong logistics and scale economies

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Processing trade drives China’s trade surplus

-40

-30

-20

-10

0

10

20

30

40

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Processing trade

Normal trade

Trade balance (RMB bn)

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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.

(2) Innovation must drive China’s 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?

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China and East Asian economies are innovating no more than comparators at similar income levels

(ranking)

But China really stands out in terms of adoption of technology

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Global R&D Landscape

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(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.

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