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China’s Rise in the Medium and Long Term Perspective: An Interpretation of Differences in Economic Performance of China and Russia since 1949 (História e Economia Revista Interdisciplinar, Vol. 3 n. 1 - 2º semestre 2007) Vladimir Popov New Economic School, Moscow, [email protected] PAPERS EXPLAINING DIFFEREING PERFORMANCE OF TRANSITION ECONOMIES • Shock Therapy versus Gradualism Reconsidered: Lessons from Transition Economies after 15 Years of Reforms. Comparative Economic Studies, 2007,. Vol. 49, Issue 1, March 2007, pp. 1-31. • Reform Strategies and Economic Performance of Russia’s Regions. – World Development, Vol. 29, No 5, 2001, pp. 865-86. • Shock Therapy versus Gradualism: The End of the Debate (Explaining the Magnitude of the Transformational Recession). – Comparative Economic Studies, Vol. 42, Spring, 2000, No. 1, pp. 1-57. Fig. 2. GDP change in FSU econom ies, 1989 = 100% Central Europe Uzbekistan Belarus 115 Kazakhstan 105 Estonia 95 Turkm enistan Azerbaijan 85 Latvia 75 Lithuania Tajikistan 65 Russia 55 Kyrgyzstan Arm enia 45 Ukraine 35 Georgia 25 Moldova 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Russian growth is lagging behind that of oil exporters and some oil importers Average annual GDP grow th rates in CIS countries in 2000-07, EBRD estimates Azerbaijan Turkmenistan Armenia Kazakhstan Tajikistan Belarus Ukraine Georgia Russia Moldova Uzbekistan Kyrgyzstan 16 14 12 10 8 6 4 2 0 In 1950-1991 mortality rate in Russia was never as high as it is today (1992-2007) Fig. 2 Mortality rate (per 1000) and average life expectancy, years 70 69 14 68 Life expectancy (right scale) 12 67 66 10 Mortality (left scale) 65 8 64 6 63 Average life expectancy, years Moratlity rate, per 1000 inhabitants 16 2007 2004 2001 1998 1995 1992 1989 1986 1983 1980 1977 1974 1971 1968 1965 1962 1959 1956 1953 1950 Table. Number of deaths from external causes per 100,000 inhabitants in 2002 – countries with highest rates Country/Indicator Russia Sierra-Leone Burundi Angola Belarus Estonia Kazakhstan Ukraine Cote D’Ivoire Colombia Niger Deaths from external causes, total 245 215 213 191 172 168 157 151 148 134 133 Including deaths from Accidents Suicides Murders Other* 158 148 64 131 120 124 100 100 86 36 113 41 10 7 8 38 29 37 36 11 6 6 33 50 18 40 13 15 20 15 27 72 14 11 7 124 13 0 0 0 0 24 19 0 *Deaths due to unidentified external causes, wars, police operations, executions. Totals may differ slightly from the sum of components due to rounding. Source: WHO (http://www.who.int/entity/healthinfo/statistics/bodgbddeathdalyestimates.xls) Crime rate (left scale), mortality rate (per 1000), murder rates and suicide rate (right scale) per 100,000 inhabitants 2900 45 Crime rate 2700 40 Mortality rate (per 1000) 2500 2300 35 30 Murder rate (death statistics) 2100 25 Murder rate (crime statistics) 1900 1700 20 Suicide rate 15 1500 2006 2004 2002 2000 1998 1996 1994 1992 0 1990 900 1988 5 1986 1100 1980 10 1970 1300 Human Development Index for China, Belarus, Russia and Ukraine Cuba 0,81 Russia 0,79 Belarus 0,77 Ukraine China 0,75 0,73 0,71 0,69 0,67 0,65 1990 1992 1994 1996 1998 2000 2002 Num ber of billionaires in 2007 and PPP GDP in 2005 (billion $) by country 450 US 400 350 300 R2 = 0,6811 250 200 150 100 Russia 50 Germ any India UK 0 0 -50 2 000 China Japan 4 000 6 000 8 000 10 000 12 000 INITIAL LIBERALIZATION AND OUTPUT CHANGE DURING RECESSION Fig. 1b. GDP change in Asian transition economies, 1989 = 100% 200 China 180 Vietnam 160 Central Europe 140 Uzbekistan Mongolia 120 Turkmenistan 100 Kazakhstan 80 Russia 60 Kyrgyzstan 40 1989 1991 1993 1995 1997 1999 2001 2003 Tajikistan Source: EBRD, World Bank. Fig. 3. Indices of economic freedom and GDP growth in Russia and China 250 4 GDP as a % of 1994 Index of economic freedom , right scale 220 3,5 190 3 160 2,5 CHINA 130 2 GDP, 1993=100%, left scale 100 1,5 RUSSIA 70 1 1993 1994 1995 1996 1997 1998 1999 2000 2001 Russia was leading in economic liberalization, while Belarus was lagging Private sector share in GDP, % 80 Russian Federation 70 Ukraine 60 Belarus 50 40 30 20 10 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 0 But Belarus and Uzbekistan are doing better (even though they are net importers of fuel), not to mention net exporters like Azerbaijan, Kazakhstan, Turkmenistan GDP in 2006 as a % of 1989 Moldova Georgia Ukraine Tajikistan Kyrgyzstan Russia Bulgaria Croatia Lithuania Latvia Rom ania Azerbaijan Kazakhstan Arm enia Czech Republic Hungary Belarus Uzbekistan Slovakia Slovenia Albania Estonia Poland Turkm enistan 40 60 80 100 120 140 160 180 Does liberalization matter? • Vietnam and China are similar in initial conditions and in transition results (immediate growth of output without transformational recession) despite different reform strategies: • Chinese reforms are the classical example of gradualism • Vietnamese reformers introduced shock therapy treatment (instant deregulation of most prices and introduction of convertibility of dong) in 1989 • Differing performance of the former Soviet Union (FSU) states: • Baltic states are the champions of liberalization and stabilization in the region. In the Baltics, however, output fell in the early 1990s by 36-60% and even in 2005, 10 years after the bottom of the