Download How the West got rich?

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.