Tentative
０. Background of the Analysis:
Chinese Economy
Three Scenarios for Quarter a Century from Now
(1) Mega trend of the first half of the 21st century seems to be:
1) Tapping underutilized resources: a pool of labor in China and India: 2) Diffusion of technology to capable countries: to both countries; 3) Substantial effects on distribution of wealth, production, on livingstandard, and factor prices among countries. (2) Possible effects to be generated by the mega trend: 1) Substantial re-distribution of wealth and production to emerging countries, underdeveloped areas domestically and internationally. 2) Flooding supply of goods, first textile, & apparels, then, electronics; 3) Higher demand for natural resources and resulting increased prices; 4) Environmental problems.
Noriki Hirose Mantaro Matsuya ESRI, CAO
(3) Questions needed to be answered:
1) What kind of world would it be if the present trend will be maintained? 2) Will there be any grave problems or only just many good things? 3) What kinds of strategy would be best fitted for such environment?
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I. Why Chinese Economy will Play the Central Role:
(1) From historical perspective, industrialization of the most populous nation is monumental achievement:
1) major poverty reduction; 2) successful globalization; 3) an emerging major economic power.
I.1-1 What has been achieved in the past decade?
• Enduring rapid growth and lifting vast majority’s living:
1) Average growth rate is about 10% after 1980 over quarter a century; 2) Four fifths of 1.3 billion people have been pulled out of poverty; True order of the accomplishment is profound & multifold. 3) In 2006 $2,000 per capita GDP is a respectable living standard among major economies (countries with100million persons or more).
(2) Resultant export led rapid growth has side-effects: causing
1) China to be the sweatshop of the world; 2) insatiable demand for natural resources; 3) climbing slope of environmental Kuznets’ inverted U curve.
• China has climbed commodity-trade-ladder very quickly:
(3) Coming to assume a de fact rule-maker:
Transition from a market participant to a new stake-holder in the international community in coming decade.
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1) Development is open in nature. FDI, which China receives most in the world, becomes locomotive of technological transfer and export facilitation; 2) Trade expanded forty folds (from 0.86% in 1980 to 8.0% in 2006 of the world trade value); 3) China becomes major producer of steel, TV, PCs on top textile; and natural resources importer of iron ore, coal.
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I.1-2 Causes of rapid growth in the past decade:
• Mobilization and re-allocation of half a billion of labor-force carried weights and improved overall efficiency but have been limited in growth contribution. • Capital investment has been huge and eye-catching, but its contribution to growth is found to be next to technological progress. A large amount of savings may well alleviate crowding-out effects and will benefit China’s development. • Technological progress is found out to be the most important factor of rapid growth: contributed more than half; Whether technological progress came from indigenously, through FDI, or “catch-up” to the developed countries is a critical factor to determine future path of development.
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I.1-3 Mobilizing half a billion :
• Mobilizing and re-allocating a large pool of under-employed labor-force proved to be long-lasting for a sustained high growth: Employing half a billion people is an opportunity as well as a challenge. • Large population has been resource: Rapid growth could have ended quickly in a decade or two if the pool had been as small as Japan, Korea, or Taiwan. • China have sustained rapid growth cum stable wages for quarter a century and may be more. • Our analysis showed that the labor contribution was smaller than capital’s or technological progress’, despite its dramatic effects.
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I.1-4 Effects of capital investment
• Capital stock is estimated to grow at about 13% p.a. or more on the average in the last decade. • Investment share of GDP is very high in China, as much as 30 – 40%, even higher than Japan or Korea during such period: Inefficient investment? • Contribution of FDI as capital stock is rather small, despite its large contribution to export expansion. • Reservation should be made to the difficulty in measuring quality of capital and efficiency of embodied technology. • Our analysis proved that capital contribution is crucial but second to that of technological progress.
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I.1-5 Technological improvement
• Technological improvement in Chinese manufacturing sector has been phenomenon. • In fact, it proved to be the most contributed factor to the recent development: more than a half of contribution. • Especially so in those sectors that produce exporting goods. • Transplants contributed to such results. • Most recently, technologies for domestic markets has been upgraded effectively and contributed to improvement of products quality. • There may be some scope for overcoming limits of catch-up process by inducing indigenous innovation.