recession was reached, was still below the pre-recession maximum. • Uzbekistan is commonly perceived to be one of the worst procrastinators. However in Uzbekistan the reduction of output in 1990-95 totaled only 18% and the economy started to grow again in 1996 • By 2005 only two former Soviet republics Uzbekistan and Turkmenistan - surpassed the prerecession level of 1989 Best performance: low distortions, strong institutions Worst performance: high distortions, weak institutions INITIAL CONDITIONS (DISTORTIONS) AND INSTITUTIONS – CLASSIFICATION OF COUNTRIES DISTORTIONS INSTITUTIONAL CAPACITY HIGH LOW LOW HIGH CHINA, EASTERN VIETNAM EUROPE ALBANIA, FSU MONGOLIA Conclusions Fig. 5. Hypothetical trajectories of output (Year "0" = 100%) assum ing gradual and instant liberalization Reduction of output in a NC sector at 10% annually Output, Year "0" = 100% 125% 120% 115% 110% Reduction of output in a NC sector at 30% annually 105% 100% 95% 90% 85% 80% 0 1 2 3 4 5 6 7 8 9 10 Years Assum ptions: size of non-com petitive sector (NC) in the initial year = 20% of total output; net investm ent (s) = 10% of total output; m arginal capital productivity, output increase per unit of net investm ent (a) = 1/3. Reduction of output in a NC sector at 100% annually Fig. 4. Change in relative prices and output in 1990-98 in Russian industry January 1998 output as a % of January 1990 output 90 Electric energy Non-ferrous metals R2 = 0,4062 60 Steel Fuel Chemicals Wood 30 Petrochemicals Machinery Food Constr. materials Light 0 40% 60% 80% 100% 120% 140% Ratio of 1998 proices to 1990 prices as a % of industrial average 160% Distortions in industrial structure and external trade and GDP change in 1989-96 Fig. 4. Aggregate distortions in industrial structure and external trade before transition and GDP change during transition 200 1996 GDP as a % of 1989 GDP CHINA 170 VIETN 140 110 SLOVEN CZECH HUNG 80 EST CROAT MACED ARM 50 20 0 10 20 30 40 50 60 70 Distortions in industrial structure and external trade, % of GDP 80 90 Size of government: post-communist economies Fig. 8. Consolidated government revenues as a % of GDP 55 50 45 % 40 Central European countries South East Europe countries Baltic states RUSSIA 35 30 Central Asian countries 25 Caucasian states 20 15 -China 10 1989 1990 1991 1992 1993 1994 1995 1996 Source: (Popov, 2000). Government spending collapsed in Russia in 1992-99 and did not recover even when economic growth started Figure 2. Consolidated government revenues and expenditure, % of GDP 70 60 50 Expenditure 40 30 20 1992 Deficit Revenues 1993 1994 1995 1996 1997 Surplus 1998 1999 2000 2001 2002 2003 Size of government: post-communist economies: the expenditure for the “ordinary government” did not fall in China and in Poland Fig. 9. Government expenditure, % of GDP 60 USSR/ RUSSIA CHINA 50 Debt service Defence Subsidies Investment "Ordinary government" 40 30 20 10 0 1985 1989 1995 1978 1985 1994 1989 1996 Source: (Popov, 2000). Size of government: post-communist economies 1996 GDP as a % of 1989 GDP Fig. 11. Change in government revenues and GDP China (1979-86) 200 170 Vietnam 140 110 80 Armenia 50 20 -10 -5 0 5 10 15 20 25 30 35 Decrease in the share of government revenues in GDP from 1989-91 to 1993-96, p.p. Source: (Popov, 2000). Size of government: post-communist economies Share of government expenditure on goods and services in GDP in Russia and China, % 23 Russia 21 19 China 17 15 13 11 9 7 5 2002 1999 1996 1993 1990 1987 1984 1981 1978 1975 1972 1969 1966 1963 1960 Corruption today is much higher in China, but especially in Russia than on the eve of/before transition Corruption Perception Indices 5,5 China 5 Russia 4,5 4 3,5 3 2,5 2 1980-85 1995 2002 2003 2004 2005 Investment climate indices (International country risk guide), % 80 75 70 65 60 55 China 50 Russian Federation 45 19 80 19 81 19 82 19 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 40 World Bank control ove r corruption indice s in Russ ia and China (points , ranges from 2.5 to +2.5) 1996 1998 2000 2002 2003 2004 2005 -0,10 -0,30 China -0,50 Russ ia -0,70 -0,90 -1,10 W o r ld Ban k g o ve r n m e n t e ffe ctive n e s s in d ice s in Ru s s ia an d C h in a (p o in ts , r an g e s fr o m -2.5 to +2.5) 0 ,20 0 ,00 1996 19 98 2000 2002 2003 2 004 2005 - 0,20 C h in a Ru s s ia - 0,40 - 0,60 - 0,80 W o r ld Ba n k r u le o f la w in d ic e s in Ru s s ia a n d C h in a ( p o in t s , r a n g e s f r o m 2 .5 t o +2 .5 ) - 0 ,2 0 19 96 1 99 8 20 0 0 2 0 02 2 00 3 20 0 4 2 00 5 - 0 ,3 0 - 0 ,4 0 - 0 ,5 0 - 0 ,6 0 C h in a Ru s s ia - 0 ,7 0 - 0 ,8 0 - 0 ,9 0 - 1 ,0 0 Democratization in countries with poor rule of law produces poor results Political rights (democracy) index Fig. 5. Indices of the rule of law and political rights (democracy), 0-10 scale, higher value represent stronger rule of law and democracy Non-CIS 10 CIS BULG Asian non-CIS MONG CIS, MONG, BALKANS 5 RUS ALB, ROM MACED, CROAT CENTRAL EUROPE & BALTICS KYRG BEL CENTRAL ASIA, AZERB 0 0 1 2 3 4 CHINA (1980--89) 5 6 Rule of law index VIETN 7 8 (1990--98) 9 CHINA 10 Rule of law is crucial for growth, democracy is not and can have even a negative impact 1998(1996) GDP as a % of 1989 GDP Fig. 6. Ratio of the rule of law to democracy index and output change 225 205 185 165 145 125 105 85 65 45 25 1996 