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The Ingredients and Challenges of
Sustained Growth
Michael Spence
Cape Town
June 2007
Outline
• Sustained High Growth
– Ingredients
– China and India
• Income inequality
• Comparative Advantage
• Leadership and political transitions
• Urbanization
• Demand Shock
• Resource rich economies
Sustained High Growth
•
•
•
•
Growth > 7% for twenty plus years
There are 11 cases
8 in Asia
(Botswana, China, Hong Kong, Indonesia, Korea,
Malaysia, Malta, Oman, Singapore, Taiwan and
Thailand)
• Japan was close - India is about to join in
• All post WW II
• All leverage the global economy
21st?
Growth is a Recent
Phenomenon
Ingredients
•
•
•
•
Functioning market system
High levels of savings and investment
– Public and private
Resource mobility
– The microeconomic evolution of a rapidly growing economy
Leveraging the global economy
– Demand
– Comparative Advantage
– Technology and know-how
China and India
• China has been in this high growth mode since 1978
• India is about to jump into the high growth category
• India’s current five year plan (just started) has
average growth over 9% accelerating to over 10%
• There are formidable challenges for each country
• They will have substantial and increasing impacts on
their neighbors, other developing countries, and the
global economy
The two most populous countries, accounting for 40% of the
world’s population, are the fastest growing economies in the
world, one a complex democracy and the other a socialist
market economy
China: GDP per capita and Poverty
Reduction
POVERTY IN PERCENTAGES
4500
4000
80
3500
70
3000
2500
REAL GDP PER
CAPITA
2000
REAL GDP PER
WORKER
1500
50
$1/DAY
40
$2/DAY
30
20
1000
10
500
0
1970
60
0
1980
1990
2000
2010
1960
1970
1980
1990
2000
Poverty in China and India
45
40
35
30
25
20
15
10
5
0
China Poverty gap at
$1 a day (PPP) (%)
China Poverty gap at
$2 a day (PPP) (%)
India Poverty gap at
$1 a day (PPP) (%)
India Poverty gap at
$2 a day (PPP) (%)
1987 1990 1993 1996 1999 2000 2001
Income Inequality
GDP per capita: China and India (constant 2000 US$)
1600
1400
1200
India GDP per capita
(constant 2000 US$)
1000
800
China GDP per capita
(constant 2000 US$)
600
400
200
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
0
Rural Populations Decline
Rural Population Percentage
85
80
75
70
China Rural population
percentage
65
India Rural population
percentage
60
55
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
50
Saving and Investment
Savings and Investment in India and China
45
40
35
30
25
20
15
10
5
0
1980 1984 1988 1992 1996 2000 2004
Investment
Rate (% of
GDP) India
Savings Rate
(% of GD) India
Gross capital
formation (% of
GDP) China
Gross savings
(% of GDP)
China
Leveraging the Global Economy
Trade in Relation to GDP China
70
60
China NE.IMP.GNFS.ZS
Imports of goods and
services (% of GDP)
50
40
China NE.EXP.GNFS.ZS
Exports of goods and
services (% of GDP)
30
20
10
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
0
Trade in Relation to GDP India
Trade in Relation to GDP India
19
80
1980
19
82
1982
19
84
1984
19
86
1986
19
88
1988
19
90
1990
19
92
1992
19
94
1994
19
96
1996
19
1998
98
20
2000
00
20
2002
02
20
2004
04
45
45
40
40
35
35
30
30
25
25
20
20
15
15
10
10
5
5
0
0
Imports % o f GDP India
Imports % o f GDP India
Exports % of GDP India
Exports % of GDP India
Trade Surplus
Exports of goods and services (% of GDP)
Imports of goods and services (% of GDP)
Trade Surplus China
04
20
02
20
00
20
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
40
35
30
25
20
15
10
5
0
-5
-10
19
XMS
China Trade Surplus
In addition to lower prices, FDI drove
rapid export growth in China
Manufactured exports growth
$ billion
300
FDI backed exports
250
200
Per cent of total exports
• China
150
100
50
• India
0
1984 1988 1992 1996 2000
Source: CMIE, China Statistical Yearbook, McKinsey CII Report
• China
• India
60.0
4.5
Public debt: China
24.4% of GDP (2005 est.)
