HOW DOES THE GROWTH AND INNOVATION STRATEGY OF CHINA AFFECT THE WORLD ECONOMY? Robert Boyer Presentation prepared for DIIS seminar Copenhagen, January 18th, 2010
INTRODUCTION • A new phase for the world economy • The need for a redeployment of basic tools • The diffusion of innovation-led strategies: the need for an assessment
THE LECTURE: THREE STEPS • In search of a new framework for the national / international macro economy • The growth regime of China: more domestic competition than export led. • The future growth regime : can it be endogenous innovation led?
IN SEARCH OF A NEW FRAMEWORK FOR THE NATIONAL / INTERNATIONAL MACROECONOMY
The 90s : the United States, Japan and China and the stability of the world economy • The Americans: the consumers of last resort • The Japanese: the savers of last resort • The Chinese: the manufacturers of the world
Figure 1 -Can two vicious circles make a world virtuous configuration?
The 2000s : Still another configuration for the world economy • The Americans: the consumers of last resort…and beneficiary of world excess of saving • The Japanese: a recovery in response to the dynamism of Chinese imports of equipment goods and high-tech components • The Chinese: the manufacturers … and the savers of the world
Macroeconomics becomes global: farewell to closed economy models • From a closed economy model to the interaction of two national economies: the US and China • A lasting overcapacity in manufacturing in China, hence a pressure towards price wars • An upward drift of the relative prices of oils and raw materials
A possible explanation of the Alan Greenspan puzzle • Not any increase in long term interest rates in the US: the consequence of the excess savings of Asia • The moderation of core inflation: the definite impact of Chinese overcapacity in commodities • The surge of consumption prices: the under capacity in the production of raw materials • These are direct consequences of the America / Asia (China) duopoly
A contrario, a drastic challenge of neoricardian international trade theory • The mobility of frontier technologies towards China • The quasi unlimited supply of labor in China • The size of the potential Chinese market
The role of increasing returns to scale • Consequently, the emergence of the hypothesis that manufacturing world prices are Chinese prices
Figure 3 – Unit production costs in China and the rest of the world Source: Artus (2009), Flash, n° 536, p. 9, 4 décembre.
CHINESE GROWTH : A DOMESTIC COMPETITION LEDMORE THAN A TYPICAL EXPORT LED REGIME
1. The Chinese institutional forms in historical perspective • Introducing progressively market incentives into a rather centralized economic system - Increasing the production for the market before down sizing the nationalized sector
Figure 4 - The example of the steel industry Source : Naughton Barry (2006) The Chinese Economy, p. 93
- A quasi minimalist public spending Figure 5 - the two phases of State public spending Source : Naughton Barry (2006) The Chinese Economy, p. 102
A pragmatic and sequential extension of local successful experiments • A large decentralization of public policy
A crucial step: the decentralization of decisions at the provincial level - The example of public spending Figure 6 - The long term evolution Source : Lou Jiwei (2007) The reform of intergovernmental fiscal relations in China, p. 159
- The structure of a quasi federal state? Figure 7 - an international comparison Source : Lou Jiwei (2007) The reform of intergovernmental fiscal relations in China, p. 165
The foundations of local state corporatism (Oi 1992)… • …a core hypothesis to understand the specificities of Chinese growth
2. The macroeconomic growth regime: domestic competition led • Basically, a series of pro growth socio-political alliances • Capital accumulation is the major tool for sustaining this alliance
Figure 8 - Macroeconomic Structure of the Chinese Economy Source : Minqi Li(2007) “US., china and the unravelling of global Imbalances”October, PERI WP, p. 43
A built in propensity to overcapacity and excess in credit financing on top of retained profits. • Hence a domestically generated fierce competition in order to capture increasing returns to scale • An implicit society wide compromise: enjoy the dividend of growth in counterpart of the ruling of the Communist Party
The dynamism of exports: the logical outcome an unbalanced distribution of income Source : Minqi Li(2007) “US., china and the unravelling of global Imbalances”October, PERI WP, p. 44
Figure 10 - A genuine institutional architecture for an exceptional growth CENTRAL STATE Undervalued exchange rate Tentative restrictive Monetary policy Public budget Poor welfare Local meso-corporatism 2 Local meso-corporatism 3 Laxist credit Overcapacity Local meso-corporatism 1 Competition led growth
3. Some quite unorthodox features of this institutional architecture and growth regime • Guanxi and Communist Party as a multilevel coordination processes, quite imperfect substitutes for legal, formal rules • Corruption: converting formally collectivist institutions into capitalist ones. It is not necessarily an obstacle to development!
