Econ455: Economic Development in China Lecture 21: April 2 Growth prospects

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Econ455 Economic Development in ChinaLecture
21 April 2Growth prospects
Sandra Poncet Lorch Hall, room 207 Email
sponcet_at_umich.edu Office Hours Mondays
1630-1830 Wednesdays 1030-12
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Introduction
Important to understand how economists and
strategists try to project future growth
-more difficult than short term
forecasts -requirement of an underlying growth
model
Most models abstract from shocks (assumed to be
random thus have zero mean) and qualitative
features
-crucial to check the reliability of the
predictions -crucial to address in a more
qualitative manner the potential threats to the
general trend.
In any case the only projection that one can make
with certainty is that In the long run we will
all be dead
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Lecture Outline
Introduction I Growth projections A-Building
blocks B-Putting the building blocks
together C-Addition of ad-hoc evolution of human
capital D-Introduction of exchange rate
evolution E-Final results F-Limits G-Plausibility
of projections despite limits II-Chinas
environmental challenge A-Stylized facts on
environmental challenge B-So far relative failure
to meet targets C-Dismal future or turning
point? Conclusion
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I-Growth projections A-Building blocks
Departure point
Simple formulation of the overall level of GDP
(Y) in terms of labor input (L), capital input
(K) and technological progress (A) or Total
Factor Productivity (TFP). GDP as simple
constant return to scale, Cobb-Douglas production
function of these three variables.
with ? 1/3 the share of income that accrues to
capital Computation is made in real terms
(constant US at 2000 prices).
Rationale for real terms
Willingness to abstract from inflation and
exchange rate changes
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I-Growth projections A-Building blocks
Departure point
Three building blocks labor input (L) capital
input (K) technological progress (A) or Total
Factor Productivity (TFP).
Labor input (L) total number of hours worked by
year L (1-unemployment rate) ? active
population ? number of hours worked per employee
Data past and projections come from
International Labor Office
Capital input (K) requires departure stock and
accumulation mechanism
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A-Building blocks
Determination of each block
Capital input (K) requires departure stock (the
further in the past) and accumulation mechanism
How to project investment I?
Typical assumption is that investment rate is
constant over time
But not true
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How to project investment I?
Alternative is to rely on past dynamics
(empirical estimation)
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Determination of each blocks
TFP (A) requires departure level (in 2000 when
projections start) and evolution mechanism
How to get the departure level?
What is the evolution mechanism?
Inappropriate to assume TFP growth constant (even
if long term average seems to be around 1.2)
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Determination of each blocks
How to obtain parameters ?, ? and c?
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I-Growth projections B-Putting the building
blocks together
Predictions of GDP
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C-Addition of ad-hoc evolution of human capital
Ad-hoc evolution of human capital (used in TFP
growth)
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D-Introduction of exchange rate evolution
Hypothesis for exchange rate evolution
Typically appreciation of currency for fast
growing economies (as demand for their currency
is high) and depreciation in the case of
countries for which TFP growth lags behind the
worldwide average.
Very simple exchange rate model a positive 1
productivity growth differential relative to the
US will raise an economys equilibrium real
exchange rate against the US dollar by 1.
Impact for fast growing countries, such as China?
Average annual GDP growth jumps from 4.6 to 7.2
One third is due to exchange rate appreciation
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E-Final results
The incorporation of the exchange rate changes
induces a decline in the relative position and
weight of developed countries such as the UK,
Germany and France.
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E-Final results
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F-Limits
No consideration for international trade/FDI
closed economy model
Assumption that TFP, investment, education evolve
similarly to the past incompatible with concept
of structural breaks from transition countries
No consideration for exogenous shocks and major
disruption oil crack, financial crisis so
correspond more to a benchmark
No consideration for endogenous limits of the
growth model environmental, social and financial
sustainability
Social limits lecture 22
Financial limits lecture 23
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G-Plausibility of projections despite limits
-coherence with other projections
-use our methods on historical data and see how
well the projections fit current reality results
are encouraging
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II-Chinas environmental challenge A- Stylized
facts on environmental challenge
1-Chinas litany of rising pollution and depleted
resources
Recent environmental news out of China has lent
new momentum to the gloomy view of Chinas
environmental future amidst its headlong rush for
economic growth.