China vs India - Infrastructure Formation
US$ bn
270
240
210
180
150
120
90
60
30
0
China (LHS)
US$50 bn over the
next 3 years
India (RHS)
1985
1987
1989 1991
1993
1995
China
Source: The World Bank; Deutsche Bank; CMIE
1997
1999
2001 2003
India
2005
Literacy Rates: India and China
100
90
80
70
60
50
40
30
20
10
0
1990
2004
Literacy
adult
women
China
Literacy
adult men
China
Literacy
adult
women
India
Literacy
adult men
India
Deng Xiaoping’s biography in brief
Secretary of Party under
Mao
Banished to a tractor
factory in Cultural Revolution
Returned under wing of Zhou
Enlai
Banished by Gang of Four
Replace Hua Guofeng
Left Hua in Central
Committee (essentially for
life)
Challenges for China
• Maintaining high growth is the overriding goal
– Managing economic relations with the rest of the
world
• Managing Rural to Urban Migration – 13 to 15 Million
People a Year
• Absence of social insurance and services
• Huge urban-rural productivity differentials
• State Owned Enterprises – SOE’s
– Government Ownership
Capital Markets and Diversifying
Sources of Growth
• Capital Markets and investment efficiency
– Capital markets are quite underdeveloped
• Exchange Rate and External Imbalance
– PBC (our Federal Reserve) accumulation of foreign
reserves
• Diversifying sources of growth
– Manufacturing sectors
– Service sector
– Domestic Market
• “China is several different economies at different
stages of development”
Capital Composition
Aside: Global Capital Markets
Gradual Appreciation of Currency is Likely
• The continuing need for direct credit and other controls on
investment
– Response to interest rates unclear
• Continuing capital controls are required to have a monetary
policy targeted to inflation and growth and at the same time
retain some control over the exchange rate.
• In addition with immature capital markets, there is the risk of
destructive volatility – without capital controls
• Phasing these out at the proper rate as the capital markets
develop is a key policy challenge
• Building capital markets and increasing efficiency of investment
is a high current priority
Internal and External Balance
China is at A in internal balance and way out of external
balance
The outside world says move to B
China is likely to go gradually from A to D
R
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Billions $
Reserves
Foreign Reserve Holdings at the End of 2006
1200
1000
800
600
400
200
0
Recent Trends
•
In
–
–
–
–
–
–
–
–
–
2007 in China
GDP: $2.8 trillion
Forecast trade surplus: $250-$300 billion
Surplus/GDP 10% or more
Investment/GDP: 40-45%
Savings/GDP: 50-55%
Exports + Imports as percentage of GDP: 70%
Reserves at the end of 2006: $1.2 trillion
Likely reserve additions: $400 billion or more
Reserves at the end of 2007: $1.6 trillion
China During Currency Crisis
1997-1998
120
110
Japanese Yen
Chinese Renminbi
100
90
80
70
Taiwan $
Korean Won
60
50
Thai Baht
40
Jun 97
Source: Bloomberg
October 22, 2003
Challenges (continued)
• Environment Problems - these are huge
• Energy efficiency and security
– China plans to double its energy efficiency in the next
decade
– Economic growth will still cause energy consumption to rise
• Rising Income Inequality
• Overinvestment in infrastructure - underinvestment in higher
education
• Internal market fragmentation – developing the domestic
market
• Restoration of pension system and medical care – especially in
the rural areas
India Assets
• Higher Education
• Optimism and Sense of Momentum
• IT/BPO Outsourcing
– Projected growth is 30% per year and India is the
dominant player
• Financial Sector and Reserve Bank of India
• Growth in Trade in Services Has Room to Grow
–
–
–
–
R&D
Medical Services
Political Speeches
Editing of newspapers
• and TV
– Grading exams
But
• This is not enough to produce and sustain high and
inclusive growth
– Doesn’t employ enough people
• India needs an additional powerful productive
employment-generating engine
• This is very well understood by India’s leaders
• Labor intensive manufacturing and exports
– Add the China approach to the portfolio
• Open up to FDI
• Special Export Zones (400+)
Investment and Policy
Challenges
Education
Infrastructure
Efficiency and Investment in
Agriculture
Impacts on Global Economy
• Rapidly growing trade with each other
• Very large regional impact in east and south Asia
– Demand and imports from each other and more
advanced neighbors
– Intense competition for less developed neighbors
• Competitive pressure on advanced economies
– Europe in particular with less flexible labor
markets and social safety nets that constrain
competitive responses
Demand for Energy and
Commodities
• Large incremental demand for raw materials
and commodities with effects of prices
(China’s equivalent of our interstate highway
system is an example)
• Potential scramble for energy security –
because of the size of the demand shock
• Increased influence in Africa and other parts
of the world
China’s Trade with Africa
Magnitude of Impacts Becoming
Material
• In 1980 when China grew ten percent, the absolute
increment to global GDP and global demand was
insignificant.