CHINA (1986/88) 1998 VIETN UZB KAZ 50 AZERB 150 TURKM TADJ 250 350 450 550 Ratio of the rule of law to democracy index 650 Victor Polterovich, Vladimir Popov (2005), DEMOCRATIZATION, QUALITY OF INSTITUTIONS AND ECONOMIC GROWTH (1) in countries where law and order is strong enough, democratization stimulates economic growth, whereas in countries with poor law and order democratization undermines growth; (2) if democratization occurs under the conditions of poor law and order (so that illiberal democracy emerges), then shadow economy expands, quality of governance worsens, and macroeconomic policy becomes less prudent. y = 5.03 – 0.001Y+ 0.160I – 1.55n – 0.859∆ + 0.156∆CPI = y = 5.03 – 0.001Y + 0.160I – 1.55n + 0.156∆ (CPI –5.51). Empirical evidence: Table 1. Typology of democracies and autocracies countries) LAW AND ORDER // WEAK LAW AND ORDER DEMOCRACY MORE DEMOCRATIC WEAK (ILLIBERAL) DEMOCRACIES: Sub-Sahara Africa, South Asia, Latin America (most CIS, Mongolia, Balkans) LESS DEMOCRATIC WEAK (ILLIBERAL) AUTOCRACIES: MENA (Central Asia, Azerbaijan, Belarus) (in brackets – former communist STRONG LAW AND ORDER STRONG (LIBERAL) DEMOCRACIES: OECD countries, S. Korea, Taiwan, Philippines, Argentina, Brazil, Mexico, Uruguay (Central Europe, Baltics) STRONG (LIBERAL) AUTOCRACIES: XIX century Europe, East Asia before the 1990s (China, Vietnam) The growth rates of GDP per capita in 1960-2000: •2.5% in industrialized countries, •4.5% in East Asia, •1.7% in MENA, •1.6% in LA, •1.8% in South Asia, •0.3% in SSA. Log(Y98/89)=5.8-.006DIST-0.005Ycap87-0.39WAR-0.01GOVREVdecline -0.17logINFL-.003DEM (-2.48) (-0.09) (-3.22) (-2.94) (-4.60) (-1.74) (N= 28, Adjusted R2 = 82%, T-statistics in brackets, all variables are shown in the same order as in equation 7 from table 1, liberalization variable is omitted). Table 1. Regression of change in GDP in 1989-96 on initial conditions, policy rule of law and democracy indices, robust estimates Dependent variable = log (1996 GDP as a % of 1989 GDP) For China - all indicators are for the period of 1979-86 or similar Equations, Number of 1, 2, 3, 4, 5, Observations / Variables N=28 N=28 N=28 N=28 N=28 Constant 5.3*** 5.4*** 5.2*** 5.4*** 5.4*** -.005** -.005** -.003 -.006** -.007*** Distortions, % of GDPa 1987 PPP GDP per capita, % -.009** -.006* -.007** -.007** -.009*** of the US level -.19c -.36*** War dummyb Decline in government -.011*** revenues as a % of GDP from 1989-91 to 1993-96 Liberalization index .05 Log (Inflation, % a year, -.16*** -.20*** -.18*** -.17*** -.13*** 1990-95, geometric average) Rule of law index, average .008 for 1989-97, % *** Democracy index, average -.005 for 1990-98, % *** Ratio of the rule of law to .07*** .07*** .06*** .05*** democracy index 82 83 83 85 91 Adjusted R2, % factors, and 6, N=28 5.5*** -.007*** -.008 *** -.37*** -.011 *** 7, N=28 5.7*** -.007*** -.008*** -.02 -.13*** .03 -.14*** -.45*** -.011 *** -.003** .05*** 91 90 Impact of initial conditions, institutions, liberalization Table 2. Regression of change in GDP in 1995-2003 on initial conditions, institutional capacity, liberalization and rule of law and democracy indices, robust estimates Dependent variable = 2003 GDP as a % of 1995 GDP For China - all indicators are for the period of 1979-86 or similar Equations, Number of 1, 2, 3, 4, 5, Observations / Variables N=28 N=28 N=28 N=28 N=28 Constant 105*** 91*** 99*** 78*** 99*** 1996 GDP as a % of 1989 GDP .33*** .45*** .46*** .24** 1987 PPP GDP per capita, % of the US level 22.9** 42.3*** 32.0*** 19.4* War dummya Liberalization index in 1995 Increase in the liberalization index in 1995-2003 Decline in government revenues as a % of GDP from 1989-91 to 1993-96a Rule of law index, average for 1989-97, % Democracy index, average for 1990-98, % Adjusted R2, % -19.9*** 15.3 *** 16.7 *** 17.6*** 17.6*** -.8*** .8** 25 38 45 1.0*** -.6*** 52 *, **, *** - Significant at 1, 5 and 10% level respectively. aEquals 1 for Armenia, Azerbaijan, Croatia, Georgia, Macedonia, and Tajikistan and 0 for all other countries. 1.2*** -.8*** 55 OBJECTION: Speed and extent of liberalization may be endogenous Cumulative iberalization indices by 1995 Fig. 3. Liberalization indices and distortions in industrial structure and trade patterns 5 4 3 2 1 0 CIS 0 20 40 60 Distortions in the industrial structure and trade patterns (% of GDP) 80 Economic liberalization and democratization go hand in hand Cumulative iberalization index by 1995 Fig. 4. Democracy index (1990-98, average) and economic liberalization index by 1995 5 4 CIS and BALKANS VIETN CROAT, MACED 3 CHINA 2 1 0 0 20 40 60 Democracy index (Freedom House) 80 100 Instrumenting liberalization stock with democracy level variable: 1989-96 Table 3. 