Era of “Reform and Opening,” 1978 – now? • Third Plenum (of 11th Party Congress) in December 1978. • What did it do? “The official view of the Third Plenum, too often echoed in foreign studies, exaggerates the meeting. ….It ignores Hua Guofeng’s achievements in moving the country away from Maoist orthodoxies and refocusing on the economy, underplays initial reform efforts before the Plenum, and oversimplifies a complex process that saw Deng emerge as paramount leader over the next two years……..the word “market” did not appear in the official communiqué from the 1978 meeting; the word “reform” appeared twice. Only some six years later did the slogan “reform and opening up” become widely used.” --Professors Fred Teiwes and Warren Sun. The Third Plenum of 1978 1. Declared that the focus of Communist Party work had now shifted to “economic construction.” Class struggle was over, and economics were in command. 2. Incremental efforts are economic “reform” were already under way, but who knew what that would mean. System exploration was ratified and accelerated: what are the rules that decide resource allocation. 3. Economic strategy was dramatically altered. The effort to accelerate industrial construction by squeezing farmers and exporting oil was abandoned. The alternative was to give farmers “room to breathe,” reduce imports and relax the economy. 4. The leadership changes associated with these policy changes took place: Chen Yun joined the Standing Committee and Hua Guofeng lost power. What economy did Chinese leaders face in 1978? • The Cultural Revolution wasn’t all bad, but… 1. A youth wave was breaking on the society, and there weren’t enough jobs. Plus 17 million sent-down youth coming back to the cities, and perhaps 2 million political prisoners to be rehabilitated. Looking back, we can call it a “demographic dividend,” but at the time…. 2. Food supplies were inadequate and nobody knew if they could be increased. Rural poverty was widespread. 3. Huge industrial investments had failed to be brought into production. There were no foreign exchange reserves, and efforts to expand oil production had failed. 4. In the city, service were non-existent; everything was either provided through the work unit or were unavailable. Question 1: How do you feel about Economics? A) B) C) D) E) I like Econ! I want to take more Economics classes at UCSD. Econ is pretty interesting, but tough! All that math. Most economics is irrelevant to the real world. Meh. Boring. I actively dislike Economics. Question 2: If you had been watching China in 1979 (after the Third Plenum), which would have been your prediction for the Chinese economy? A) It will Struggle, because the political issues are so deep. B) It will Grow, but be held back by agricultural shortages; not clear if China can feed itself. C) It will Grow, but be held back by the difficulty—the impossibility —of reforming command economy (socialist) systems. D) It will Grow rapidly, and become economically successful. E) It will Grow explosively: faster, longer than any economy in history The Outcome: A combination of structure (“Growth Miracle”) and system (“Market Transition,” or Reform and Opening. Clearly, market transition succeeded, through a two-phase “gradualist” reform program. What is “market reform”? A policy that increases fair market competition by lowering barriers to entry or creating better rules. Phase 1 (1978-1991): Allow entry, experiment, create a “dual track”: Special Economic Zones. Phase 2 (1993-2002): Create a (mostly) uniform tax system, central bank, financial system, foreign trade system, join W.T.O. Are we now in a “Post-Transition” Phase? 20% 15% 10% 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981 1980 1979 1978 0% Budgetary Revenues The first phase of reform led to a fiscal crisis…. Percent of GDP Can we capture the reform experience in one graph? 35% 30% Budgetary Expenditures 25% 5% 20% 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981 1980 1979 1978 0% Budgetary Revenues 15% Percent of GDP 35% 30% That was resolved through further reforms….. 25% Budgetary Expenditures 10% 5% I. The High Speed Growth Era: There have only been a few “miracle” economies, mostly in East Asia. These few “miracle” economies have all combined multiple conditions. China is the same: 1. Demographic dividend: rapid labor force growth and low dependency. 2. Rapid rural-to-urban migration, urbanization, and structural change. 3. High saving and investment. 4. Manufacturing growth “leads” with rapid productivity (TFP) growth. 5. Export orientation (prevents market saturation) Labor force growing much more rapidly than population; opportunity but also employment pressure. 