The economics of institutional reform and development in China

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The economics of institutional reform and
development in China

• Gérard Roland
• UC Berkeley

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Lecture 1. The Chinese Miracle. Stylized facts
and puzzles.
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1. Introduction

• Chinese growth since the beginning of the reform
  process in 1978 has been very impressive. Three
  decades of very high growth in a country of over
  a billion inhabitants is akin to an economic
  miracle and is one of the most important
  economic events since Englands
  industrialization.

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• Real GDP grew at an average rate of more than 9
  during 30 years.
• Real GDP per capita at more than 8.
• Consumption at nearly 8.
• Foreign trade as a of GDP from less than 10 to
  more than 60...

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Table 2. Growth of various indicators.
Source Qian-Wu (2005)
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Table 3. Evolution of employment.
Source Qian-Wu (2005).
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Table 4. Rural poverty reduction.
Source Qian-Wu (2005).
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• While the growth is impressive, not everything is
  rose.
• Income inequality has increased and many social
  problems, environmental problems.

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Table. Income and consumption inequality.
Source Qian-Wu (2005).
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Puzzle 1. Chinas transition success.

• This impressive high growth period is the result
  of the transition process from socialism to
  capitalism. Chinas performance during the
  transition period is much better than that of
  other transition countries. Why did China do so
  much better than other transition countries?

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China has high growth. Other transition countries
had output fall and decline!
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Differences between China and other transition
countries.

• 1) China started off poorer.
• Sachs-Woo, 1992 Being an agricultural economy,
  China was facing the classical problem of
  development (transfer of rural labor force to
  urban industry) whereas other transition
  countries were facing issue of transfer of labor
  from SOEs to private sector. BUT
• .. Other countries have been facing classical
  problem of development and have not had success.
• While some convergence à la Solow argument may
  apply, it does not explain why East European
  countries had an output fall and long decline in
  the nineties. Still leaves open issue of why
  China did better than other transition countries.

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China started off poorer.

• Blanchard- Kremer, 1997. China had less complex
  economy. More complex economies with
  institutional weaknesses should have larger
  output fall.
• China did not have any output fall. Does not
  explain either lack of any output fall or high
  growth.

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Differences between China and other transition
countries.

• 2) China did not introduce democratization
• Little academic work on this but much journalism.
  Issue nevertheless quite crucial.
• Main argument is that absence of democracy gave
  the Chinese government more freedom of maneuver
  to introduce painful reforms.
• Ironically, reforms were less painful in China
  compared to countries that democratized.
• Moreover, countries that democratized less or had
  anti-democratic backlash have tended to do less
  well (former CIS countries had longer output
  fall).
• TO SUMMARIZE Chinas transition success not
  clear in view of the overall transition
  experience.

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Puzzle 2. High growth despite relatively low
quality of institutions.

• China represents a puzzle for the new mainstream
  view in economics according to which quality of
  institutions is a main factor explaining high
  growth and differences in development. (Hall and
  Jones, 1999 Acemoglu, Johnson and Robinson,
  2001). China does not rank highly in terms of
  institutional comparison.

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Table. Freedom house index of political freedom
and civil liberties.
Source Qian-Wu (2005).
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Table. Rule of Law Index.
Source Kaufmann et al. (2005). From Qian (2005).
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Table. Ease of Doing Business.
Source World Bank 2006, Doing Business report.
From Qian (2005).
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Table . Regulatory quality.
Source Kaufmann et al. (2005). From Qian (2005).
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Table . Corruption perceptions.
Source transparency International.
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Figure. Institutional quality and GDP per capita.
Qian (2005).
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• Chinas institutional quality, corrected for
  income per capita is not that low.
• There have been significant improvements since
  the beginning of the reform period on the legal
  and political front.
• Still, the coexistence of strong growth and weak
  institutional quality is a puzzle. How to
  explain high growth despite low quality of
  institutions in comparison to international
  norms?
• Possible answers we will investigate
• Transitional institutions were created at
  different points during the transition process
  that were very imperfect but helped move the
  reform process forward and thus operate large
  scale resource reallocation and creation of
  markets.
• Meritocratic administration fundamental in
  explaining sustained growth.
• Success in transition and in growth are linked
  but useful to look at them separately. High
  growth presupposes successful transition but
  successful transition does not automatically
  imply high growth.

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Explaining the growth success

• Lecture 2. We will look at the basic sources of
  growth over the last decades to understand better
  the anatomy of growth in China and see what the
  macro-indicators tell us. Traditional growth
  analysis will give us anatomy of growth but will
  not give us detailed causes of the Chinese
  success and we will need to dig in more deeply in
  understanding the causes and consequences of the
  institutional changes associated with Chinas
  transition process.

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Explaining the transition success.

• Lecture 3. Chinese gradualism. Experimental
  approach to reforms and flexibility of
  administrative organization played a very
  important role in a) getting reforms started, b)
  providing flexibility for reversal in case of
  failure. Chinese M-form organization made
  experimentation much easier since it could be
  done at a small scale without disturbing the rest
  of the economy. Chinese gradualism was criticized
  in the 1980s but proved more successful than East
  European big bang approach.

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Explaining the transition success.

• Lecture 4. The dual-track approach to price
  liberalization. Price liberalization at the
  margin helped prevent the output fall, protected
  existing rents and acted as Pareto-improving
  reform. Was criticized for some of the rents it
  generated. Represents a general political economy
  device for creating reform without losers.

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Explaining the transition success.

• Lecture 5. Fiscal decentralization and incentives
  of bureaucrats. Reform of organization of
  government and provision of incentives to
  bureaucrats played important role in creating
  support for growth. Local and provincial
  governments became interested in promoting reform
  and growth.

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Explaining the transition success.

• Lecture 6. Meritocracy and yardstick competition.
  Leaders with more success in growth got faster
  promotion. Organization of government facilitates
  yardstick competition. Promotion within
  government administration a strong incentive for
  elite members.