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Global Classroom Lecture. Poverty Alleviation and Economic Growth in China By Geng XIAO China’s Legacy and Reform Strategy. Legacy of the Chinese Civilization and the China Puzzle.

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Global Classroom Lecture

Poverty Alleviation and Economic Growth in China



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China’s Legacy and Reform Strategy

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Legacy of the Chinese Civilizationand the China Puzzle

  • 200 years ago, which country had the largest economy in the world? (UK? US? China?)

  • What was China’s historical economic performance?

    • Compared to the Roman Empire 2000 years ago

    • Compared to Europe about 600 years ago

      • China had a seven-fold increase in population from 1400 to 1950

  • China’s lead in technological invention included:

    • Water mills, harnesses for horses, paper and porcelain (Han dynasty, 200 BC to 200 AD)

    • Printing, crossbow, iron, gunpowder, paper money (Tang dynasty, 600-900 AD)

    • Abacus (Song dynasty, 1000-1271 AD)

    • Irrigation, drainage, double cropping, seed selection, transplanting, use of manuals, import of maize and potatoes from new world

  • Why did China start to decline relative to the West about 500 years ago and end up in a state of extreme poverty for majority of its people for more than 100 years until Deng Xiaoping’s reform beginning in 1979?

Source: Angus Maddison, Monitoring the World Economy 1820-1992.

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Explaining China Puzzle and European Miracle

  • Domestically unchallengeable Chinese central power led to high-risk inward-looking policies

    • In 1434, Ming Emperor destroyed China’s own internationally competitive fleet led by eunuch admiral Zheng He and lost the chances to discover the new world

    • In 1793, Qing Emperor Qianlong closed the door for developing friendly trading relations with the rising Western Europe powers and led to China’s disastrous and humiliating loss in the Opium War in the mid-19th century

    • For 500 years, the weakening Chinese dynasties spent monopolized military resources to deal with domestic rebellions and internal struggles with little outside competitive pressure on advancing technology until mid-19th century

  • European modern civilization and economic miracle emerged from competition among new nation states

    • Emergence of nation-states stimulated competition and innovation through trade, migration, and intellectual interchange

    • End of feudalism led to commercial, property, and financial institutions protected by a non-discretionary legal systems separated from the state bureaucracy

    • The Renaissance and the Enlightenment encouraged experimental sciences, technological innovation, and sciences education

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    Three Pillars of China’s Poverty Alleviation and Growth Strategy

    • The leadership by the Party

      • The Chinese Communist Party was born and grew out of crisis and war and gained its authority as the only leadership force for a population as large as 1.3 billion through internal competition and external pressure.

      • Over a period of more than half a century, the party developed a sophisticated and resilient central and local organizational capacity for defining and enforcing its policies (right or wrong), including defining and protecting property rights during the reform period

      • The Party has become an imperfect but working substitute for whatever modern institutions China lacks during its long process of modernization (institutions such as markets and free trade, social safety net, independent judiciary and rule of law, free press, and democracy)

    • The open door policy

      • Opening up to international trade and foreign direct investment

      • Accession to the World Trade Organization

      • Acceptance of globalization

    • The market-oriented reform

      • Restoration of family farming and abolishing of communes

      • Privatization of SOEs and entry of non-state enterprises

      • Free mobility of labor and free labor market

      • Development of capital markets and property rights infrastructures

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    Striking Similarity between Meiji Reform in 1867 and Deng Xiaoping’s Reform in 1979

    • Traditional Japan: very isolated

      • Travel and study abroad prohibited, ships not larger than 75 tons, trade only through a small depot in Nagasaki of the Dutch East India Company once a year

      • In 1853, American navy opened Japan for trade concession to U.S. and then other Western powers

    • In 1867, the new Meiji regime started sweeping reforms

      • Abolished feudalism and legal inequality across old classes

      • State taxes replaced feudal levies in kind

      • Free to choose occupation, free to produce any crop or commodities, free to buy or sell land

      • Compulsory primary education, textbooks with western contents, many students sent to study aboard

      • A national monetary and banking system established

      • Agricultural research and industrial development encouraged

      • A program of military modernization

      • A family planning habit to check population growth

    Source: Angus Maddison, Monitoring the World Economy 1820-1992.

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    What Is Special about China?

    • China is big

      • Labor force is larger than the sum of all developed economies

      • GDP at PPP is second only to U.S.

      • Global market share of many manufacturing products about 50%-80%

    • China is young

      • China’s population profile is similar to Japan’s but about 25 years younger, with working age population now among the highest in the world at about 70%

      • With one-child policy China’s aging is likely to be quicker than Japan

    • China is very open

      • OECD capital is moving to China, competing not with China but with other OECD investors through unprecedented inflows of FDI

      • Hong Kong and western economic institutions are replicated in China with help from large numbers of returning overseas students

    • China is doing all the successful things Japan and other Asian dragons have done before while having unlimited supply of labor for the last 30 years and at least for next 15 to 20 years

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    China’s Achievements in Poverty Alleviation and Growth

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    China Achieved an Impressive Average Growth Rate of 10% during the 30 Years of Reform

    Source: Barry Naughton, The Chinese Economy, Figure 6.1 on page 144, 2007.

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    Both Rural and Urban Income Grew Rapidly with Significant Rise in Living Standard for Every Chinese

    Source: Barry Naughton, The Chinese Economy, Table 9.1 on page 210, 2007.

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    Rural Poverty as Defined by the World Bank Declined from more than 65% to about 10% Lifting Several Hundred Million Chinese Out of Extreme Poverty in Less than 30 Years

    Source: Barry Naughton, The Chinese Economy, Figure 9.1 on page 213, 2007.