300 2. Chinese-style Rural-Urban Migration: the “Floating Population.” 250 Million 200 150 100 50 0 1982 1987 1990 1995 2000 2005 2010 2014 2015 2016 2017 2018 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 3. High and Rising Investment: A Fundamental Feature of the Entire PRC 50% 45% 40% 35% 30% 25% Gross Fixed Capital Formation 20% 15% 10% 5% 0% 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 25% 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 35% 1985 1984 1983 1982 1981 1980 1979 1978 Percent of GDP 50% Investment Share of GDP 45% Gross Fixed Capital Formation 40% China 30% Upper-Middle Income (incl. China) 20% High Income 15% 10% 5% 0% 4-5. External Orientation • All growth miracle economies have been export oriented (except perhaps Brazil, 1950-1980). • In the simplest sense, the highly elastic demand on the world market implies that expansion of labor-intensive manufacturing can continue almost without limits. Domestic demand does not constrain development. • Inflows of external technology and saving can be large. Imitation and “learning by doing” are both rapid. 35% 15% 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Percent of GDP Exports and Imports (Share of GDP) 40% Exports 30% 25% 20% Imports 10% 5% 0% Market Reforms fading as Growth Drivers: By 2005-2008, the most dynamic reform measures had been completed: 1. State-owned enterprise system downsized (from 75 million to about 35 million); collective enterprises shrink even more. 2. Membership in WTO (World Trade Organization). Agreement with new sets of rules and influence of world prices. 3. Modern fiscal and financial system: Tax reform (1994); PBC (Central Bank: 1995); CBRC Regulator (2003). Last step is the restructuring of state-owned banks from 2004-2006. Massive bad loan write-off, restructuring, foreign strategic partners, stock market listing. (Even the laggard Agriculture Bank completed in 2010). All three of these achieved in the context of an expanding market economy. These three milestones of restructuring ensured the core of the economy also marketized. Growth Surge amid Secular Slowdown • Why did China’s GDP growth first accelerate (in 2005-2007) and then resume secular slowdown? • Because of successful economic reforms and entry into W.T.O. • It seems that successful reform should have consolidated China’s policy direction. China Annual GDP Growth 16% 14% 12% 10% 8% 6% 4% 2% 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 China’s WTO Commitments were substantial, but still much less than those made by developed countries. 2. Search for New Growth Drivers • For a while, we hoped to find new growth drivers in the growth of Chinese domestic consumption. • In fact, Chinese consumption has grown rapidly, about 6-8% per year in the last decade. • But as a share of GDP, consumption has not increased very much. • Exports have grown, but declined even more as a share of GDP. • The has left Chinese policy-makers looking at investment and ambitious new industrial policy programs as the main growth drivers. Question 4: Clearly, China’s growth miracle phase is over. No more growing at 10% per year. Between now and 2030, China is likely to grow at: A) B) C) D) E) 8% per year. 6% per year. 4% per year. 2% per year. Stagnate or decline. How do you manage the end of the Miracle Growth era? • Earlier “Miracle Growth” economies have had difficulty. Japan ran into a decade of stagnation; Korea hit the Asian Financial Crisis. • But these economies also shifted to “light touch” government policy. • Corporations took over technology development. • Societies became more democratic. • China’s path has been quite different, and it is accelerating. Accelerated Industrial Policy 1. China’s industrial policy today is focused on—but not limited to —the “fourth wave” of technological change. It is: A. The “keystone” of current development strategy: a great deal depends on it. B. Big and Growing Rapidly C. Government “Industrial Guidance Funds” will play a main role. 2. Success is far from certain: this is an enormous gamble. A. China has many of the pre-requisites of success, and will clearly emerge from this wave of technological change as one of a small handful of global leaders. B. Industrial policy will be quite wasteful, and is already distorting valuations. C. China’s pursuit of industrial policy is one of the main causes of the Trump Administration’s “trade war.” What are the rules under which international technological competition will take place? “Innovation-Driven Development Strategy” (2016) • Endorsed by a key joint Communist Party Center and State Council (government) document in May 2016. It is the