Why Has China Grown So Fast For So Long?
This is the result of a personal effort to understand China. When I first came to China a little over three years ago, I really invested time in meeting with professors from Columbia and Harvard. I was based in New York, and I’d been following China for some time. When I got here I realized it was quite difficult to square what they were telling me with what I was seeing here. And that forced me to dig in and try to understand what was happening in China and give me a structured way of looking at things.
It also brought home a simple fact. I was told when I first got here that if you want to write a book about China, write it in the first three months. After that it becomes much more difficult. The longer you are here the less clear it becomes, and I had a very good friend who has been associated with China for 20 plus years. I said, “finally someone who really knows China,” and he said, “Well you know I only know very little about China.” So I think that China is a complex phenomena and a rich culture. All of that requires a very interesting review of the country and its performance.
I think it is quite remarkable what is happening, and maybe China has not been sufficiently reviewed in a way that is helpful to other countries. I was struck by the fact that the UN Human Development Report has never really taken on China to try to understand why it has grown for so long and so fast. China has really become a different country in just two generations – in a lifetime. Very amazing, it hasn’t happened elsewhere. Those who are economists find if very difficult using traditional techniques to explain all of this. What has China done so well?
China lifted something like three to four million people out of poverty – a remarkable example of a society shifting and transforming itself. I also want to highlight that development is fundamentally about transformation. And those who have studied economics, I hope that you also confirm that you are not taught that much about transformation. You are taught about microeconomics and microeconomics. And there’s a very good quote by Professor Stieglitz who said that successful development transformation must come from within the country itself, which must have institutions and leadership to catalyze, absorb, and manage the process of change and the change to society.
To me in a sense, this kind of sums up China. If you look at China through the transformation lens, you have a much more broad perspective and maybe the beginning of a explanation of China’s success; and I begin to look at the prospects for China’s future success. It’s also been very intriguing that whenever you look at the analyses of China, there have always been analysts who say that next year the Chinese bubble will collapse. Next year it will slow down. Now this has been going on for maybe the last 20 years, so maybe China has been doing something right after all, eh?
So the question is, what is that? So let me give you a little outline. China has the largest sustained GDP growth ever witnessed. It outperformed the previous tigers. Its share of world trade has tripled since 1990 and is still rising fast. It’s now reached a per capita income of $1700 which means China is no longer a low income country. It is actually alone responsible for the reduction in global poverty. If you took China out of the equation, global poverty actually rose. The human development index has gone up 43% since 1985.
The acceleration of growth is quite remarkable. And if you compare that with India, actually my own view is that the gap is not narrowing but increasing. Official poverty fell by fifteen percent: from 16% in 1984 to 2% in 2004. Admittedly this is quite a low definition, but even if you take the dollar a day poverty line, China has reduced poverty by 422 million people from 1981 to 2001. So regardless of measure, it is the largest reduction in human history.
As a result China is regaining its place. This is a quite interesting study done by an historian named Professor Madison. He has managed to get data from 1600 to 2003 – PPP data. By the 1820’s for a long period China had been 1/3 of global trade and went to low of 4% in 1920. But look at what is happening in 2003, we are beginning to see China gaining its rightful place in the global economy and global prowess.
Again, more towards the economists, if you look at all the studies done here, it is fascinating that some of my good friends try very hard to massage the economics to capture this. Now most of neoclassical economics, which is probably what you’re taught, sees growth and development as a simple form of adding more capital and labor. And then the emphasis is very much on standard policies and institutions regardless of the country specific context.
Now this is very important. China did not follow any of these prescriptions. It did not have prices which were reflecting scarcity value; it did not have institutions of the kind that have been recommended; it did not have capital markets; it did not have people trying to think in a global environment. But somehow it still did well. So privatization, marketization, liberalization are seen as key for achieving growth. This is the current dogma which is accepted globally. And China did not follow that.
So China did not follow any of the prescriptions in the so called ‘Washington Consensus’. A few years ago we had this big conference in Shanghai and Paul Wolfowitz, President of the World Bank said, “Let’s not talk about the Washington Consensus again. The Washington Consensus is finished. We won’t talk any more about it.” Because it was heavily criticized in the 1990’s for not having produced results. It was a very influential set of policies which every country was being recommended to follow.
And I’m being a bit provocative here. And yet the Chinese bumblebee, which someone told me is an appropriate metaphor here, continues to defy the laws of neoclassical gravity because neoclassical economics has defined some rules of gravity. And I said, “Is this the beginning of something called the Beijing consensus? A new consensus?”
