Development of China: An Introduction

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Development of China An Introduction

• Dr. Zhigang Li
• The University of Hong Kong

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Ming-Ching Transition
End of Ching
Yuan-Ming Transition
Sung-Yuan Transition
Sung Dynasty
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China Fell Behind

• China was the worlds leading economy in terms of
  per capita income in the 10th-15th century.
• Chinas share of world GDP fell from 1/3 to 1/20.

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Economic trends in 19th and early 20th century
Shocks and Recovery (S.L. Morgan)

• Opium imports (before 1839) caused huge outflow
  of silver, leading to a long recession
• Slower capital accumulation
• Smaller demand for produce, reducing rural income
• Internal rebellion (Taiping Rebellion)
  (1854-1864) stopped rural production in many
  areas
• By the 1870s, the Qing government re-established
  social order, bringing 50 years of sustained
  growth up to the Sino-Japanese War (1937-1945).
• Rapid growth of population, silver stock, and
  grain prices
• Per capita output grew by 1.2 per year and per
  capita consumption grew by 0.5 in early 20th
  century.

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Height of Chinese (1880-1930)

• Reasoning Trend in height could reflect the
  change in the welfare of the people.
• Data Height data (10,000 records) of employees
  of state-run enterprises and government agencies.
  Potential pitfalls
• Serious selection bias
• Comparability of different generations of
  employees
• Findings
• A modest rise (1.25cm) in average stature
  1880-1930
• People in East China grew faster than the rest

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China from 1949 to 1978

• A new regime
• Sacrifice of the market mechanism
• Weakened property right protection (land reform)
• More equality
• New technology and modern organization from USSR
• Political instability (Korean war, Sino-Soviet
  split, Great Leap Forward, Cultural Revolution)
• GDP rising threefold and per capita income by 80
  per cent. Industrial share of GDP rose from 10 to
  35 per cent.

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China from 1978 to the Present

• Introduce market mechanism
• Privatization
• Open to the outside
• In 1996 exports by China was only 3 per cent of
  the world total (about 11 per cent of Asian
  total)
• Problems
• The growth is driven by investment but not
  innovation
• Corruption
• State-owned enterprises (inefficient financial
  system)

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Trend in Height of Chinese, 1979-1995 (S.L.
Morgan)

• Data
• National survey of Han ethnic students
• Over 1 million observations
• Findings
• In general all people gained. The largest gains
  in stature occurred 1985-1995.
• Urban-rural gap narrowed significantly
• Coastal region students gain the most
• Losers include rural students in Shaanxi

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Development of China (1949-1980) (S. Ishikawa)

• Phase I (1952-66) Pre-Cultural Revolution
• Great Leap Foreword An economic and social plan
  (1958 to 1962) which aimed to rapidly transform
  China from an agrarian economy into a modern
  industrialized one.
• Phase II (1966-76) Cultural Revolution
• CR was mainly caused by an ideological dispute
  over the orthodoxy of socialist construction
  principles.
• Phase III (1976-80) Post-Cultural Revolution
• Or post-Mao

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Output Growth (1949-80)

• National income annual growth rates were about
  6, 5, and 6 in phases I, II, and III,
  respectively
• Heavy industry outputs grew by 16, 9.7, and 13
  per year
• Grain output grew by 2, 3, and 2.4 per year
• Per capita national income grew by 4, 2.6, and
  4 per year
• Data problem
• Empty portion in data (useless outputs) in
  phase I and II (potentially large during the
  Great Leap-forward).

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Structural Transformation (1949-1980)

• The weight of heavy industrial outputs in
  national outputs increased from 10 in 1952 to
  30 in 1966 (even after classification revision
  in 1963 that shrink the class of heavy
  industries) and 40 in 1976.
• The ratio is significantly higher than those of
  other developing countries.

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Investment and its Effectiveness (1949-80)

• The domestic investment rate (ratio of investment
  to national income) had been consistently high
  (around 30)
• Investment efficiency (marginal output to
  investment) systematically declined over time.
• Decreasing marginal return to investment
• Increasingly inefficient allocation of capital
  across location and industries
• Large portion of investment on non-productive
  infrastructure (the third frontier).

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Foreign Trade and Technology Import (1949-1980)

• Foreign trade of China before 1980 has been
  closely related to imports of technology
• During the First Five-Year Plan (1953-57) whole
  plants were imported from the Soviet Union for
  technology assimilation.
• The second wave of whole-plant imports occurred
  1962-65 and the third wave occurred during
  1973-76 (in chemical fertilizers, petro
  chemicals, synthetic fibres and metals.)

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Population Growth (1949-80)

• Population Trends
• Absolute population shrinkage (about -1)
  1960-61.
• Pop. grew by 3.35 in 1963. Thereafter the rate
  gradually decreased to 1.2 in 1980 (one-child
  policy starts in 1970s).

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Sources of Fluctuations (1949-80)

• Two Troughs
• Great Leap-forward (1958-66)
• Cultural Revolution (1966-69)
• Three waves of technology imports
• 1940s and 1950s plus the third front
  construction
• 1962-65
• 1973-76
• The trial and error method of large scales

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The Solow Model Equilibrium

• Long-term growth rates depend on technology
  growth rates only.
• Long-term growth levels depend on technology
  level, saving rate, population growth rate, and
  capital depreciation rate.

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New Ideas

• North (1981) suggests that the rapid development
  of intellectual property rights (e.g. patents) in
  the past couple of centuries has stimulated
  creations of ideas, thus greatly increases world
  growth rates.
• Only transitional growth rate is affected.
• In 1880, 13000 patents were issued in 1999,
  150000 patents were issued.
• The number of scientists and engineers engaged in
  RD increased from .25 of the labor force in
  1950 to .75 in 1993.

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Social Infrastructure

• Social infrastructure includes government
  policy, institutions (e.g. business environment),
  culture, etc.
• How may SI affect investments?
• An investment is made when the expected value of
  the investment is larger than its costs.
• SI may affect the costs of investments
• SI may affect the value of investments
• The size of the market
• Protection of investors
• Stability of economic environment

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Natural Resources and Economic Growth

• Land
• In a Solow model, rewrite YAKaTßL1-a-ß, then the
  growth rate with land is g-ßn/(1-a).
• Growth rate is lower if land is needed for
  production. Moreover, the higher the population
  growth rate, the lower the economic growth rate
  when land is restrictive.
• Non-renewable resources
• Implication similar to land

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Summary

• Technology advancement is the key for sustained
  development
• The growth of China in late 20th century might
  have benefited from technology spillover from
  outside (the catching-up effect).
• Institutional reform (marketization and privation
  may be important factors for the growth in the
  past two decades).
• The fundamental institution of China that hinder
  innovation (relative to the West) may not have
  fundamentally changed.