2SLS robust estimates – regression of change in GDP in 1989-96 on initial conditions, institutional capacity, liberalization and rule of law and democracy indices (Liberalization index instrumented with the democracy level variable) Dependent variable = Log (1996 GDP as a % of 1989 GDP) For China - all indicators are for the period of 1979-86 or similar Equations, Number of 1, 2, 3, 4, Observations / Variables N=28 N=28 N=17 N=17 Constant 6.4*** 6.3*** 6.0*** 6.0*** Pre-transition distortions, % of GDP -.01*** -.02*** -.004 1987 PPP GDP per capita, % of the US level -.007** -.01*** -.45*** -.29b War dummya Liberalization index in 1995 Decline in government revenues as a % of GDP from 1989-91 to 1993-96 Log (Inflation, % a year, 1990-95, geometric average) Rule of law index, average for 1989-97, % Increase in the share of shadow economy in GDP in 1989-94, p.p. R2, % -.18** -.02*** -.39* -.02*** -.19*** -.19*** -1.7*** -.22*** -.01c -.22*** -.19*** -.02*** 88 -.015*** 90 86 77 *, **, *** - significant at 1, 5 and 10% level respectively. aEquals 1 for Armenia, Azerbaijan, Croatia, Georgia, Macedonia, and Tajikistan and 0 for all other countries. b Significant at 12% level. c Significant at 16% level. Instrumenting liberalization change with liberalization stock and FSU dummy variables:1995-2003 Table 4. 2SLS robust estimates – regression of change in GDP in 1995-2003 on initial conditions, institutional capacity, liberalization and rule of law and democracy indices Dependent variable = 2003 GDP as a % of 1995 GDP For China the indicator is for the period 10 years earlier. Equations, Number of Observations / Variables Instruments for liberalization change in 1995-03 variable 1, N=28 LIBER95 2, N=28 FSU Constant 1996 GDP as a % of 1989 GDP War dummya 97.8*** 95.8*** 3, N=28 LIBER95 and FSU 97.7*** 19.5* 19.8** 19.5* 4, N = 28 LIBER95 and FSU 79.5*** .18* 25.0** Increase in liberalization index in 1995-2003 Decline in government revenues as a % of GDP from 198991 to 1993-96 Rule of law index, average for 1989-97, % Democracy index, average for 1990-98, % R2, % 18.2*** -.76*** 19.2** -.78** 18.3*** -.76*** 22.9*** -.65*** 1.24*** -.76*** 55 1.28*** -.76*** 54 1.25*** -.76*** 55 1.13*** -.62*** 56 *, **, *** - significant at 1, 5 and 10% level respectively. aEquals 1 for Armenia, Azerbaijan, Croatia, Georgia, Macedonia, and Tajikistan and 0 for all other countries. Conclusions • The impact of the speed of liberalization at the initial stage of transition, i.e. during the transformational recession, appears to be negative, if any. • The reason for the negative impact is most probably associated with limited ability of the economy to adjust to new price ratios Conclusions • At the recovery stage liberalization starts to affect growth positively, whereas the impact of pre-transition distortions disappears. Institutional capacity and macroeconomic policy continue to be important prerequisites for successful performance. • Liberalization at the recovery stage influences performance positively because it creates market stimuli without causing rapid collapse of output of inefficient industries, which cannot be compensated fully by the rise of efficient industries due to investment constraints. Medium term perspective – since 1949: Beijing consensus versus Washington consensus The catch-up development of China since 1949 looks extremely impressive: • not only the growth rates in China were higher than elsewhere after the reforms (1979-onward), • even before the reforms (1949-79), despite temporary declines during the Great Leap Forward and the Cultural Revolution, the Chinese development was quite successful. China was growing rapidly even before the reforms Average annual GDP grow th rates (5-year m oving averages), 1960-2002гг., % Japan 10 China India 5 US Eurozone 0 -10 Russia 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 1982 1980 1978 1976 1974 1972 1970 1968 1966 1964 1962 1960 -5 PPP GDP pe r c apita, $ c omparis o n fo r 1996 (WDI, 199 8) 3000 0 PPP GDP p e r c apita, $ - c o mparis on fo r 2002 (WDI, 2004) 400 00 350 00 300 00 250 00 200 00 150 00 100 00 50 00 0 2500 0 2000 0 1500 0 1000 0 500 0 0 Rus sia Ch in a US P P P G DP , b illio n $ - c o m pa ri son fo r 1996 (WDI, 1998 ) R us s ia China US P P P GD P , b illio n $ - c o m pa ris o n fo r 200 2 (W D I, 200 4) 12000 8 000 7 000 10000 6 000 5 000 8000 4 000 6000 3 000 4000 2 000 1 000 2000 0 0 R us s ia Ch ina US Rus s ia China US PPP GDP per capita in current int'l dollars, China and India, 1975-2002 (WDI) 5000 4500 4000 China 3500 India 3000 2500 2000 1500 1000 500 2001 1999 1997 1995 1993 1991 1989 1987 1985 1983 1981 1979 1977 1975 0 Life expectancy at birth, years, China and India, 1960-2002 (WDI) 75 70 China 65 India 60 55 50 45 40 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 1982 1980 1978 1976 1974 1972 1970 1968 1966 1964 1962 1960 35 Since 1979 Chinese economic model is based on: • Gradual democratization and the preservation of the one party rule in China allowed to avoid institutional collapse, whereas in Russia institutional capacity was adversely affected by the shock-type transition to democracy (Polterovich, Popov, 2006); • Gradual market reforms – “dual track price system” (co-existence of the market economy and centrally planned economy for over a decade), “growing out of socialism” (no privatization until 1996, but creation of the private sector from scratch), non-conventional forms of ownership and control (TVEs); • Industrial policy – strong import substitution policy in 1949-78 and strong export-oriented industrial policy afterwards with such tools as tariff protectionism (in the 1980s import tariffs were as high as up to 40% of the value of import) and export subsidies (Polterovich, Popov, 2005); • Macroeconomic policy – not only in traditional sense (fiscal and monetary policy), but also exchange rate policy: rapid