• Now the GDP is about 2.22 trillion $, and a ten
percent increment is large in absolute terms
– The rough equivalent (in terms of global demand)
of about a 1.78% increment in US GDP growth
Demonstration Effects
• India has been galvanized by China’s growth
• High growth is possible in a complex democracy
• Can other developing countries compete with China
and India
– locating comparative advantage
• Quality of the economic policy debate
The Latest Entrant: Vietnam
Vietnam: GDP per capita
3000
2500
Growth Rate
5.88%
2000
1500
1000
500
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
0
GDP per capita, PPP (constant 2000 international $)
South Africa: GDP/capita PPP adjusted constant
dollars
12000
10000
8000
6000
4000
2000
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
0
South Africa: Saving and Investment
19
81
19
83
19
85
19
87
19
89
19
91
19
93
19
95
19
97
19
99
20
01
20
03
Se
rie
s
Na
m
e
40
35
30
25
20
15
10
5
0
Gross capital formation (% of GDP)
Gross domestic savings (% of GDP)
20
04
20
02
20
00
19
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
South Africa Gini Coefficient
70
60
50
40
30
20
10
0
Rising Income Inequality and
Resistance to Globalization
• Developed Countries
– Middle income lag
– Protectionist sentiment
– Trade in services and
globalization of some
labor markets
– Impact of technology
• Developing Countries
– Rising inequality side
effect of benign growth
dynamics (China and
India)
– “Inclusiveness”
– Unequal distribution of
assets can retard growth
16.00
12.00
2.00
8.00
4.00
0.00
0.00
Income
Bottom
Bottom
Low
Lower
Middle
Upper
High
Top
Growth
4.00
Grow th Factor
Grow th Rate
Growth Rate
China: Total Growth and Growth
Rate: Per Capita Income: 19952004
Gini Coefficients
Global Warming
• Decision making under extreme uncertainty
– Very long time horizons
– Large ranges in the estimates of climate
impacts
– These will decline over time as the science
becomes more precise
• The stocks and the flows of green house gases
– The Kyoto impasse
– How to allocate the emissions rights equitably
Three Major Sets of Issues
• 1. Mitigation
– Allocation of emissions rights across countries
– Efficiency – carbon trading market mechanisms
• 2. Technology
– Reduction of the costs of mitigation
– Subsidies and rapid transfer globally
• 3. Adaptation
– Capacity to adapt to climate change that does
occur
– Poorer country problem
• RESPONDING TO CLIMATE CHANGE IS A
MAJOR TEST OF OUR COLLECTIVE CAPACITY
Demand for Energy and
Commodities
• Large incremental demand for raw materials,
commodities, and energy with effects on
prices (China’s construction of the equivalent
of the US interstate highway system is an
example)
• For developing countries with commodity
exports, the effect can be beneficial in the
short run – but rising commodity prices is not
a basis for sustained growth
• Generally rising energy costs hurt poor
countries more than richer ones
• Potentially damaging scramble for energy
security – because of the size of the demand
shock – and the potential for supply problems
in unstable regions
Global “Imbalances”
United States Savings and Foreign Reserves
Foreign Reserve Holdings at the End of 2006
1200
1000
600
400
200
ng
ap
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Billions $
800
US Household Assets
H o u si n g P r i c e I n d e x : 10 0 i n y e a r 2 0 0 0
180
14
12
10
8
6
4
2
0
15
10
5
0
160
140
2001 2002 2003 2004 2005
120
100
80
60
40
20
0
2000
2001
2002
2003
2004
So u r c e : O F H E O U n i t e d St a t e s G o v t
2005
Mortgages
Growth Rate
Growth Rate
Trillions of dollars
US Total Mortgages
Recent Trends
• In
–
–
–
–
–
–
–
–
–
2007 in China
GDP: $2.8 trillion
Forecast trade surplus: $250-$300 billion
Surplus/GDP 10% or more
Investment/GDP: 40-45%
Savings/GDP: 50-55%
Exports + Imports as percentage of GDP: 70%
Reserves at the end of 2006: $1.2 trillion
Likely reserve additions: $400 billion or more
Reserves at the end of 2007: $1.6 trillion