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    China Achieved Dramatic Improvementin Human Development Index (Life expectancy, Literacy, Education, and GDP per capita)

    Source: Barry Naughton, The Chinese Economy, Edited from Table 9.2 on page 224, 2007.

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    The Role of Public Investment in China’s Growth

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    China’s Green Revolution Started Long before Deng’s Reform and Never Stopped since 1949

    Source: Barry Naughton, The Chinese Economy, Figure 11.5 on 259, 2007.

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    The Central and Local Governments Led Massive Investment in Infrastructure Which Laid Foundation for the Take-Off of the Private Business

    Source: Barry Naughton, The Chinese Economy, Figure 14.3 on page 346, 2007.

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    China’s Cheap Talents Are Fuelling its Industrial Productivity Catching Up

    Source: Barry Naughton, The Chinese Economy, Figure 15.3 on page 362, 2007.

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    Massive Laid-off from SOEs Did Not Lead to Social Instability due to Protection Measures Valued Much Higher than Real Wages of Migrant Workers

    Source: Barry Naughton, The Chinese Economy, Figure 8.2 on page 187, 2007.

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    Demographic Gifts to East Asian Miracle

    Source: Jeffrey G. Williamson, Demographic Shocks and Global Factor Flows

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    China Enjoyed Two Decades of Demographic Dividends Which May Last for Another Two Decades

    Source: Barry Naughton, The Chinese Economy, Figure 7.3 on page 173, 2007.

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    China’s Open-Door Policy

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    Trade Liberalization Fuelled both Export and Import but Created Large Trade Surplus in Recent Years

    Source: Barry Naughton, The Chinese Economy, Figure 16.1 on page 378, 2007.

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    China and its Asian Neighbours:Gaining Export Market

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    Foreign Invested Enterprises Are Driving China’s Exports

    Source: Barry Naughton, The Chinese Economy, Figure 16.2 on page 388, 2007.

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    More than Half of China’s Imports Are for Re-Exports Relating to International Supply Chain

    Source: Barry Naughton, The Chinese Economy, Figure 16.3 on page 392, 2007.

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    China’s Trade and FDI: Concentratedin Nine Coastal Provinces

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    At the Start of Reform, China Allowed Wholly Foreign Owned Enterprises and Created Favourable Legal and Tax Environments for Foreign Invested Enterprises

    Source: Barry Naughton, The Chinese Economy, Figure 17.3 on page 412, 2007.

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    Hong Kong Provided Mainland China not just Money and Management but also Knowledge of Market Institutions and their Working

    Source: Barry Naughton, The Chinese Economy, Figure 17.1 on page 403, 2007.

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    China’s Market-Oriented Reform Policy

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    Rural Reform Released Rural Surplus Labour and Made It Possible for the Decline of Agricultural Employment from 70% in 1978 to 40% in 2007

    Source: Barry Naughton, The Chinese Economy, Figure 6.3 on page 151, 2007.

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    Migration and Floating Rural Population Are Driving Rapid Urbanization in China

    Source: Barry Naughton, The Chinese Economy, Figure 5.1 on page 127, 2007.

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    Good Infrastructure and Relaxation on Labour Mobility Created Probably the Greatest Waves of Rural-Urban Migration in the World’s History

    Source: Barry Naughton, The Chinese Economy, Figure 5.2 on page 130, 2007.

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    Booming Non-State Sector in the Cities Absorbed Massive Rural Surplus Labour

    Source: Barry Naughton, The Chinese Economy, Figure 8.3 on page 190, 2007.

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    What Happened to China’s SOEs?Privatization of the small to get rid of state liabilitiesCentralization of the large to secure state monopoly profits

    Source: Barry Naughton, The Chinese Economy, Figure 13.1 on 305, 2007.

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    Rapid Privatization of SOEs during 1995-2005Number of SOEs in Large and Medium-sized Industrial Enterprises

    Source: National Bureau of Statistics.

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    SOEs Performed Worse than NSEsbut Still Dominated in Large Enterprisesand in Monopoly Sectors

    Structure and Performance by Ownership of Top 500 Chinese Enterprises in 2006(%)

    Source: China’s Top 500 Enterprises, 2007.

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    Reading List

    • Sach, D. Jeffrey. “China: catching up after half a millennium,” chapter 8 in The End of Poverty, 2005.

    • Sachs, D. Jeffrey and Wing Thye Woo. “Structural Factors in the Economic Reforms of China, Eastern Europe, and the Former Soviet Union” Economic Policy, Vol. 9, No. 18 (Apr., 1994), pp. 101-145.

    • Dollar, David. “Poverty, inequality and social disparities during China’s economic reform.” Policy Research Working Paper, WPS4253, The World Bank, 2007.

    • Cheong, Young-rok and Geng Xiao. “Global Capital Flows and the Position of China: Structural and Institutional Factors and their Implications,” Chapter 8 in China’s Role in Asia and the World Economy - Fostering Stability and Growth, Forum on Debt and Development, December 2003.

    • Xiao, Geng. “Reforming the Governance Structure of China's State Owned Enterprises.” Public Administration and Development, No. 18, 273-280, 1998.

    • Woo, Wing Thye and Geng Xiao. “Facing Protectionism Generated by Trade Disputes: China’s Post-WTO Blues,” In Garnaut, R. and L. Song (eds.) China: Linking Markets for Growth, 2007.

    • Naughton, Barry. The Chinese Economy: Transitions and Growth, The MIT Press, 2007.

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