China’s economic growth model and progress under Gaige Kaifang

1. China’s economic growth model and progress under Gaige Kaifang David Dollar Senior Fellow Brookings Institution March 2014

2. Outline • Key features of China’s reform • Some comparison with growth records of Japan, South Korea, Taiwan • Economic and social outcomes • China’s reform 2.0

3. GDP per capita in China and East Asian neighbors (Penn version 8)

4. China’s economic reform • Household responsibility system • Open up to foreign trade and investment (join WTO in 2001) • Legalize the private sector • Ease up on migration restrictions

5. Followed the export-led model of Japan, Korea, and Taiwan – but with some differences • Slower movement of labor out of agriculture • Even higher investment rate • Large trade surplus at an earlier stage • Very low household income and consumption

6. China’s agricultural share of the labor force is high for its per capita GDP

7. China’s investment rate has risen to unprecedented levels

8. China developed trade surpluses at an earlier stage of development

9. China’s household consumption is very low

10. Followed the export-led model of Japan, Korea, and Taiwan – but with some differences • Slower movement of labor out of agriculture • Even higher investment rate • Large trade surplus at an earlier stage • Very low household income and consumption

11. China’s unusual institutional features • Household registration (hukou) • Repressed financial system with undervalued exchange rate • Open, competitive manufacturing but closed, uncompetitive services (SOEs) • One-party rule

12. China’s exchange rate pegged to the dollar until 2005

13. Good economic outcomes, but… • Extraordinary growth and poverty reduction • But rising inequality • Terrible air and water pollution • Increasing corruption • Old model economically and environmentally unsustainable

14. Poverty has declined dramatically

15. Inequality has risen

16. “Growth still is good for the poor” in a sample of 118 countries • Correlation between average income growth and income growth in the Bottom 40% is robust over time • Slope ~1 in both time periods (1967-2000 and 2000-2011)

17. Growth still is good for the poor • No worldwide trend in bottom 40% share – in either direction • Change in inequality uncorrelated with growth • Growth explains 77% of the variation in income of the bottom 40% • No institutional or policy variables are robustly correlated with change in quintile share

18. China’s corruption is high for its level of income (World Bank Control of Corruption Index, 2011)

19. China: structural reforms to improve efficiency of investment, spur innovation and encourage consumption • Hukoureform • SOE privatization or commercialization • Financial liberalization • Opening up of services more generally • Incentives for local government

20. Premier Li Keqiang’s speech to the National People’s Congress, March 5, 2014 • 100 million urban registrations for migrants • Financial liberalization • Opening up services to foreign investment • Broaden incentives for local government

21. Useful sources of data and information • Brookings.edu (Thornton China Center) • Penn world tables version 8 • World Development Indicators • World Governance Indicators