Unbalanced growth in China--- understanding Chinese Success in a framework of political economy Shen，Ling School of Economics Shanghai University of Finance and Economics
How to find me? • http://se.shufe.edu.cn/ “people” “Ling Shen” “personal web page”
Target • Chinese economy grows very fast in last three decades. This should be understood systematically in order to share this experience with other developing countries. • We focus on two main characteristics of Chinese growth, i.e., an authoritarian political institution and high income inequality. • For each feature, we show firstly the facts, and then a theoretic model.
Briefly introduction of Chinese growth • Understanding this growth in a framework of political economy • Who enjoys this success • Chinese financial system and its effect on growth
1. A Brief Introduction of Chinese Success (All data without special notes are from Chinese Statistical Yearbook) 1978: 2007: Nominal GDP 364.5 Billion RMB 24953 Billion RMB GDP p.c. 381 Yuan RMB 18934 Yuan RMB
2.1 Nature resources From Jiang, Ze-min (Journal of Shanghai Jiaotong Uni., 2008 42(3))
Infrastructure “要致富，先修路” Units: 1,000KM *: Data in 1988.
2.4 Market-oriented reform: privatization and open-door policy • Is China already a market economy?
3. Economic growth in dictatorship • Most developing countries have dictatorial political institution. • Civil Liberty Index: from Freedom house • 1.0 --- 7.0 political environment of economic development.
Discussion in a political economy model • 3.1 Do we “need” a dictator? • 3.2 When will a dictator be “good”? • 3.3 When will democratization happen? • .
Some facts: • Democracy has higher growth rate on average • and quite stable --- less hope to catch up • Dictatorship is a risky project
Dictatorial countries: Index of civil liberties (1.0 - 7.0) bigger than 6.0 in 1972/74. All data from UN and Barro-Lee 1994.
Do we “need” a Dictator? • Barro (1996): “Democracy and growth”, Journal of economic growth(1),pp.1-27 • Tarares and Wacziarg (2001): “How democracy affects growth”, European Economic Review (45),pp.1341-1378 • Democracy: Advantage: more human capital investment, less inequality Disadvantage: less physical capital investment • Dictatorship: Advantage: more infrastructure (physical) investment Disadvantage: more corruption
Main features of the model • Utility function: • Production function:
Capital evolution functions: • Political institutions: dictatorship: the single ruler decides the tax rate and investment democracy: simple majority rule – the median voter
The optimality problem in democracy： Proposition 1： If there is no government, or government is democratic, the economy could have a zero growth rate – in a “poverty trap” -- under certain conditions.
The optimality problem in dictatorship： For individuals: • Proposition 2： If there is a selfish dictator, the incentive of private investment decreases.
Proposition 3： Under certain conditions, even a selfish dictator would lead the economy to leave the “poverty trap”, i.e., to achieve a positive growth rate.
3.2 When will a dictator be “good”? • “Stability overrides everything.” ---- Deng, xiaoping 稳定压倒一切 －－－ 邓小平 • McGuire, M.C. and Olson, M. (1996) “The Economics of Autocracy and Majority rule”, Journal of Economic Literature 34, pp.72-96 • Timing: Expropriation Growth- enhancing policy Private Investment Production
Shen, ling (2007) “When will a dictator be good?” Economic Theory 31(2), pp. 343-366 • Endogenous life-time of dictatorship: • Political transition (Gun Model) Dictator: good policy or bad one? Dictator: represses or not? Parameters revealed Expropriation Citizens: revolution or not? Investment Production revolution
Dictator has incentive to transfer more to citizens if they have a lower incentive to invest. • Emphasize the trade off faced by the dictator: ---economic benefit in short term ---induce earlier revolution in long term • Stability does not necessarily lead to a better dictator.
4. Who enjoys ? • Poverty level: <100 yuan p.c. in 1978 250 Million • <625 yuan p.c. in 2000 32 Million
HH Income(RMB) in each province (2007) Beijing Shanghai Zhejiang
What is the effects of income inequality on economic growth? • Traditional ideas: • The saving rate increases in the income. • The rich saves more than the poor proportionally. • Hence, redistribution from the poor to the rich will increase the aggregate investment
What is the effects of income inequality on economic growth? • Lucas Puzzle (1993) • South Korea and the Philippines were similar in the early 1960’s with respect to: GDP per capita, Population, urbanization, HC etc. • However, the growth rates in following 30 years are very different: 6% vs. 2%
From anecdotal to formal empirical evidence • Alesina and Rodrik (1994) • Persson and Tabellini (1994) • Perotti (1992,1994,1996) • Initial inequality is detrimental to long-run growth.
What are the effects of income inequality on economic growth? • Bénabou, Roland. (1996) “Inequality and Growth” in Ben S. Bernanke and Julio J. Rotemberg, eds., NBER macroeconomics annual 1996. Cambridge, MA: MIT Press, pp. 11-74. • Ling Shen (2009) “Urban-rural disparity: the demand analysis” The Journal of Developing Area 43(1) pp.87-107
Overview • Theories: • Imperfect capital markets • Political economy • Social conflict model