accumulation of foreign exchange reserves in China (despite positive current and capital account) led to the undervaluation of yuan, whereas Russian ruble became overvalued in 1996-98 and more recently – in 2000-07. Undervaluation of the exchange rate via accumulation of reserves became in fact the major tool of export-oriented industrial policy (Polterovich, Popov, 2004). TARIFFS Fig. 1. Increase in the ratio of exports to GDP and average annual grow th rates of GDP per capita in 1960-99, % 7 Average annual grow th rates of GDP per capita in 1960-99, % Botsw ana 6 S. Korea Hong Kong 5 Japan Thailand Portugal 4 Ireland Iceland 3 Trinidad and Tobago 2 1 Malaysia Sri Lanka R2 = 0,1883 Guyana 0 -1 Zam bia -2 -30 -20 Niger -10 0 10 20 30 40 50 Increase in the ratio of exports to GDP in 1960-99, p.p. 60 70 TARIFFS Fig. 2. Average share of exports and investm ent in GDP in 1960-99, % Average share of investm ent in GDP in 1960-99, % 45 Bhutan 40 Micronesia West Bank and Gaza 35 St. Kitts and Nevis Singapore 30 R2 = 0,1359 25 20 Luxem bourg 15 10 Sierra Leone 5 0 20 40 60 80 100 120 140 Average share of exports in GDP in 1960-99, % 160 180 TARIFFS Im port duties as a % of im port, average for 1975-99, and PPP GDP per capita as a % of the US in 1985 Im port duties as a % of im port, average for 1975-99 35 30 25 20 15 10 R2 = 0,3151 5 0 0 20 40 60 80 PPP GDP per capita as a % of the US in 1985 100 120 TARIFFS Grow th rate of per capita GDP in 18701890 and in 1890-1913, % Average tariff rate (% of im port) and grow th rate of per capita GDP (%) in 1870-90 and 1890-1913 3,0 CAN, 1890-1913 2,5 ARG, 1870-90 RUS, 1890-1913 2,0 ARG, 1890-1913 USA, 1870-1890 AUS, 1890-1913 1,5 MEX, 1870-90 MEX, 1890-1913 R2 = 0,0721 1,0 0,5 India, 1870-90 0,0 India, 1890-1913 RUS, 1870-90 -0,5 0 10 20 30 40 Average tariff rate in 1870-90 and 1890-1913 50 60 TARIFFS Increase in the ratio of export to GDP in 1980-99, p.p. Fig. 3. Im port duties as a % of im port in 1975-99 and the increase in export as a % of GDP in 1980-99, p.p. 70 50 30 R2 = 0,0001 10 -10 -30 -50 0 5 10 15 20 25 30 35 Im port duties as a % of im port, average 1975-99 40 45 50 TARIFFS • GROWTH=CONST.+CONTR.VAR.+Tincr.(0.06– 0.004Ycap75us–0.004CORRpos–0.005T) • GROWTH, is the annual average growth rate of GDP per capita in 1975-99, • the control variables are population growth rates during the period and net fuel imports (to control for “resource curse”), • T – average import tariff as a % of import in 1975-99, • Tincr. – increase in the level of this tariff (average tariff in 198099 as a % of average tariff in 1971-80), • Ycap75us – PPP GDP per capita in 1975 as a % of the US level, • CORR pos – positive residual corruption in 1975, calculated as explained earlier. • R2=40%, N=39, all coefficients are significant at 5% level, except the last one (33%), but exclusion of the last variable (a multiple of T by Tincr.) does not ruin the regression and the coefficients do not change much. TARIFFS GROWTH=CONST+CONTR.VAR.+T(0.005RISK–0.002Ycap75us–0.3) • (N= 87, R2 =42, all coefficients significant at 10% level or less, control variables are population growth rates, population density and total population). • The equation implies that for a poor country (say, with the PPP GDP per capita of 20% of the US level or less) import duties stimulate growth only when investment climate is not very bad (RISK > 50%) – the expression in brackets in this case becomes positive. Vietnam – export oriented development Dani Rodrik. WHAT’S SO SPECIAL ABOUT CHINA’S EXPORTS? Harvard University, January 2006 Actual sophistication of exports as compared to predicted one (based on GDP per capita) is very informative for explaining variations in growth rates among countries Until recently Chinese import tariffs were extremely high Share of high-tech goods in industrial exports, % 35 Korea Japan 30 China 25 20 15 10 5 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Number of R&D personel per 100,000 of inhabitants in China, Japan, Korea 6000 5000 Japan Korea 4000 China 3000 2000 1000 0 1996 1997 1998 1999 2000 2001 2002 R&D expenditure in selected countries as a % of GDP Israel 5,5 Finland 5 Japan 4,5 4 Korea, Rep. 3,5 Germany 3 United Kingdom 2,5 United States 2 Russian Federation China 1,5 1 India 0,5 1996 1997 1998 1999 2000 2001 2002 China- success since 1949 • Rapid growth is a complicated process that requires a number of crucial inputs – infrastructure, human capital, even land distribution in agrarian countries, strong state institutions, economic stimuli among other things. • In this sense, economic liberalization in 1979 and beyond was only the last straw that broke the camel’s back. The other ingredients, most important – strong institutions and human capital, have already been provided by the previous regime. • Without these other ingredients liberalization alone in different periods and different countries was never successful and sometimes counterproductive, like in Sub-Sahara Africa in the 1980s and former Soviet republics in the 1990s. China- success since 1949 • Market-type reforms in China in 1979 and beyond brought about the acceleration of economic growth because China already had an efficient government that was created by CPC after Liberation and that the country did not have in centuries (Lu, 