China: How to maintain balanced growth? Ricardo Hausmann Kennedy School of Government Harvard University

China: How to maintain balanced growth? Ricardo Hausmann Kennedy School of Government Harvard University

China s growth process An unprecedented miracle

China has been the fastest growing country in the world since 1978 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% GDP per worker GDP per capita Total GDP 4.0% 3.0% 2.0% 1.0% 0.0% CHN BWA KOR THA IRL SGP HKG IND MYS IDN CHL Figure 1. Fastest growing countries between 1978 and 2003.

Is this because it started from a very low base in 1978?

It has also been the fastest growing country since 1988 10% 9% 8% 7% 6% 5% GDP per worker GDP per capita Total GDP 4% 3% 2% 1% 0% CHN VNM IRL MOZ THA KOR LAO SGP UGA IND MYS CHL MUS Figure 2. Fastest growing countries between 1988 and 2003.

In fact, it is the fastest growing large country in any 25-year period since 1960

Fastest 25-year growth episode and enddate MaxgGDPPW25 0.02.04.06.08.1 BWA OMN MLT JPN HKG SGPKOR GAB HUN IDN GRC EGY BLZ AUT ESP COGCMR ITA SYR DZA LVA LBY FIN BEL FRA ISR PAK PRT BRA NOR PRI TUN PRYBDI KEN ISL PAN TGOMAR BRB GEO TUR CIV MEX MRT MWIBFA DOM PNG BEN BHS CHE COL DNK ECU NLD GBR SWE RWA NGA GTM TTO ZAF AUS ZWE HND SLE ARG FJI CRI HTI PHL GMB IRQ PER SAU CAF CHN CYP LSO THA MYS IRL SLB IND LUX CHL LKA SWZ MMR NPL TCD DEU USA BGD URY SDN CAN GNB MLI JOR SENNZL GHA 1985 1990 1995 2000 2005 Maxdate25

Who can we compare China with? MaxgGDPPW25 0.02.04.06.08.1 BWA OMN MLT JPN HKG SGPKOR GAB HUN IDN GRC EGY BLZ AUT ESP COGCMR ITA SYR DZA LVA LBY FIN BEL FRA ISR PAK PRT BRA NOR PRI TUN PRYBDI KEN ISL PAN TGOMAR BRB GEO TUR CIV MEX MRT MWIBFA DOM PNG BEN BHS CHE COL DNK ECU NLD GBR SWE RWA NGA GTM TTO ZAF AUS ZWE HND SLE ARG FJI CRI HTI PHL GMB IRQ PER SAU CAF Population less than 1.5 million CHN CYP LSO THA MYS IRL SLB IND LUX CHL LKA SWZ MMR NPL TCD DEU USA BGD URY SDN CAN GNB MLI JOR SENNZL GHA 1985 1990 1995 2000 2005 Maxdate25

We choose Korea since 1960 MaxgGDPPW25 0.02.04.06.08.1 BWA OMN MLT JPN HKG SGPKOR GAB HUN IDN GRC EGY BLZ AUT ESP COGCMR ITA SYR DZA LVA LBY FIN BEL FRA ISR PAK PRT BRA NOR PRI TUN PRYBDI KEN ISL PAN TGOMAR BRB GEO TUR CIV MEX MRT MWIBFA DOM PNG BEN BHS CHE COL DNK ECU NLD GBR SWE RWA NGA GTM TTO ZAF AUS ZWE HND SLE ARG FJI CRI HTI PHL GMB IRQ PER SAU CAF CHN CYP LSO THA MYS IRL SLB IND LUX CHL LKA SWZ MMR NPL TCD DEU USA BGD URY SDN CAN GNB MLI JOR SENNZL GHA 2 percent 1985 1990 1995 2000 2005 Maxdate25

The Korean model Demographic transition Fertility decline Mortality decline Urbanization Education Technology Manufacturing exports Growth

Did China grow faster than Korea because it did more of these determinants?