A genuine mixed economy: the false opposition between private and public firms, since they are densely connected • The diversity and fuzziness of property rights help in the evolutionary process of catching up
The multinationals are part of this pro growth alliance and contribute to over accumulation • Foreign relations are more governed by the appropriation of frontier technologies than mercantilist objectives!
4. Imbalances and contradictions of this socio-political regime • A waste of capital due to over accumulation at the detriment of a general increase of standards of living
Figure 11 - A high but declining profit rate Q/K Pro/Q Pro/K Source : Minqi Li(2007) “US., china and the unravelling of global Imbalances”October, PERI WP, p. 45
A financial volatility and fragility in spite of an impressive restructuring of bad debts, constantly recreated by over accumulation
Figure 12 - The stock market global indexes Figure 13 - The price/earning ratio • A typical bubble Source : Artus Patrick (2008) « Au coeur de la bourse Chinoise », Flash n° 308, p. 2
The choice of the exchange rate regime imply large trade surplus, accumulation of reserves… … An excessive liquidity, source of speculation, and inflation… ... And it implies the risk of protectionist backlash
Figure 14 - The explosive Chinese trade surplus Source : Artus Patrick (2007) « Avec l’abondance de liquidités… », Flash n° 468, Décembre, p. 2
The very success of China creates structural unbalances at the world level ...In the adjustment of saving and investment ...The run for appropriating natural resources …The geopolitical hegemony of the US
The progressive loss of control by the political authorities of a complex, contradictory and divided society and economy... • An evidence: on 2007-2008 a typical dilemma of Chinese economic policy: - fighting inflation - without killing the dynamism of growth
The social and domestic imbalances are acute • social inequalities, • dual citizenship, • housing, heath care, aging • fighting inflation And the call for an harmonious society and endogenous innovation is not easy to implement
An explicit recognition by public authorities about the design of a national system of innovation The legacy of the past: a Soviet-type of SSI, with typical problems for linking basic research, innovation and economic activity
A continuous flow of organizational and institutional reforms • Building connections between research and industry • Opening to world technology • Various incentives for innovation at the firm level
Table 2 - Total R&D expenditures • A fast increase in the volume of RD… but still a limited size in international perspective Table 3 - R&D expenditures by firms Source: OECD « »Main Science and Technology indexes”, 2008.
Table 4 - Fraction of total population and absolute number • A large pool of researchers…But low productivity in terms in patenting Table 5 - Density and number of triadic patents Source: OECD « »Main Science and Technology indexes”, 2008
Presently, a clear external dependency for high tech products and technologies… Table 6 - Position on high tech technologies (% of world trade)
…A high import content of high tech Chinese export Table 7 - Import content of exports
A productivity revolution in the manufacturing sector due to the import of technological frontier investment goods… Lau (2004), p. 5
How much national is the Chinese System of Innovation? • A significant dependence with respect to the flow of technologies within multinationals… High tech trade in % of total trade for each category of firm Gaulier, Lemoine, Ünam-Kesenci (2005), fig. 11, p. 42
…The contribution of Chinese firms to high tech net exports is negative • But a clever use of international collaborative research… Percentage of patents with foreigners at EPO Schaaper Martin (2004), fig. 60, p. 59
Number of Chinese students enrolled in the US, Japan, EU …and a significant pool of Chinese students and researchers abroad Schaaper Martin (2004), fig. 37, p. 37