Multiplication of environmental protests and
often addressed by slow reflexes and preference
for secrecy of the government
Illustration massive benzene spill in Songhua
River by the Jilin Petrochemical Corporation in
November 2005
HARBIN TIMELINE 13 Nov Explosion at
petrochemical plant, Jilin city 21 Nov Water to
Harbin city cut off local government
cites need for maintenance 22 Nov State media
say water could have been contaminated after the
blast 23 Nov Authorities admit very high levels
of benzene have been found in the water 23 Nov
Authorities say 100 tons of benzene emptied into
the Songhua river 26 Nov China apologizes to
Russia where the pollution is expected to arrive
within two weeks
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II-Chinas environmental challenge A- Stylized
facts on environmental challenge
1-Chinas litany of rising pollution and depleted
resources
The conventional wisdom is that Chinas
hyperspeed economic growth is exacting a
frightful environmental cost that will
dramatically worsen in the next few decades.
AIR pollution
Nearly two-thirds of Chinas 343 major cities
currently fail to meet the nations air quality
standards, and air pollution is expected to get
worse. The World Health Organization reckons
that seven of the ten most polluted cities in the
world are in China.
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AIR pollution
State Environmental Protection Administration in
June 2006, "by 2005, one-third of China's
territory suffered from acid rain.... and
one-third of the urban population breathed
heavily polluted air." .
World Bank estimates roughly 300,000 Chinese
residents each year die prematurely from
respiratory diseases. 75 million asthma attacks
International Energy Agency forecasts that
Chinas greenhouse gas emissions will rise nearly
120 percent over the next twenty years, by which
time Chinas emissions will exceed those of US.
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WATER pollution
SEPA over 70 percent of the water in five of
China's seven major rivers is of undrinkable
quality. Over the years, the wanton disposal of
industrial waste, household sewage, agricultural
chemicals, and shipping discharges into these
rivers have caused severe pollution to China's
precious water resources.
"one quarter of the Chinese people drink
substandard water." the rate of
environment-friendly disposal of urban waste in
China is below 20, while the disposal rate of
dangerous industrial waste is 32.
Water sources are overused. The Yellow River, for
example, has run dry every year since 1985
because of diversions in 1997, it failed to
reach the ocean for 226 days. 25 out of the 27
largest lakes in China were polluted, some
badly. Chinese industry appears to be sloppy in
its practices 2,500 environmental accidents a
year over the last decade.
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WATER pollution
SEPA over 70 percent of the water in five of
China's seven major rivers is of undrinkable
quality. Over the years, the wanton disposal of
industrial waste, household sewage, agricultural
chemicals, and shipping discharges into these
rivers have caused severe pollution to China's
precious water resources.
"one quarter of the Chinese people drink
substandard water." the rate of
environment-friendly disposal of urban waste in
China is below 20, while the disposal rate of
dangerous industrial waste is 32.
Water sources are overused. The Yellow River, for
example, has run dry every year since 1985
because of diversions in 1997, it failed to
reach the ocean for 226 days. 25 out of the 27
largest lakes in China were polluted, some
badly. Chinese industry appears to be sloppy in
its practices 2,500 environmental accidents a
year over the last decade.
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Toll of environmental degradation is difficult to
quantify around 8 but possibly more because of
the resilience
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Environmental woes
China's rock-bottom score on the Environmental
Sustainability Index (ESI) constructed jointly by
Columbia and Yale Universities 2005 China ranked
133rd out of 146 countries.
Findings of extreme weakness in the
sustainability of water use, air pollution, and
emissions of acid rain and greenhouse-effect
gases, as well as in resource and waste
management, and environmental governance.