China s population growth was already lower and declined less rapidly than Korea s during the growth miracle 3 2.5 2 1.5 China Korea 1 0.5 0 Korea: 1 = 1960 China: 1 = 1978 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43

Fertility rates changed much less in China 6 5 4 3 China Korea 2 1 0 Korea: 1 = 1960 China: 1 = 1978 1 2 3 4 5 6 7 8 9 101112131415161718192021222324252627282930313233343536373839404142 Figure 11. Fertility Rate Number of births per woman

so did under-5 mortality rates 140 120 100 80 China Korea 60 40 20 0 Korea: 1 = 1960 China: 1 = 1978 0 10 20 30 40 Figure 12. Under-5 mortality rate Number of deaths per thousand

China s labor force grew more slowly China Korea Korea: 1 = 1960 China: 1 = 1978 Figure 8. Labor Force Index: Year 1 = 100

But GDP per worker grew faster 800 700 600 500 400 China Korea 300 200 100 0 Korea: 1 = 1960 China: 1 = 1978 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 Figure 9. GDP per worker Index: Year 1 = 100

The big difference is in GDP per worker 900% 800% 700% 600% 500% 400% China Korea 300% 200% 100% 0% Total GDP GDP per capita GDP per worker China 845% 597% 535% Korea 544% 295% 204% Figure 10. How much more than Korea did China grow after 25 years? Cumulative growth rate

Why was productivity growth faster in China than in Korea? Was it because of faster education? Was it because of faster urbanization? Was it because of faster productivity growth in agriculture?

China had fewer children to educate 130 125 120 115 110 105 100 Population under 14 years of age Index: Year 1 = 100 China Korea 95 90 85 80 Korea: 1 = 1960 China: 1 = 1978 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43

but education progressed faster in Korea than in China 7 Average years of schooling of the population over 15 6.5 6 5.5 China Korea 5 4.5 4 1975=1960 1980=1965 1985=1970 1990=1975 China 4.38 4.76 4.93 5.85 Korea 4.25 5.39 4.91 6.6 Source: Barro-Lee dataset

China s educational progress is not outstanding 0 50 100 150 200 School enrollment, secondary (% gross)- WDI (2005) GBR BEL AUS SWE FINDNK NLD NZL ESP BRA PRT NOR URY HUN FRA IRL LTU POL BGR ARG CZE GRC DEU AUT CHE BLR ISR ITA JPN KGZ UZB UKR BOL ARM CHL HRV AZE JAM EGY GEO JOR KAZ RUSLVA LKA PER SVK USA KOR TJK KWT MNG PHL MKD ROM ZAF ALBNDZA IRN TUR THA TUN MEX OMN HKG MDA VNM CHNVENPAN COL MYS PRY CRI SAU IDN NIC ECU SLV DOM IND YEM NPLBGD SYR LAO MAR GHA GTM MWI NGA KEN SDN ZMBERI BEN CMR KHM GIN ETH MLI MOZ MRT PAKPNG UGA RWA SEN BDI TCD BFA NER 2.5 3 3.5 4 4.5 LYPPPK Log of GDP per capita PPP Figure 15. Secondary School Enrollment and GDP per capita PPP in 2000

especially in tertiary, where Korea is world class School enrollment, tertiary (% gross)- WDI (2005) 0 20 40 60 80 Korea KOR FIN SWEUSA NOR GRC AUS LVA NZL LTU RUS DNK GBR UKR BLR ESP ARG POL BEL ISRITANLD PRT FRA HUN DEU JPN IRL AUT CHE LBN KAZ KGZ PAN CHL BOL VEN GEO BGR HRV MNG THA URY JOR DOM ROM CZE SVK PER MDA EGY PHL MYS HKG ARM PRY MKD TUR TUN COL SAU DZA IRN MEX BRA NIC CRI TJK IDN AZE JAM SLV UZB CHN ZAF IND VNM MAR NGA GTM BGD COG NPLLAOCMR BDI ETH MDGMLI MRT KHM GHA MWI ERI BFA RWA UGA PAK China TZA AGO 2.5 3 3.5 4 4.5 LYPPPK Log of GDP per capita PPP Figure 16. Tertiary school enrollment and GDP per capita PPP in 2000

China s educational improvement in the 1990s was similar to other countries 100 90 Secondary school enrollment 1990-2000 80 70 60 50 40 1990 2000 30 20 10 0 China India Korea Mexico Turkey South Africa

especially in tertiary education 90 80 Table 4. Tertiary enrollment: 1990-2000 77.6 70 60 50 40 30 20 10 0 39.1 20.5 16.5 15.2 15 11.3 9.8 10.9 11.7 6.2 2.9 Brazil China India Korea Mexico South Africa 1990 2000