1999). • Through the party cells in every village the communist government in Beijing was able to enforce its rules and regulations all over the country more efficiently then any emperor, not to speak about Guomindang regime (1912-49). Chinese growth model - a hit in developing world • Because Chinese growth model became so successful in ensuring catch-up development, no surprise it is extremely appealing in developing world. • “Beijing consensus” may not yet be a rigorous term (Ramo, 2004), but it is clear that the Chinese growth model provides the developing world with the real alternative. • Chinese model became the logical and natural heir of the Soviet model – it is no longer a centrally planned economy, but it is by no means a model of a liberalized market economy that is recommended by the advocates of Washington and even postWashington consensus. Before 1820 China and India accounted for about half of the world GDP Share of m ajor countries in w orld's PPP GDP, 1500-2001 (Source: A. Maddison) 100% Other 80% Japan Other WE 60% UK 40% US 20% India China 0% 1500 1600 1700 1820 1870 1913 1950 2001 Millennium perspective: How the West got rich? PPP GDP per capita in major countries and regions since 1500, 1990 international Geary-Khamis dollars; source: A. Maddison; log scale) 100 000 United States Japan Total 29 Western Europe Total Former USSR Total Latin America China India Total Africa 10 000 1 000 100 1500 1550 1600 1650 1700 1750 1820 1860 1900 1950 2006 Millenium perspective: How the West got rich? • Evolutionary school (Landes, 1998; Mokyr, 2002) - growth of Western countries in 1500-1900 that allowed them to become the wealthiest in the world was the inevitable result of social changes: – abolition of serfdom and guarantees of human rights, – Reformation and Protestant ethic, – Magna Carta and European enlightenment are said to cause openness and the – flow of ideas and technological innovations How the West got rich? • Another school (Dimond, 1997; Pomerantz, 2000) pays special attention to seemingly minor historical events – fortunate and misfortunate, but mostly accidental – that pre-determined the development of countries and continents for centuries to come. – Pomerantz (2000) argues that even in the 18th century China was not inferior to Europe in terms of technology, social structures that could support technological innovation, large pools of accumulated capital, etc. – The reason that Europe “succeeded” and China did not was largely determined by a pure chances – the lack of large deposits of coal and iron ore close to each other and the absence of large outward migration (after Zheng He, the greatest world traveler before Columbus, discovered Madagascar, African Horn and Saudi Arabia in early 15th century, the emperors of the Ming dynasty prohibited the construction of big ships and the Middle Kingdom experienced self-imposed isolation for more than three centuries). – Pomeranz’s argument is that mass emigration from Europe played a crucial role in the transition to the modern growth regime from a Malthusian regime by raising the price of labor Another view (Guandong James Wen, 2008): Land scarcity stimulates urbanization and industrialization Per capita cultivated land (m u, left scale) and the level of urbanization (%, right scale) in China 40 50 China, per capita cultivated land, m u 35 45 China, URBANIZ 40 30 35 25 30 20 25 15 20 10 15 1949 1800 1655 1502 1381 1250 1083 950 800 650 500 350 200 5 50 0 -150 10 -300 5 But the example of other countries does not support the conclusion Per capita cultivated land, mu (=1/15 of a hectare), in 1993 Australia Canada US FSU Brazil Europe (without FSU) India China Japan 45 40 35 30 25 20 15 10 5 0 How the West got rich? • (Acemoglu, Johnson and Robinson, 2001) -“Colonial Origins of Comparative Development” • Instrumentation the institutions variable – mortality rate among settlers in the colonies of major European states in the 19th century. • The argument was that, if these mortality rates were very high (Gambia, Mali, Nigeria had mortality rates hundreds times higher than Australia, Bahamas, Canada, Hong Kong, New Zealand, US), the settlers did not bother to set good institutions in those countries. • The authors concluded that, after controlling for the impact of institutions, the geographical location does not really have an impact on growth. How the West got rich? • Sachs (2003) and Faye, McArthur, Sachs, and Snow (2004) attribute a lot of variations in performance to the direct impact of geographical location – through the access to the sea (land-locked countries), transportation costs, climate and diseases. • Arguing with Acemoglu, Johnson, and Robinson (2001), Sachs (2003) writes: – “Acemoglu, Johnson, and Robinson completely neglect the fact that the disease dramatically lowers the returns on foreign investments and raises the transaction costs of international trade, migration, and tourism in malarial regions. This is like claiming that the effects of the recent SARS (Severe Acute Respiratory Syndrome) outbreak in Hong Kong SAR can be measured by the number of deaths so far attributable to the disease rather than by the severe disruption in travel to and from Asia.” (Sachs, 2003). How the West got rich? • Sachs (2003): impoverished regions with an