most authoritative type of policy that the Communist Party issues. • A broad program, with many distinct components. Many of the better-known industrial policy programs with—such as “Made in China 2025”—are in fact components of this broader strategy. • A broad strategy, rather than a tightly controlled plan. Supports multiple, opportunistic approaches to technology acquisition. • Signals a new level of commitment and a dramatic increase in the volume of resources devoted to industrial policy. Broad Program with Many Components Innovation-Driven Development Strategy (IDDS) Megaprojects (from 2006) Strategic Emerging Industries (SEIs) (from 2010). Made in China 2025 (2015) Internet Plus (2015) Military-Civilian Fusion (2017) Artificial Intelligence and AI 3-Year Action Plan (2017) Smart Solar Power Action Plan (2018) Selected Quotations from “Innovation-Driven Development Strategy”: “A new round of global technological revolution, sectoral change and military change is accelerating … A group of revolutionary new technologies— intelligent, green and ubiquitous—are reshaping the global competitive landscape and changing the relative strength of nations … We not only face a rare historical opportunity to catch up and surpass, we also face the serious challenge that the gap might widen again.” “The basis of national strength is technological innovation capacity… a nation with weak innovation is in peril. A main reason China was weak and preyed upon in the modern era was that we had missed out on successive technological revolutions; we were technologically weak and a weak nation.” “Traditional development drivers are steadily weakening … we must rely on innovation to create a new engine for development, to nurture new growth poles, to continuously raise quality and efficiency …. and to achieve the “twin objectives” of maintaining medium-high-speed growth and advancing toward medium-and-high tech levels for individual sectors.” Extremely rapid growth in outlays for Industrial Policy • Fifteen years ago, China spent almost nothing on industrial policy. • In the immediate wake of the global financial crisis (2009), the new 16 “Mega-projects,” were getting $5 billion annually. • In 2010--the next year—the Strategic Emerging Industries (SEI) program was launched, probably approached $100 billion annual support within a year or two. • Today, industrial policy commitments are in the hundreds of billion US dollars. • Semiconductor Funds: $300 billion (?) • Electric vehicles: $150-300 billion (??) • Many Individual sectors: Advanced manufacturing ($3 billion); Merics identified $6-7 billion in support for industrial robotics. • The old funding commitments don’t disappear: this is largely cumulative. [Comparison: US government annual support for innovation is about $50 billion.] Value of Government Guidance Funds 12 Cumulative Value: Fund-raising Scope 10 10.3 trillion RMB = USD $1.5 trillion Trillion RMB 8 8.75 trillion RMB 6 4 Source: Zero2IPO and company websites. 2 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 Q2 Policy Instruments: Multiple, Overlapping, Cumulative • After 2006, Chinese industrial policy-makers rapidly developed a basked of overlapping targeted polices: • • • • • Subsidies and tax breaks to producers; Demand-side subsidization (e.g., electric vehicles); Technical standard-setting that privileges domestic firms; Procurement preferences; Strategic targets that serve a coordination function • Since 2014, rapid roll-out of • Programs such as Innovation-Driven Development; Made in China 2025; and Internet Plus. These are in principle better, because they are less targeted and envisage raising capabilities throughout the economy. • Establish funding mechanisms that have some role for competitive project selection and rates of return analysis. • However, none of these instruments are “sunset,” they all persist and overlap. Result: • Nobody really knows how much money is being spent; • There are evaluations of the effectiveness of programs, but they are never public and we don’t know the criteria or the outcomes. Nobody knows how effectively the money is being spent. • How do the incentives and protectionist measures affect upstream and downstream industries? • Do these policies actually end up fostering high tech industrial development? • Semiconductor industry fund: equivalent to $50 from every man, woman and child in China. A new type of technological frontier: • Artificial intelligence is enabled by Big Data • Artificial intelligence: Don’t think of IBM’s Watson, a stand-alone genius computer. • Artificial intelligence: Think of cheap, on-demand processing services, like a utility, that makes many