General 13/06 Flashcards
What are the main problems for advanced countries in order to restore growth?
Non-economic factors:
- ageing populations;
- falling long-term rates of economic growth;
- inability to engage in substantive and lasting reforms.
Macroeconomic problems:
- the poor state of finances;
- institutions entering a spiral of decline from which it is difficult to escape.
The steady downward trend is due to:
1) the exhaustion of the supply of educational improvements;
2) the exhaustion of the gains from past innovation.
The Rule of 70
To double the income, a country needs 70/g years, in which g is the constant growth rate.
Chinese Growth
The People’s Republic of China was born in 1949, and it started its industrialisation process [investments in heavy industries: steel, concrete, machinery] immediately.
In 1978 Deng Xiaoping started a series of reforms and a general opening up of the Chinese Economy.
❶ Gradual reforms started in rural areas with township and village enterprises (TVEs).
❷ Then first steps followed to open up the economy to foreign trade and investment [which only started to play a significant role in the 1990s].
❸ More generally, China’s economic reforms model became “Crossing the river by feeling the stones”.
❹ Gradualism was a means to:
- circumvent political resistance to reform;
- adopt a pragmatic approach in a heavily distorted environment where the ‘first best’ solutions were unlikely to apply.
❶ Decentralisation and incentives became a powerful tool for progress within the confines of central political guidance.
❷ The distributed benefits of reforms to a large part of the population, to local government and party officials generated strong incentives to pursue growth and promote the market economy.
❸ A dual-track system allowed the survival of the planning system [avoiding a collapse in production] and an unplanned economy to emerge.
The 3 phases of China’s reform
The first phase revolved around the search for the right economical institutions for China.
The second phase started in 1993 with the national congress laying out a comprehensive plan to build the institutions for a market-driven economy. During this phase, there was the entrance of China into the WTO (2001). There was also an explosion in the foreign investment
The third stage happened from 2004 onwards. We have 2 main ingredients. The first is the gradual expansion of the social safety net -> China started to think about national welfare policy. They had a vast working-class and needed to start thinking about pensions, housing and other forms of welfare execution. The other factor was a return to industrial policy -> they started 16 megaprojects and the five-year strategy from 2015 had a great focus on industry policy.
Recent return to industrial policy to the government’s forefront since 2015.
China’s Demographic Transition
Pre-divident: pre-industrial society, high birth rate but also mortality.
Early-divident: with an increase in food supply and sanitation, the death rate falls rapidly as life expectancy increases and the population overall increases. This is a classic case for developing countries, the position of many African countries nowadays.
Late-divident: death rate continues to fall, reaching a floor level and remaining stable from there on as no more significant health and food improvements can be made. The birth rate starts falling and so the total increase in population keeps increasing but at a smaller rate.
Post-divident: birth rate keeps decreasing and the overall population is stable or slowly increasing
No-more-divident: the birth rate is very low and the population starts to decrease slowly or keeps stable. Current situation.
Economic implications of the demographic trends
For a country to grow it needs investment (infrastructure investment, then human capital investment, research, etc).
Impeeding factors to investment:
Too low incomes do not allow suitable levels of savings
Too low incomes do not allow to support high birth rates, which are expected to counterbalance a low life expectancy
In countries late-divident countries, the global dependency rate is very low and frees up resources for saving and, therefore, investment
Dependency ratios: children/adults, elderly/adults, (children+elderly)/adults.
During the 35 years between 1975 and 2010, China enjoyed a period with a very relevant positive gap between the working population vs dependent population, allowing for a window of opportunity during which investment was high.
From now on the old-age dependency ratio comes back to grow (China has entered its fourth phase of DT).
This rise some problems in terms of the welfare state: pension problems firstly, which may slow down future growth.
Middle-income threat: you are stuck in a situation where you are not rich enough to pay for the old population.
History of China’s Economic Growth
❶ Pre-1978 period, growth comes from increases in both physical and human capital. TFP declines by 1.07% a year in this period.