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I.2 Basic Framework of Analyses:
• Needed framework:
(1) Global, trade-linked, and multi-sectoral model: CGE (Computable General Equilibrium) Model such as GTAP, a candidate; (2) Population, technological progress, tariff rates must be incorporated; (3) China, India, and Japan, USA, EU are independently treated; (4)Goods characterized by intensity of primary inputs.
I.2-1 Basic Framework: Analytical
assumptions
Growth in capital stock and technological changes had predominant impacts.
Changes in Endowment from 1992 to 2001
Capital (% p.a.) Labor (% p.a.) 111 ( 1.17%) 85 60 180 ( 6.7%) 117 ( 1.76%) 65 60
(1991=100) Technological progress (% p.a.)
Tariff rate
• Analytical framework to be used:
(1) Technological progress in manufacturing (6% pa), capital stock accumulation, population, tariff rates are based on researche results. (2) Side-effects such as environmental issues, water quality, air pollution, and global climate change and so on are out of reach of this paper, (3) Trade surplus and intervention caused excessive liquidity, “bubble” phenomenon, and inflation.
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China
Developed G. NICs G.
284
(12.3%)
172 172
( 6.2%)
India
Developed G. NICs G.
110 110
( 1.1%)
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I.2-2 Summary of Analyses (1): Macro indicators (estimated results vs. actual)
Model and analytical assumptions can track closely past economic performance. Discrepancy in inflation suggests that inflation is monetary phenomenon.
Comparison between Estimated vs. Actual
(Index:1992=100) China Estimated GDP Index (Growth rate) CPI Index (Inflation rate) Export Index (Rate of growth) 230 (9.70%) 100.9 ( 0.1%) 279 (12.1%) Actual 234 (9.91%) 183 (6.94%) 303 (13.1%) Estimated 194 (7.64%) 97.7 (-0.03%) 197 (7.82%) India Actual 170 (6.07%) 190 (7.39%) 270 (11.7%) 11
I.2-3 Summary of Analyses (2): Global
effects from China’s development
China’s development in the past decade benefited all, especially herself. Globally her effects other than trade are modest. Cf. inflation rate.
China's Impact on Major Economies
(difference between 1992 and 2001) Japan impact GDP Index 0.9 (0.1%) Inflation Index -0.6 (-0.1%) Import Index (from China) 6.4 (0.7%) actual 10.3 (1.1%) 2.6 (0.3%) 59.4 (5.3%) impact 1.1 (0.1%) -1.1 (-0.1%) 3.8 (0.4%) USA actual 35.2 (3.4%) 26.2 (2.6%) 109.4 (8.6%) impact 1.3 (0.1%) -1.2 (-0.1%) 1.4 (0.2%) 12
(1):% impact on 1992 (2): Rate of Change (%, pa)
EU actual 21.4 (2.2%) 76.2 (6.5%) (n.a.)
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I.2-4 Summary of Analyses (3): Relative
contributions of factors to Growth
China’s rapid development in the past decade made possible mainly by technology transfer and capital formation.
China's Development Contribution by Factors
Capital Labor
(Index:1991=100)
I.2-5 Comparison with India : Global effects from India’s development
Overall effects from Indian development is still negligible on the course of the developed countries.
India's Impacts on Major Economies
(difference between 1992 and 2001) Japan USA actual 10.3 (1.1%) 2.6 (0.3%) 59.4 (5.3%) impact -0.1 (0.1%) -0.3 (-0.1%) 0.0 (0.0%) actual 35.2 (3.4%) 26.2 (2.6%) 109.4 (8.6%) impact -0.1 (0.1%) -0.3 (-0.1%) 0.0 (0.0%) 14 EU actual 21.4 (2.2%) 76.2 (6.5%) (n.a.)
Tariff rate
technological progress (%)
impact GDP Index -0.1 (0.1%) Inflation Index -0.3 (-0.1%)
*
(% ) China's GDP (%)
*
*
* 134 ( 9.9%)
(share, %)
42.0 (31.3)
( 4.0)
9.7 ( 7.2)
( 1.0)
3.6 ( 2.7)
( 0.4)
73.6 (54.9)
( 6.3) Import Index (from India) 0.0 (0.0%)
(Note) (1) * indicate numbers in the parenthesis are growth rates per annum. (2) “shares” do not add up to 100% because of substitution effect.