unfavorable geography, such as most of subSaharan Africa, central Asia, large parts of the Andean region, and the highlands of Central America, that have experienced the severest economic failures in the recent past and that have all been characterized by initial low levels of income and small populations (and hence small internal markets) that live far from coasts and are burdened by disease, especially AIDS, tuberculosis, and malaria. • This latter group of countries, Sachs (2003) insists, has “essentially been trapped in poverty because of their inability to meet the market test for attracting private capital inflows”. How the West got rich? • Rodrik, Subramanian and Trebbi (2002) “Institutions Rule”: • They instrument institutions with the settlers mortality rate, like Acemoglu, Johnson and Robinson (2001), and instrument the share of trade in GDP with the predicted share of trade (from gravity models). • Institutions are largely, but not totally, determined by geography, and in turn they determine the trade openness and growth. The direct impact of geography on growth (apart from the impact through institutions) turns out to be insignificant. How the West got rich? • Rodrik, Subramanian and Trebbi (2002) believe that geography, in particular settlers’ mortality rates, is a good predictor of institutional quality, but not the major cause of it. • Rodrik (2004) explains the difference with the following example: – the variation in GDP per capita in countries that were never colonies is no less substantial than among colonized countries – here Ethiopia and Afghanistan are at the one end of the spectrum and Japan at the other end with Turkey and Thailand lying somewhere in between. What accounts for the different quality of the institutions in this non-colonized part of the world? How the West got rich?- Continuity and Asian values – A different interpretation of the genesis of the institutions in colonized and non-colonized countries is the continuity perspective. – All countries had traditional community structures in the past, everywhere before Reformation, under the Malthusian growth regime, the law of the land was what we now call “Asian values” – the superiority of the interests of the community over the interests of the individuals. – The West was the first to break away with this principle, making individual rights and freedoms sacred: this resulted in a rapid growth of productivity and allowed to overcome the limits of the two-dimensional Malthusian world (more population => more GDP). How the West got rich? -Continuity and Asian values – The other regions of the world, including the most advanced regions, like China, stayed on a different trajectory of development – preservation of “Asian values” and slow, going hand in hand growth of productivity and population. – The colonial expansion of the West interrupted the logical development along the second trajectory. – Colonization of Sub-Sahara Africa, North and South America, Australia and to a lesser extent – South Asia led to complete or near complete destruction of traditional (community) structures that were only partially replaced by the new Western-style institutions. How the West got rich? -Continuity and Asian values – Among large geographical regions, only East Asia, MENA and to an extent South Asia managed to retain traditional community institutions despite colonialism. – It could be hypothesized that those countries and regions that preserved traditional institutions in difficult times of colonialism and imposition of Western values have now a better chance for the catch up development than the less fortunate regions of the world periphery, where the continuity of the traditional structures was interrupted. China - preserved continuity (Asian values) more than any other region – Formally China was a non-colonized country, although after loosing the Opium wars in the middle of the XIX century it became a semi-colony of the West for nearly a century. – The fact is, however, that in the beginning of the XIX century China was definitely the most successful country in the framework of Malthusian growth regime – The share of China in total population of the world increased in the XVIII century from a long term average of 22-26% to 37% (fig. 16) – a truly remarkable achievement by the standards of the pre-industrial world. Chinese continuity – Sinologists agree that the continuity of the Chinese civilization makes it truly unique: • all nations started with pictograms (characters), but only larger China (Japan and Korea included) preserved characters throughout all history; • the amount of ancient manuscripts and of factual information about the ancient history is at least by the order of magnitude greater than in any other nation of the world; • the respect to the ancestors, Confucian values; etc. Long Term Development: China was successful in increasing its population in 16th -18th centuries Share of China in w orld population, % of total 40 38 36 34 32 30 28 26 24 22 2001 1950 1913 1820 1700 1600 1500 1400 1300 1200 1100 1000 900 800 700 600 500 400 300 200 100 1 20 Long Term Development Share of China in population and PPP GDP of China and Western Europe, % of total 80 Share of China in population 70 60 50 Share of China in PPP GDP 40 30 20 2001 1950 