products work (or work better). • The operator with the biggest data set has an intrinsic advantage: Google is the leader. • China has the largest data sets because: • 1.32 billion mobile phone users, who conduct, on average more business on their phones than Europeans or Americans do. • Government that actively cooperates with internet businesses to collect and analyze data (Cf. MERICs “Social Credit” Report). • Absence of privacy protections. Industrial Policy is complementary to the enormous investment effort of the Chinese Government • China continues to make an extraordinary investment effort. China’s fixed investment ratio, at 42.7% of GDP is by far the highest in the world. Moreover, although it has come down slightly from its 2013 high point (of 45.4%), it is still much higher than it was before the Global Financial Crisis. • China has almost 40% of GDP available to government under the broadest possible definition, including social insurance revenues, local government land revenues, and state enterprise profits. Yet China today has none of the social welfare burden that weighs on an aged society like Germany. China’s aging is a crucial future problem, that will start to weigh heavily around 2030. Right now, China has a window of opportunity. • Industrial policy will insure that the investment ratio stays high: China is not “rebalancing.” B. Massive Physical Constructions and Reconstructions 1. The “Belt and Road Initiative” has gotten the most attention. This is important, but don’t think of it in terms of “belts,” think of it in terms of “hub and spoke.” 2. Completion of China’s high-speed transport infrastructure 3. Reconstruction of *Three* Major Urban Areas a. Beijing-Tianjin-Hebei through construction of new urban center in Xiong’an District. b. Lower Yangtze Urban Belt c. Pearl River Delta “Greater Bay Area” – Hong Kong-Macau-ShenzhenGuangzhou-Zhuhai China is to be the hub of six transport spokes Eurasian Land Bridge Corridor Russia Corridor Mideast Corridor BurmaIndia Corridor Southeast Asia Corridors Pakistan Corridor (First) High Speed Railway to Southeast Asia Grand Designs for China’s Largest Cities • Driven partly by air pollution concerns, Beijing and Shanghai have both adopted new population caps. ➢ Beijing: total 2020 population capped at 23 million ➢ (from 2015 population of 21.7 million). ➢ Beijing central city population (existing 6 urban districts) to be capped at 10.85 million in 2020 ➢ (down from 2015 population of 12.8 million). ➢ Beijing: build new urban center at Tongzhou and completely new city at Xiong’an. ➢ Shanghai: cap total 2030 population at 25 million ➢ (from 2016 population of 24.19 million). • New version of traditional policy of restraining growth of the largest cities, channeling growth into smaller cities. Xiong’an New District Built-up core will be low-density (< 10,000/km2), green, universal broad-band. (Singapore as a whole is ≈ 8,000/ km2) By 2035, a green, harmonious city with excellent infrastructure, in which high tech sectors will lead development and effectively take over the non-capital Guangdong Greater Bay Area: Plan Released February 2019 Highway Bridge here Opened October 24, 2018 3. Conclusion: A Huge Gamble • China’s economy is slowing; but China’s leaders do not accept the full magnitude of this slowdown, and are hitching development strategy to a new technological revolution. • These programs are all reasonably well conceived. They envision changes that are likely to take place under market conditions and create polices to accelerate them. • Some will certainly succeed: it is unquestionable that China will emerge as the world’s largest economy (at market exchange rates) and a primary technology power over the next twenty years. • However, the scale, direction, and acceleration of these policies creates substantial sources of risk. • Prepare for a wild ride. China is the world’s most competitive economy, and it is moving upwards fast in a range of sectors. These policies try to “push the river,” moving China faster to where it will go in any case. • It is unusual to see industrial policy adopted as a way to seize advantage at the technological frontier; past industrial policy (Japan, Korea) has been targeted at catching up, by late developers. • These policies compete with many other priorities for the Chinese people, in particular health care and provision for an aging society. • They have contributed to a significant backlash against China: will the “trade war” really come to an end this month? The trade deficit issues are easy to resolve, but the industrial policy division is much deeper and more intractable.
Purchase answer to see full attachment