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(1):% impact on 1992
(2): Rate of Change (%, pa)
I.3 Issues to be Addressed
• Trade frictions among major trading partners are already observed. • Environmental issues, such as water quality, air pollution are pressing problems. • Trade imbalances under fixed exchange rate regime produced excessive liquidity, “bubble” phenomena and inflation. • Can this trend be kept for another decade? • When wages start to shoot up, can rapid growth be maintained? • As textile and footwear are examples, trade disputes will not cause trade disruption globally?
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I.4 Focusing Issues on to 3 Scenarios
(logical development) Simple extension of present trend (case 1) Rapid growth→ soft landing to balanced growth
• Huge trade imbalances • Drastic restructuring of industries in the developed • Rearrange to Scenario1
China’s Retaliation (case 2) Global reaction to Scenario 1 by trade & tech Strategy changed to seek plus sum: “efficiency”
Negative sum
Scenario 1
Scenario 2
Scenario 3
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I.4-1 Reasons to Focus on 3 Scenarios
(1) Export-led growth of more than 10% p.a. for another decade and a half (case 1) is out of the question for China herself: (2) Judging from catch-up process, impacts on the world market, interdependent nature of technology transfer, effects on prices of natural resources, environmental side-effects, so on, case 1 is not a case to be seriously examined. (3) Interdependence matters most in case 2. Because China’s retaliation is not a viable option, the original strategy of case 1 must be re-considered. (4) These accounts leave three scenarios to be discussed as visualized in I.4.
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II. Three Scenarios about the Next Decades for China
• There exist 3 main references: “Dancing with Giants (2007),”
“Mapping the global future (2004),” “Dreaming with the ‘BRICS’(2003).”
• Main messages : A simple extension of present trend proves to be almost
always false; One has to check the reasons why so.
• The followings are results of reflection on it and ensuing scenarios that
address issues with continued rapid growth.
• Scenario 1 “Trend” case: smooth flow of technology; expansion of
export & import; enduring rapid growth.
• Scenario 2 “Disruption” case: disruption of export-led development; a
possible reaction to the outcome of the scenario 1.
• Scenario 3 “Efficiency” case: transition to efficiency based growth
strategy.
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II.1-1 “Trend” keeping path: Scenario 1
• Scenario1: Staying on the present “trend”. Highest possible
growth with entrenched various problems. Development will be enabled by catch-up process which incorporates changes of development phases and export whose composition shifts is counted. Environment and unequal income distribution are not explicitly discussed here.
II.1-2 “Trend” : Major assumptions
Labor supply will reach plateau after 2015, but capital formation and technology progress keep on playing major roles. Worldwide tariff rates are assumed to come down to zero before 2025. All considered, export drive will be upheld.
Main Assumptions for China
(scenario 1) Population Capital technological Manufacture Service other 19 Tariff 6.2 0.9 1.8 0.0 323.6 24.0 53.4 -10.0 p 20 % p.a. 0.5 9.2 % increase 13.8 719.0
• Technology: Smooth technology diffusion and capital goods
import are assumed; technological progress rate in manufacturing remains 6% pa.
• Capital formation: Up to 2010, present rapid growth will continue;
After that, growth will be moderated to “double in a decade” rate.
• Outcome will be China’s decade? What are major effects on the developed countries?
II.1-3 Major Outcomes of “Trend”:
Growth rate; GDP share;
Growth rate of major countries
“Trend” Japan China India USA EU ROW World 1.7 7.3 5.6 2.2 1.8
26.5 32.2
II.1-4 Effects of “Trend” on China:
Extension of today’s imbalance
“Trend” shows that this is just export-led rapid growth. Share of export expands 10% points at the sacrifice of consumption. China retains high competitiveness against all.
World GDP Share in 2025 （inside, 2001）
Conspicuous increase in share by China: Japan and EU reduce their standing.