The World Bank has suggested that "China's low
overall rank could be interpreted as an alarming
indication of the country's environmentally
unsustainable development."
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II-Chinas environmental challenge A- Stylized
facts on environmental challenge
2-Environmental challenge is directly connected
to the energy situation


SMOG
Percent of emissions due to energy
ACID RAIN
GLOBAL WARMING
NUCLEAR WASTE
TOXICS
Sources EPA, DOE
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Chinas Energy Mix predominance of coal (poor
quality, low efficiency, more polluting (mercury
emission 25 from China)
2-Environmental challenge is directly connected
to the energy situation
World 2002
China 2002
Source IEA, 2004
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2-Environmental challenge is connected to the
energy situation
Chinas Energy investment is not efficient so
far policy has focused on energy security rather
than efficiency
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Energy Consumption Per Capita
2-Environmental challenge is connected to the
energy situation
Chinas Energy production and consumption rise
faster than GDP While GDP rises at 9.1,
electricity rises at 15.5, Oil up 18 in 2004
(1/3 US) and energy rises at 10
So far US with 4 of world population consumes
25 of fossil fuels while China with 20
population uses 8
If Chinese people consume as much as in US
unsustainable situation more than 122 in CO2
emission (global warming)
Source Energy Information Administration, 2002
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3-Environmental Kuznets curve turning point or
dismal future
EKC sulfur dioxide pollution is expected to
begin declining at a per-capita income between
5-9,000.
China is still far from this range, with a
current per-capita income of almost 2,000.
However, by some measures Chinas SO2, ozone, and
particulate levels may have already peaked and
begun declining preliminary evidence of drop and
left shift of EKC.
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3-Environmental Kuznets curve turning point or
dismal future
True enough China energy efficiency has risen
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3-Environmental Kuznets curve turning point or
dismal future
But still a long way to go to meet the standards
(especially North)
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The Growth in Chinese Vehicle Population Is Only
at Its Beginning
3-Environmental Kuznets curve turning point or
dismal future
Efficiency gains may well be outstripped by the
increase in scale
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Chinese Vehicle Fuel Consumption is Higher Than
Many Other Countries
3-Environmental Kuznets curve turning point or
dismal future
Efficiency gains may well be outstripped by the
increase in scale
Note 100 km56 miles and 1gallon4 liters so 10 L
per 100 km corresponds to 22 miles per gallon
(typical SUV less than 20 miles per gallon)
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3-Environmental Kuznets curve turning point or
dismal future
Especially as efforts (efficiency investment)
seem to have halted
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Energy Growth Far Faster Than GDP Since 2001
3-Environmental Kuznets curve turning point or
dismal future
So that energy growth seems to grow out of
control (numerous power plants are unauthorized
reflection of local governments focusing on
development)
Lawrence Berkeley National Lab
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II-Chinas environmental challenge B-Relative
failure to meet environmental target
1-Targets
2020 development target Quadruple 2000 GDP (4 x
1.08 trillion) Increase per capita GDP from 850
in 2000 to 3000 in 2020 Attain Three
Transcendences Sustainable development Peacefu
l rise as a great power Rule of law harmonious
socialist society
The Cleaner Production Promotion Law 2002
10th five year plan and yearly goals Goals of
2006 cut energy use per unit of GDP by 4 and
emissions of major pollutants by 2. Numerous
proposed highly polluting and energy-intensive
industries were put on hold. State Council
signed energy-saving responsibility agreements
with 30 provincial governments and 14 central
state-owned corporations. Pressure on power
plants to increase their desulphurization
capacity.
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II-Chinas environmental challenge B-Relative
failure to meet environmental target
2-Failure of 2006 goals
Achievement cut in energy use per unit of GDP of
1.2 percent, far short of the target of 4
percent.SO2 emissions rose by 1.8 percent, and
chemical oxygen demand (a water pollution index)
increased by 1.2 percent thus slowing down of
the growth of these pollutants but missed goal of
2 reduction.