Not world-class improvement in secondary school enrollment Improvement in enrollment 1990-2002 SECENR 0 20 40 60 80 SLB CPV BRA THA BOL KWT VNMWSM BWA OMN PRY VEN SLV BLZ TUN LCA TUR BGD MUS MKD ARG CYP HUN MWI MEX MAC NAMCRI SAU BGR URY JOR COL LAO NIC SUR PER POL IRN ZAF BRN HRV KNA CHN DZAJAM LBY SVN GIN BEN GMBMMR IDN CHLGUY COM ARE EGY MLI PNG SDN MYS NGA NPL PHL VUT LTU MOZDJI MRT KEN LSO MAR VCT IND PAN LKA QAT TCD RWAUGA ZMB BDI BFA ETH CZE CMR GHA ECU ISR TON SEN SWZ ALB CUB LVA UKR NER HKG TTO MNG RUS KOR 0 20 40 60 80 100 sespgl12 Enrollment in 1990

or in tertiary It has been growing but from a low base Change in enrollment rate 1990-2002 gterenr12 0 10 20 30 40 50 SWE LVA KOR LBY FIN POL AUS GRC NOR HUN LTU GBR NZL PRT DNK ARE KGZ ROM CHE ITA ESP MNG BEL MYS PAN IRL ISR JPN PRY CZE DEU NLD TUN BOL HRV AUT SAU FRA RUS TUR CHN EGY COL CUB UKR JAMIRN MKD JOR VEN BLR ALB NICBRA VNM DZA IDN MEX URY BGR IND KHM BFA BDI ETH GHA CMR BGD ZAF KAZ MLI UGA PHL TZA AGO MRT NPL SLV PER GEO 0 20 40 60 80 100 setpgl12 Tertiary enrollement rate in 1990 USA

So, it was not education Was it urbanization?

Korea became urbanized much faster 90 80 Rate of urbanization Percent of total population 70 60 50 40 China Korea 30 20 10 0 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43

Urban population growth 1999-2004: not a world record Urban Population Growth 1999-2004 0.02.04.06 NPL KHM LAO BFA YEM ZAR IDN HTI PAK HND GTM PRY PHL BGD MYS SAU CHN NIC VNMMMR JOR MAR BOL DZA PNG SYR SLV ECU IRN IND TUR COL LBY DOM ISR PER BRA VEN EGY MEX TUN CHLAUS THA PRT USA LKA NLD CAN ARG PRK KOR UZB GRC CHE FRA HUN CUB ESP KGZ AZE SVK JPN AUT SWE DNK DEU GBR FIN ITABLR HKG BEL 20 40 60 80 100 Urban population in 1999(% of total)- WDI (2005), L5

therefore, the rural population has declined very little in China 120 110 Rural population Absolute number of persons. Index: base year=100 100 90 80 China Korea 70 60 50 40 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43

Average agricultural productivity per worker is very low Log of VA per worker in agriculture at constant Market Prices (US$ 2000) 5 6 7 8 9 10 MNG PAK YEM HTI IND PNG SVN LBN ITA BRB SAU ESP HRV ARG GRC KOR BGR URY CHL DMA MYS DOM LTU MUS CRI CZE ROM GRD PAN HUN BRA EST ARM MKD SYR COL SUR BLR PRY GTM IRN TUN MEX RUS VCT LVA NIC EGYDZA FJI JAM KNA TTO MAR PER LCA GEO ECU SLV TUR UZB WSM UKRTKM ALBKAZ POL HND AZEPHL JOR VNM BTN LKA BOL IDN THA SYC CHN 6 7 8 9 10 Log of GDP per capita at constant Market Prices (US$ 2000)

Agricultural productivity grew at a slow rate both in China and in Korea Agriculture: value added per worker (Index) 700.0 Agriculture value added per worker 600.0 500.0 400.0 Korea quadrupled In the following 20 years China Korea 300.0 200.0 100.0 Both countries doubled in the first 25 years 0.0 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43

What can we conclude so far? China s growth was exceptional in spite of not particularly exceptional Demographic transition Urbanization Education Agricultural progress Where is the miracle?