10.7 23.9 13.4 22.7 3.7 1.5 3.2 11.1
China's Demand Share in2025（Inside 2001）
10%+ shift from Consumption to Export
China's Trade Partners in 2025（inside, 2001）:
Almost no change in the somposition
12.5 0.0 0.8
Japan China India USA EU ROW
32.9 44.4 33.5 42.7 （Import Share） 2025 22.5％ 2001 24.3％ 12.7 Cons Invest G'nt Export
14.9 36.9 35.8 0.0 0.7 1 2 3 4 5 6 JPN CHN INDIA USA EU ROW
28.5
29.1
2.9 2.6
21.8 29.1
11.8
35.3 33.5
20.2
20.6
21
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II.1-5 Side Effects of “Trend”:
China’s gain in trade share will be spectacular: based on technological progress, “made in china” will beat competitors almost in every markets.
II.1-6 Evaluation of “Trend” (I)
• Domestically, resource allocation will be biased toward export (43%, 10% point up) and high investment rate will be maintained.
Export Shares in 2025 of Goods mainly Produced in
Developed Countries now （inside, 2001）: China's jump
2001）:
Export Shares in 2025 of Goods mainly Produced in NICs （inside, China's big jump in shares
2.3 3.9
• Hind side of it, consumers may well feel plight because of lesser GDP share of already small consumption (33%, 10% point down). • China’s rapid growth critically depends on the premise of 6% pa technological progress in manufacturing. This rate is very fast by historical standard, and there exists no precedents that such high rate lasts more than a quarter of century at this economic scale. • Demand for natural resources will be higher than it is today, represented by shoot-up of the rent of land in China. This will suggest high demand for imports.
9.5
29.6 28.9
10.4 4.8 0.4 14.6 18.8
1 JPN 2 CHN 3 INDIA 4 USA 5 EU 6 ROW
31.6 36.8
12.4 1.9 7.6 35.2
1 2 3 4 5 6
JPN CHN INDIA USA EU ROW
1.2
40.9 29.9
11.0
37.5 3.0 22.9 5.1
23
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II.1-7 Evaluation of “Trend” (II)
• Internationally, EU will be hardest hit by the exports increases from China. • Looking into further the export market shares of respective countries, exports to China will increase universally. Largest increase of them will be in the case of export from Japan to China. Largest decline will be EU’s regional wide trade share. • Our analyses picture the results under the hypothesis of smooth restructuring of economies, but they still show clearly enormous changes that might trigger political tensions. •In the real world, economic adjustment is not always smooth. On the contrary, positive sum of effects cannot necessarily persuade lawmakers to enact policies or to ratify treaties because of the adjustment costs.
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II.2 “Disruption” of Export: Scenario 2 ---- Main scenario
• If exports from China will generate large scale restructuring in the developed countries, there may set a stage of popular unrest. • That might lead to epidemic of anti-globalism of the developed: Obstacles to export-led development and rises in tariff to Chinese export increase. • Abrupt halt of technology transfer: If this happens, it will be forced to choose either ethno-centralism of technological development or strict observance of intellectual property rights. Either choice will raise costs.
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II.2-1 “Disruption” : Main assumptions
• Assumptions of “Trend” are changed so as to reflect policy and trade environment changes of “Disruption.” • Capital formation has been cut in half. So the technological progress. • Rest of the world raises tariff rate by 20% point vis-à-vis China.
Main Assumptions for China
“Disruption” Capital Technological Manufacture Service other Tariff 6.2 0.9 1.8 0.0 2.9 0.5 0.9 0.0 27 (Note) Tariff is to Chinese goods. Trend 9.2 Disruption 6.1
II.2-2 Major Outcomes of “Disruption” :
Growth rate; GDP share; Trade share
Unless China’s slower growth reduces the investment in the developed further, the “Disruption” will decrease China’s growth rate by 3% points. Although domestic balances will be restored, the growth rate would be too slow to absorb underemployed.