1913 1820 1700 1600 1500 1400 1300 1200 1100 1000 900 800 700 600 500 400 300 200 100 1 10 Long Term Development GDP per capita, % of the US level GDP per capita in 1990 international dollars as a % of the US level 100 Western Europe (average of 12 countries) Japan 80 60 40 20 0 USSR China India 1820 1830 1840 1850 1860 1870 1880 1890 1900 1913 1920 1929 1938 1950 1960 1973 1980 1992 Long Term Development Total PPP GDP of China and Western Europe in 1990 int'l dollars, % of total 100% 80% WE-share 60% China-share 40% 20% 2001 1950 1913 1820 1700 1600 1500 1400 1300 1200 1100 1000 900 800 700 600 500 400 300 200 100 1 0% Chinese continuity • The problem, however, was that the rules of the game in the world economy have changed: the productivity growth rates in the West increased and Malthusian growth regime came to an end. • China experienced a humiliating defeat in the Opium wars (1840-42 and 1856-60) and had to accept globalization on Western terms. Chinese GDP per capita fell from about half of the US level in early XIX century to a meager 5% in 1950 (fig. 18); the ratio of Chinese GDP to that of Western Europe fell from 2:1 to 1:5 in the same period (fig. 19). Chinese continuity – However the subsequent Chinese development differed from that of the other colonies and semicolonies. Being the largest and most powerful country of the pre-industrial age, China was better able to preserve the continuity of its traditional institutions. In a sense, Britain is called the country of traditions by mistake. It is China that managed to preserve the continuity of traditional values more than any other nation of the world. The Liberation of 1949 has thus lead to a breakthrough: the temporary protection from foreign influence imposed by the CPC (1949-79) allowed to strengthen the traditional institutions, and to continue the development along the lines of the millenium-old trajectory. Long term development: how the West got rich? Where institutions are good/bad? Institutional continuity vs. transplantation of foreign institutions • Developed countries (with the exception of the US) • East Asia (with the exception of Philippines) • MENA (Muslim) countries • ======================== • SSA • LA • FSU WB indices: GE2002 R_of _L Voice&Acc PolStab RegQ ual Cont rCorr Government effectiveness 2 Rule of law 1 Voice and accountability 0 Political stability -1 Regulation quality -2 Control over corruption -3 20 40 6080 Murders per 100 000 inhabit ant s (WHO) + murder rate Risk index (ICRG), Corruption perception index (ICRG) and murder rate (per 100,000 inhabitants), 2002 10 90 80 60 C PI a v0 2 -0 3 R I SK 70 8 6 4 50 2 40 20 40 6080 Murders per 100 000 inhabitant s (WHO) 20 40 6080 Murders per 100 000 inhabitant s (WHO) Murders per 100 000 inhabitants (WHO) Iraq China Saudi Arabia Azerbaijan Bulgaria Jordan 3 INSTITUSyrian Arab Republic TIONS: Lebanon Mauritius Libya Hungary Murders Slovak Republic Yemen, Rep. per 100, Oman Bosnia and Herzegovina 2 Croatia Tunisia Korea, Rep. 000 of Yugoslavia, FR (Serbia/Montenegro) Poland Lithuania Belgium inhabiMalta Australia Canada Brunei Portugal Kuwait Czech Republic tants and New Zealand Greece Egypt, Arab Rep. Netherlands MoroccoBahrain Italy Qatar NorwayUnited Kingdom governSweden Denmark Spain 1 United Arab Emirates Ireland Austria Switzerland Fiji Singapore ment Slovenia Germany Israel France Japan Iceland effectiveJamaica ness Cyprus index in 0 -1 0 1 2 2002 Government effectiveness index Murders per 100 000 inhabitants (WHO) Colombia 70 60 Sierra Leone 50 South Africa 40 El Salvador Guatemala Venezuela, RB Somalia Liberia Russian BrazilFederation Sudan 30 Cote d'Ivoire Namibia Tanzania Guinea Nigeria Ecuador Congo, Dem. Uganda Rep.Philippines Bahamas, The Ethiopia 20 Korea,Kazakhstan Dem. Rep. Burundi Cambodia Paraguay Myanmar Congo, Rep. Ukraine Papua New Guinea Estonia -2 -1 0 1 2 Government effectiveness index Angola INSTITUTIONS: Murders per 100, 000 of inhabitants and government effectiveness index in 2002 Conclusions • First, Chinese reforms were very different from the Washington consensus package (gradual rather than instant deregulation of prices, no mass privatization, strong industrial policy, undervaluation of the exchange rate via accumulation of reserves) – it is explained why these policies contributed to success. • Second, the recent Chinese success (1979-onwards) is based on the achievements of the Mao period (1949-76) – strong state institutions, efficient government and increased pool of human capital. Unlike in the former Soviet Union, these achievements were not squandered in China due to gradual rather than shock-therapy type democratization. • In a longer term, millennium perspective, the extraordinary success of China before the Opium wars (mid XIX century) and after the Liberation (after 1949) is due to the institutional continuity – the ability to proceed along the evolutionary path without the break up with traditional structures (Asian values). • It follows that the successful catch up development of China, if continues, would become the turning point for the world economy not only due to the size of the country, but also because for the first time in history the successful economic development on a major scale is based on indigenous, not Western-type economic model.