The miracle is especially in industry: Productivity per worker (US$ 2000 prices) 5000 4500 4000 3500 Secondary 3000 2500 2000 Tertiary 1500 1000 500 Primary Average 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Industry is 8 times more productive than agriculture 900.0% 800.0% 700.0% 600.0% Productivity in Industry and Services relative to Agriculture 500.0% 400.0% 1990 2003 300.0% 200.0% 100.0% 0.0% Ind/Ag SrvAg 1990 431.1% 375.2% 2003 812.7% 381.1%

and this is not common Relative agricultural productivity relprodagr 0.5 1 1.5 2 KGZ ARM BGR SVN UZB BRB GEO MDA NIC NGA BLR TJK HRV CAF MNG UKR ROM CMR SYR MKD GNB DOM BEL FRA BEN PRY SGP GHA LAO FINDNK AZE COL RUS SWE BDI TCD TGO TKM URY CIV MAR CPV ARG ALB CHL ETH COM HND DEU AUT BGD ECU EGY GTM IRN LTU SUR MYS MUS GBR ESPITA NERRWA MLTZA KHM I PAK TUN SAU MWINPL UGA HTI LSO PHL KAZ DZA BRA CRICZE EST KOR NOR MDGMBIND LKA FJI HUN GRC BFA IDN BOL JAMLVA MOZ MRT VNMPNG PAN SWZ PER SLV GIN YEM TUR ZAF KEN ZMBSEN ERI CHN NAM GAB BTNCOG JOR MEX THA POL TTO AGO BWA GNQ 4 6 8 10 12 LYPCKUS Log of GDP per capita

The miracle has had to do with investment 45 40 35 30 China Korea 25 20 15 10 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43

Excess savings, excess investment, excess savings over investment Gross capital formation (% of GDP)- WDI (2005) 10 20 30 40 50 60 AZE NIC Pop 8.3 million Foreign oil investment JAM HRV HTI LVAHND KOR MOZ CZE ECU GRC HUN ARM ALB PAN ESP KAZ NPL GEO MLI ROM TUN SVK THA BLR CHL AUT COG IND DOM JPN GHA MAR TURKHM BGD BGR LKA JOR HKG NAM LTU MKD BIH CRIUGA ETH MEX MDA ITA BENMDG BRA DEU DNK MYS SEN UKR RUS POL PER SAU RWA TJK FIN GTM ISR GBR EGY IDN NOR SLV KGZ ZAFYEM PAK PHL COL BDI OMN SWE ARG VEN URY KEN BOL SGP CHN 10 20 30 40 50 Gross national savings, including NCTR (% of GDP)- WDI (2005)

The miracle has been in exports.145647 Growth in exports of good and services per worker (current US$) vs. growth in GDP per worker (constant LCU prices) 1977-2002 CHN Growth in exports of G&S current dollars ZAR NIC VEN KWT SAU SLE IRL TUR THA MEX PRT HKG LSO KOR ESP HUN LUX MYS AUT IND DEU BGD MLT DNK ITA FIN BW A PHLMLI GBR DOM CHE CANUSA FRA BEL CHL ARG GHA GRC JPN NOR BRB SW E MARNLD NPL PAK CRI NZLCOGAUS GNBBRA ISR ISL TUN LKAIDN URY OMN SYR SW Z ZWE JAMCOL EGY PER PRY SLV BFA BOL GUY HND TTO JOR HTI CMR ZAF ECU GMB SDN BEN GTM PNG GABDZA MRT NGA MW I CIV MDG KEN SEN TGO IRN NERCAF TCD RW A ZMB SUR BDI -.076888 LBR -.054968.076963 Growth in GDP per worker (constant prices)

China s export package is unusually sophisticated for its level of development 10.0514 LUX Sophistication of exports in 2003 MWI TZA MDG CHE IRL ISL DEU JPN FIN SWE AUT CZE GBRDNK HUN KOR SGPFRA USA SVN BEL CAN ISRESPHKG ITA NLD MEX CHN MYS ZAF NZL POL SVK KNA PRT BIH THA EST GRC AUS TUR LVA HRV NOR ARMPHL BLR BGR BRA CRI LTU BRB IND WSM ROMURY RUS IDNEGY ARG SLV LCA NAM MKD COL GRD CHL MUS NPL PAK BGD AZE LKA JORVEN OMN MAR GTM LBN DZA KAZ IRN TTO NGA MDA FJI CIV GEO BOL SYR ALB GAB CMR ECU VCT PAN SEN BHR TGO NIC PRY PER HND BLZ KGZ GUY DMA KEN MNG SDN PNG CAF UGA RWA 7.89512 NER ETH 6.348 10.9828 Log of GDP per capita in 2003

but this advantage is being eroded relexpy 7 6 5 4 3 2 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