❷ After 1978, capital accumulation and TFP growth reversed their roles [The physical capital/output ratio remained constant and the growth rate of hc was lower]. In contrast, TFP grew rapidly at 3.16% a year, equal to 78% of the growth of GDP per capita.
Ak Mod
The total final output per capita Y depends on:
A: Total Factor Productivity, Knowledge and Technical efficiency
K: Capital (financial c., buildings, technical plants, etc.)
L: Labour (number of employees, worked hours, Skills)
Why do we need sustainable growth?
Demography, growing demand for better life quality and well-being. With growth, it is easier to manage many of the problems we face. In order to have growth, we need to ensure a good quality of fundamentals: human capital, institutions’ quality, tax burden, public and private debt, rules and trust.
Understanding Total Factor Productivity Differences
- Human Capital: worker’s skills -> this comes from education and training (more education and training usually means better wages)
- Technology: more efficient technologies increase the productivity parameters.
- Institutions: foster human capital and technology growth by securing basic rights such as A) Property Rights B) The Rule of Law C) Government Systems D) Contract Enforcement
The Middle Income Trap
Several developing countries experienced rapid economic development. At some point in their development they began to experience economic stagnation [or slower growth compared to previous levels] over a sustained period of time: a phenomenon labelled as the ‘middle income’ trap.
Middle-income countries find themselves in a trap because they can no longer compete in standardised, labour-intensive commodities, as wages are relatively too high (can’t be simply a place of cheap labour anymore), but they have not achieved the ability to compete in higher value-added activities on a broad scale, as productivity is relatively too low.
The migration of people from the unproductive sides of the country to the productive parts slows down or the population just gets older.
It is very difficult to keep moving up the value chain (you can only go so far with production of let’s say tomatoes like Mexico and to move to a technological hub is impossible).
How to get out of the middle income trap?
Education, Specialization, Democratization, Strong middle class Large scale institutions at a world-class level
Factors that indicate that China might be stuck in the middle income trap
- China is losing its advantage in low-cost labour. A decline in China’s workforce could drive up wages faster than productivity gains.
- China has already experienced a slowdown in TFP growth in recent years
- Potential slowdown in the near future: The IFM (2017) warned that for China: “A sharp slowdown in the future remains a risk”.
Evolution of Employment in China
- Underemployment in rural areas allowed the industrial sector to expand and increase its labour force with no pressure to raise wages.
- However, since 2005, the “labour shortage” phenomenon has begun to turn up in coastal cities
- This finding has important policy implications both for the general global economy as well as for China’s future development.
Policy Themes for Getting ou of the Middle Income Trap
Policymakers in middle-income countries must focus on the transition from productivity growth stemming from inter-sectoral resource reallocations to intra-sectoral catch-up technological growth (moving up the value chain). Also develop more mature institutions. Focus on:
- Innovation: Competition and new capital investments and R&D can create an environment for innovation
- Cities: ‘Smart cities’ have become a dominant theme in recent economic development literature
- Demography: The danger for all middle-income countries is that of growing old before they get rich
China: Growth Sources, Trends and future Challenges
Capital Accumulation
Low dependency ratio conducive to high savings; unlimited supply of labour preventing diminishing return on capital
Challenge: Unsustainable. It is difficult always to find new productive investments, especially when there are shortages in the labour market for high-skilled positions
Quantity of Labour
Population structure guarantees labour supply, which turns into a comparative advantage in labour-intensive manufacturing.
Challenge: Unsustainable. Demographic dividend disappears as economy passes Lewis turning point (situation in economic development where surplus rural labour is fully absorbed into the manufacturing sector)
Human Capital
Education expansion and mass labour entry improves the quality of stock of workers
Challenge: Education expansion eventually slows, calling for enhancing its quality and equality
Total Productivity Factor (TPF)
An increase from the improvement of incentives and resource allocation system
Challenge: Increasingly challenging and important to sustain growth; requires new sources of increase
TPF (Resource Allocation)
Reallocating efficiency of resources through labour mobility from agriculture to industrial sectors
Challenge: Dominant in the early stage of development; diminishes after Lewis turning point
TPF (Technology)
The utilisation of advantages of backwardness through absorbing foreign technology and management
Challenges: A gap narrows; technological progress increasingly rely on independent innovation
Population Factor
A widely defined demographic dividend is manifested in all factors driving rapid growth
Challenge: Diminishes as China ages; the second dividend available from removing remaining barriers to movement
Romer Model: Increase in the share of research
If we increase the share of the working population doing research, initially the output will go down (as fewer people are working on producing output) but in the long run, the output per person will be higher because we’ve increased our growth rate.