3-Reasons of failure
-Socialist inheritance (overlooking of
environment) and wild capitalism
-Chinas development strategy focus on industry
4 of world GDP yet consuming 40 of coal, 50
cement, 1/3 iron, ¼ steel
-Environment is the victim of system in which
officials promotions are largely based on
increased economic performance (especially in
year of Central Committee meeting)
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II-Chinas environmental challenge B-Relative
failure to meet environmental target
3-Reasons of failure
-Importance of degradation (correction is harder
for important deterioration)
-Priority given to energy security (Three gorge
dam) instead of improving the efficiency of
existing resources.
-Lack of financial and human resources (State
Environmental Policy Agency 300 employees)
promotion in 1998 to ministerial status.
-Lack of regulatory and sanction mechanism weak
enforcement. Typical problem of tragedy of
commons overuse
-Economic decentralization explains local
resistance to SEPA as well as collusion of local
authorities and firms fraud, false statistics
-Civil society under control protests are hidden
and solved by force
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II-Chinas environmental challenge C-Way out?
Dismal future or turning point?
1-Rational to expect a turning point
-Environmental degradation has emerged as a main
cause for the escalation in "public order
disturbances.
-Rising middle class consciousness is involved
with the popular protests about environmental
calamity in China the affluent society no
longer wished to be the effluent society.
-Repeated failures constitute a blow to the
images of President Hu and Prime Minister Wen,
who have made building a harmonious society
through scientific development the guiding
principle of development
-Olympic Games
-Ambitious targets Renewable energy law target
share of 10 by 2020Ambient air quality goals
are in some cases more ambitious than the US
clean Air Act
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II-Chinas environmental challenge C-Way out?
Dismal future or turning point?
2-Options exist but implementation will not be
easy
-Fundamentally, the central government must
change Chinas currently energy-inefficient and
environmentally-unfriendly pattern of economic
growth.
Incentives need to be provided to gain local
officials cooperation on the environmental
issues environmental performance has to be
considered in evaluation criteria as well as
economic growth.
-Reinforce SEPAs authority
Grant it the authority to suspend proposed
projects or to remove officials for
nonperformance.
Provide it with the necessary authority over
local environmental bureaus.
Fines must also be raised and implemented The
maximum fine of 200,000 yuan (about US25,000) is
hardly a deterrent to companies
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II-Chinas environmental challenge C-Way out?
Dismal future or turning point?
2-Options exist but implementation will not be
easy
There are some good signs
-On January 10 2007, the SEPA made an
unprecedented move, suspending approval of new
construction projects in four cities and four
major national power-generating groups until they
bring their existing facilities into compliance
with environmental regulations.
To disregard the environmental problems in their
regions now can cost them a lot. Thus far, the
new regional permit restrictions seem to be
effective. Only one month after the suspension,
one city quickly came into compliance and
recovered its rights.
-The central government is also exploring other
ways to enhance the efficacy of environmental
monitoring and compliance. From April 1 2007,
SEPA will work with the Peoples Bank of China on
a new credit evaluation system under which
environmental compliance records of companies
will be incorporated into the Banks
consideration of whether or not to provide loans.
The Bank could turn down requests for loans from
firms with poor environmental records.
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CONCLUSION
Hu and Wen incorporated energy-saving and
environmental goals into the five-year economic
blueprint to clearly distinguish their vision of
Chinas development from that of their
predecessors. This is a test of their leadership.
  Last years results were disappointing, but
encouraging signs are now being seen. It is
possible to be cautiously optimistic that China
will be able to meet the goals.   Meeting these
goals in turn could help put the country on a
more sustainable development path.   If Hu and
Wen can make China green, history will
certainly record their contribution as equal to
Mao Zedong's achieving Chinas independence, and
Deng Xiaoping's creation of a more prosperous
country.