However, there is ample room for China to upgrade its exports In a recent paper (Hausmann and Klinger, 2006) I looked at the nearest products to the current areas of comparative advantage I measure how close they are and how upscale they are China has tremendous potential for upgrading its exports

lnprody-lnexpy -3-2.5-2-1.5-1-.5 0.5 1 1.52 2.5 CHN 1 1.5 2 2.5 3 3.5 4 Density (inverse) Petroleum Forest Animal Prods L Intensive Machinery Raw Materials Tropical Ag Cereals K Intensive Chemicals

lnprody-lnexpy -3-2.5-2-1.5-1-.5 0.5 1 1.52 2.5 BRA 1 1.5 2 2.5 3 3.5 4 Density (inverse) Petroleum Forest Animal Prods L Intensive Machinery Raw Materials Tropical Ag Cereals K Intensive Chemicals

lnprody-lnexpy -3-2.5-2-1.5-1-.5 0.5 1 1.52 2.5 MEX 1 1.5 2 2.5 3 3.5 4 Density (inverse) Petroleum Forest Animal Prods L Intensive Machinery Raw Materials Tropical Ag Cereals K Intensive Chemicals

lnprody-lnexpy -3-2.5-2-1.5-1-.5 0.5 1 1.52 2.5 MYS 1 1.5 2 2.5 3 3.5 4 Density (inverse) Petroleum Forest Animal Prods L Intensive Machinery Raw Materials Tropical Ag Cereals K Intensive Chemicals

lnprody-lnexpy -3-2.5-2-1.5-1-.5 0.5 1 1.52 2.5 VEN 1 1.5 2 2.5 3 3.5 4 Density (inverse) Petroleum Forest Animal Prods L Intensive Machinery Raw Materials Tropical Ag Cereals K Intensive Chemicals

lnprody-lnexpy -3-2.5-2-1.5-1-.5 0.5 1 1.52 2.5 IND 1 1.5 2 2.5 3 3.5 4 Density (inverse) Petroleum Forest Animal Prods L Intensive Machinery Raw Materials Tropical Ag Cereals K Intensive Chemicals

Conclusions China s growth has still many potential additional sources that can sustain it Excess savings Excess investment Moderate urbanization Low integration of the domestic economy Low effort in education and health Low agricultural productivity Low dynamism in service sector productivity Potential to upgrade its exports And hence face real appreciation successfully

Excess of savings and investment Opportunity: Allows for domestic lead growth Allows for a rapid improvement in current living standards without compromising future growth Policies: Special fiscal spending program Improved social protection Distribution of dividends by SOEs Corporate governance changes in SOEs and social security reform

An accelerated pace of urbanization Will increase land/labor ratios for those left in rural areas Can harness the productivity differentials between agriculture and the rest of the economy Will reduce regional inequalities because urban wages are much more equal across provinces than GDP per capita

Inequality in urban wages is much smaller than inequality in GDPpc 50000 45000 40000 35000 GDPpc 30000 25000 20000 15000 10000 Wages 5000 0 Shanghai Beijing Tianjin Zhejiang Guangdong Jiangsu GDPpc Fujian Liaoning Shandong Heilongjiang Hebei Xinjiang Jilin Hubei InnerMongolia Hainan Henan Hunan Shanxi Qinghai Chongqing Tibet Ningxia Jiangxi Shaanxi Anhui Sichuan Guangxi Yunnan Gansu Guizhou

Policies to achieve a more rapid urbanization Relaxation of the Hukou Additional central government resources for urban development Integration of the domestic economy Reform of the service sector Improved CIT (communications and information technology) to promote domestic business process outsourcing

Excessive investment in physical capital, inadequate investment in human capital Permits to accelerate growth by exploiting a more efficient reallocation of resources Permits faster technological improvements and upgrading of exports Important in a context of real appreciation Permits improvements in social goals

Reform the service sector China s miracle in industry was due to competition + FDI The same formula can be applied to the service sector, which has lagged in productivity growth Liberalize private investment (domestic and foreign) in services to promote competition