Growth rate
Disruption 32.9 33.5 11.8 44.4 22.6 100.0 34.4 32.1 12.1 40.1 18.8 100.0 Japan China India USA EU ROW World Trend 1.7 7.3 5.6 2.2 1.8 2.9 2.6 2001～25 Disruption 1.7 4.2 5.6 2.2 1.8 2.9 2.4 28
China's GDP
Trend Consumption
2025
Main Assumptions for OECDs
“Disruption” Tariff Trend 0.0 Disruption 20.0 Investment Government Export Import Total
II.2-3 Effects of “Disruption” on the World:
II.2-4 Side Effects of Disruption:
GDP share
Trend Japan China India USA EU ROW World
2025 Disruption 10.7 11.1 3.2 29.1 21.8 23.9 100.0 11.3 5.8 3.4 30.9 23.2 25.4 100.0
Export share (export total)
Trend Japan China India USA EU ROW World
Export share
2025 Trend Disruption 5.3 16.6 2.5 10.5 29.0 36.1 100.0 5.7 8.4 2.5 11.2 33.3 38.8 100.0 29 Japan China India USA EU ROW World
2025 Disruption 9.5 18.8 1.2 11.0 29.9 29.6 100.0 10.3 7.2 1.2 12.9 35.0 33.4 100.0
Export share
Trend Japan China India USA EU ROW World
2025
(goods mainly produced in developed countries)
(goods mainly produced in NICs) Disruption 2.3 35.2 3.0 5.1 22.9 31.6 100.0 1.9 21.0 3.0 5.9 30.1 38.1 100.0
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II.2-5 Evaluation of “Disruption”:
(within the framework of global CGE model)
• Disruption of trade and technology inflow will inflict China severely.
II.3 “Efficiency” Based Growth: Scenario 3 - A Strategy Change
• A radical shift of development policies: renders a new strategy
focusing on efficiency and sustainability.
• Although interdependency exists, negative effects on China will not cause equivalent order of knock-on effects abroad. ---------------------------• Chinese economy will become realigned more with domestic demand-led growth and better balance between investment and consumption at a cost of lower growth rate, well below 7%. • With respect to the trade share, China’s gain will become more moderate and the result suggests that there will be more respite room for the developed to restructure.
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• As to the economic policies, such strategies are to emphasize
promoting technological progress of knowledge and service sectors. • Translating these policies into numbers, technological growth rate of service industries is assumed to be 4.7% p.a. (twice the present efficiency level in about fifteen years).
• For inducing domestic demand-led growth, increasing demand for
service is critical. Also, reducing capital-output ratio needs high priority.
• Higher labor productivity is a source of favorable outcomes: lower
service prices increase share of consumption, efficiency, and welfare; higher demand for labor under lower growth rate than “Trend” case.
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II.3-1 “Efficiency” Based Growth: Main assumptions
Emphasizing importance of domestic demand-led and technological progress.
II.3-2 Major Outcomes of “Efficiency”
: GDP share; Growth rate;
China's GDP components Main Assumptions for China
2025
Growth rate
Efficiency 39.2 38.8 India 5.6 2.2 1.8 2.9 2.4 Japan China Disruption 1.7 4.2
2001～25 Efficiency 1.7 5.8 5.6 2.2 1.8 2.9 2.5 34
Disruption
“Efficiency” Capital
Disruption 6.1
Efficiency 6.1
Consumption Investment Government
34.4 32.1 12.1 40.1 18.8 100.0
Technological Prog. Manufacture Service other Tariff 2.9 0.5 0.9 0.0 1.7 4.7 4.7 0.0
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13.8 31.3 23.1 100.0
USA EU ROW World
Export Import Total
II.3-3 Effects on the World:
Export share
(export total) Efficiency 11.1 8.0 3.4 30.2 22.6 24.8 100.0 35 Japan China India USA EU ROW World Disruption 5.7 8.4 2.5 11.2 33.3 38.8 100.0 Efficiency 6.2 9.3 2.7 11.4 31.9 38.5 100.0 2025
II.3-4 Side Effects of “Efficiency”:
Export share
2025
Export share
2025
GDP share
2025 Disruption
(Goods mainly produced in developed countries) Disruption Japan China India USA EU ROW World 10.3 7.2 1.2 12.9 35.0 33.4 100.0 Efficiency 10.9 7.3 1.3 12.9 34.0 33.5 100.0
(Goods mainly produced in NICs) Disruption Japan China India USA EU ROW World 1.9 21.0 3.0 5.9 30.1 38.1 100.0 Efficiency 2.6 19.2 3.6 6.5 28.5 39.5 100.0 36
Japan China India USA EU ROW World
11.3 5.8 3.4 30.9 23.2 25.4 100.0
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II.3-5 Evaluation of “Efficiency”:
• Efficiency based policy critically depends on raising service sector productivity on top agriculture. • To realize it requires introduction and full-fledged implementation of rule-based policy, de-regulation, competition to service sector. • To assure high employment, wage income, and lowering prices of service, one can realize those by establishing productivity-based-wage policy and scrapping interventions of the central and local governments.