Change in China’s Economic Model
- Old model based on statal intervention and strong exports is no longer sustainable:
The Chinese economy was characterised by high levels of investment, infrastructure building. China has been investing half of its GDP.
But now a lot is lost, most things needed were already built -> they need to shift toward more complex mechanisms.
Another problem is that with such a steep growth the government has more margin for error and people get sloppy, too optimistic, less competent.
A turning point to the Chinese economy came in 2009. Predictions were that a big recession would come, but government policies acted as to not permit that. Boosted investment and spending. This accomplished the goal but was well over what was sustainable. It is sustainable for a big growth rate, but if it falls it isn’t anymore. - More emphasis on private consumption and innovation.
- Challenging implementation of a new sustainable growth model unless China can effectively implement economic reforms.
Signs of an Expected Regression in China’s Economy
- Real state bubble: Chinese property is too expensive and there was an overbuild -> many infrastructures for not enough people
- Stock market bubble
- Municipal debt: Chinese municipal governments shouldn’t be borrowing money, but they were doing it and incentivised by the central government to keep up with the desired investment levels.
- Excess capacity: too much stimulation of investment and confidence, many enterprises and not sustainable that are being kept afloat by cheap credit or political privileges.
- Capital flight: capital leaving the country with fear of the economic collapse, which only further speeds up the process.
However, there are reasons to be optimistic. China has a lot of human capital (they have been investing in this area).
Major long-term challenges facing China’s Economy
- Incomplete transaction to a market economy (still a huge number of state-owned enterprises).
SOEs in the banking sector: creation of the Big Four to support companies through funding in specific sectors - State-dominated banking sector, with excess credit (“cheap money”) and high debt
- Large internal imbalances (of savings, fixed investment and consumption)
Xi Jinping’s new 5-year plan: Dual Circulation (Domestic + External)
Domestic:
- increase domestic demand
- upgrade supply chains
- seek more independence in key technology (more investment in Research and Development)
External:
- welcome Foreign Direct Investment (FDI) in China
- strengthen the BRI strategies
- take advantage of regional trade integration
Key factor for China’s sustainable development: Human and Social Capital
- China is at the forefront of a global transformation and aims to establish itself as a major hub for both the generation of knowledge and the production of innovation.
- The initiative intends to “transform China from a manufacturing giant into a world manufacturing power” by 2049.
- The enhancement of innovation requires building a learning economy, the basis of which is social capital.
Social capital: the networks of relationships among people who live and work in a particular society, enabling that society to function effectively”. It involves the effective functioning of social groups through interpersonal relationships, a shared sense of identity, a shared understanding, shared norms, shared values, trust, cooperation, and reciprocity.
“Made in China 2025” Initiative
- The initiative intends to “transform China from a manufacturing giant into a world manufacturing power” by 2049.
- China is quickly gaining ground on advanced economies in high tech value chains.
- China’s share in manufacturing global value chains has risen sharply from 6% to 19% in the past 15 years at the expense of the EU.
Digital Silk Road (DSR)
China aims to use the Digital Silk Road (DSR) to advance global
technological integration.
1. The DSR draws on three core state-driven strategies: (a) Made in China 2025, (b) the BRI, and (c) China Standard 2035.
2. The defining feature of DSR has been its core focus on connectivity infrastructure, both in telecommunitation/5G, hardware, and smart cities.
3. Chinese companies have signed more than 116 smart-city of safe-city partnerships exporting China’s ‘sharp eyes’ approach to high-tech urban policy.