III. Policy Choice for Future
• Nature of Pending issues is not choice of development tactics but choice of strategy. • Criterion of choice is to maximize people’s welfare. • Global consideration is equally vital because of China’s shear size and economic interdependence . • Forward looking policy is an indispensable ingredient because policy changes take time to produce concrete results. • Maintaining present export-led & rapid growth policy may sound a
practical choice: gradual end of “catch-up” process may also prove to be the end of export-led and rapid growth.
• Without fast improvement in livings, none can easily mitigate or
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address domestic problems such as income inequality.
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III.1 Policy Choice: Lessons learned from 3 Scenarios
• Whether maintaining present export-led & rapid growth policy or not is of critical importance: Scenario 1 “Trend” case.
(1) Likely to produce higher income, employment & larger economy in the “Trend”. (2) Hind side of it, there emerge “trade war,” deteriorating environment, & income inequality.
III.2-1 Globalism vs. Ethno-centralism (1)
For China, • International trade opened opportunities of wealth creation and poverty
reduction.;
• Globalism also provides China with challenges: trade means
• • interdependency, and in return, creates reciprocal relationship. The world, excluding China, can sustain “trade-disruption” if not favors it. But China suffers most from trade disruption. Selective engagement would not solve the fundamental problems. If she determines to use only indigenous technology, that would result in slower progress rate and growth rates.
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• “Disruption” of trade and technological transfer damages
China dearly: Now a day, China is one of the most dependent countries on the world market.
• Improving productivity of non-manufacturing sectors is
one of the proposals worth investigating: for transforming present imbalances into better external and domestic balance, realizing domestic demand-led growth.
• Technological progress would not be able to escape from “disruption.”
III.2-2 Globalism vs. Ethno-centralism(2)
To the international society, • For exploiting untapped labor resources, embracing populace countries as partners deserves pivotal importance. • To welcome them not only as a rule abiding trading member but as a stakeholder is the inescapable way. • On the other side of the same framework, the international society should not accede to anyone’s “free-rider” behavior. • To cope with “anti-globalism,” there needs clear-cut messages against ethnic-centralism not only in the case of China and India but also the Sub Saharan countries.
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III.3 Remained to be Analyzed: Five undecided issues
• Political implications of strategy change of Chinese development. • Demonstration of superiority of the globalism with free trade over the ethno-centralism with selective trade engagement. • Analyses of effects from the distortion of relative price changes in favor of natural resources and capital over labor. • Treatment of “development right.” • Implications for global warming and climate change.
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III.4 Toward the Next Generation: Perspective over 2025 and beyond
• Globalization and “catch-up” of the most populous countries will cause fundamental shifts among international relations and balances: natural resources will be more scarce, labor will be more abundant, hence, petroleum price may well be higher and fabric products will be cheaper. • Present market system and international decision making systems are ill-equipped with these foreseeable shifts. • But most powerful countries like China can unilaterally choose one’s own policies to alleviate possible tension and fill the gaps of present systems.
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Conclusion I
Why not continue the maximum growth path ? :
• Because export-led growth of China’s size encounters eventual limits shortly rather than in decades. • Domestically, because income inequality, environmental damage, and other impending issues will be aggravated. Internationally, because trade frictions will be mounting, risk of going back to protectionism will be real and China would lose most. • If policies are meant to maximize welfare, there seems to need to overhaul rapid growth strategy and assign higher priority to efficiency based growth.
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Conclusion II
• Efficiency based policy is to use capital, labor and natural resources effectively, that facilitates maximization of welfare:
Raising efficiency in knowledge & service sectors is the prime target; “Efficiency” strategy enables Chinese economy endogenous growth and domestic demand-led compatible with globalization and technological transfer.
• Otherwise, “huge” expansion of export risks generating “China bashing”:
Thank you for your attention
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Because mass re-allocation of employment of competing industries in developed countries may prompt protection and henceforth stop of technological transfer.
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