Again to elaborate on how people have understood the standard development explanation: think of the shift of surplus labor out of agriculture to high productivity industrial sectors. That large pool of labor keeps wages low and returns to capital and investments high. And that all works out somehow to propel growth. And there have been a lot of studies on this basic understanding.
But many other countries have similar conditions, so why don’t they grow equally fast? So this question is not whether these two models work or they don’t work. And I know some mathematicians here may not like what I’m saying. The questions is how could China generate, sustain, and leverage the accumulation and reallocation of factors, I mean what is this thing called China? And again a little thin on traditional economic theories – there’s always a missing gap, capital labor can’t explain growth. And that’s not just true of China, that’s true of other countries as well. So that gap must be something special; and that gap they have called global factor productivity.
And different studies try to estimate what is that mysterious middle gap between contributing extra percentage points to growth. Some say it’s an extra three to five percentage points, but then some say a lot of the data in China is not very strong and they try to reduce some of the data. So I just want to put it out there for you to know that there are still other explanations to explain which China has done well or not.
Of course the question is what is total factor productivity and why has it grown. And of course this is a difficult question to answer because people try to give it as a residual and give it a name. But no one can fully explain it and I’ll explain it beneath some theory of development. My view has been that development is fundamentally about transformation. And I know some followed what happened in Russia and some of the former C.I. states.
My view is that there’s a very important relationship between ownership, capacity, and policy. And these three parts have to be kept together in a very serious way. And that’s the best way to understand Russia. When Jeffrey Sachs recommended the big bang approach – push forward with new growth oriented market oriented policies – why did it fail so miserably? It failed because you had social capital: how people relate to each other, you had organizational capital: which is institutions, and you had people’s own mindsets and attitudes: which were fit into how the Soviet Union was organized. There was an expectation of how factories are organized. There was an expectation of social benefits which are coming out of it.
And there was in some ways an alignment between these three: ownership, capacity, and policies even though the outcomeswas not a high level outcome. But when you shifted it and had new policies which were more market friendly, there were no institutions to manage them to implement them to make them happen. And people were resistant to it because they were not really for the free wheeling market. So there was a misalignment and that was a fundamental reason why that did not work for them.
In Russia, the big ban approach left a political vacuum. The state was captured by powerful interest groups; the state was seen as a grabbing hand, suffocating growth and development, not as a supporting hand. And I’ll come back to that in a minute. And in some areas the government classes just disappeared. Somehow there was a view that the state did not have a role to play and I’m going to argue that it has a lot of role to play. So managing development is all about managing transformation and managing this alignment, and how you sequence these things becomes very important.
There are at least 4 key elements which go very far in explaining why China has done well. First, long term commitment to reform and development. Quite remarkable. Twenty-five years ago when Deng Xiaoping launched his reforms in the late 70’s, early 80’s, he foresaw a 25-50 year period. That’s quite remarkable to have such a long commitment to reform and development. Most countries’ governments are for four to five years and they get into power the first few years and the last few years they want to stay on in power. So people have their political cycle and you actually see the cycles in the economic markets also. And China also. Rather than having a big detailed movement, there was much more almost like a philosophy, a strategy – you were aiming at a broad direction, but the means are flexible, you’re allowed to keep adjusting things as you go along.
Second it was about being pragmatic. If something was not working, you fix it, you change it. No policy since the late 70’s has been carried out in China in one go. There’s always been piloting and testing how it will pan out, again following Deng Xiaoping’s famous phrase of feeling the stones as you cross the stream. And that’s quite remarkable and I think that’s quite unique in many ways.
Third thing – institutions were strong and they kept changing to meet reform needs. Whenever there was a reform agenda, they were clear adjustments of institutions to deliver that.
Fourthly, public goods. You’ll be amazed that there was strong public growth in creating human capital which is education, cohesion bringing society together and a very deliberate investment in public infrastructure to open markets. And you can see that in the late 70’s and early 80’s public goods become very important and they keep on becoming very important.
Now I’ll talk about the role of ownership. When you compare what happened in the early 90’s in Africa, and there’s a lot of pressure on cooking up policy prescriptions from the outside and convincing African leaders to adopt them. The results were not very positive. I think what China has done well is to fundamentally say to everyone, and to believe themselves, that Chinese development is to be led by Chinese leaders and Chinese institutions; and to believe that they may not be perfect, but they’re ours. They’re our objectives, our policies. Very important,. I think this paints a picture. And maybe they did well because they didn’t listen to many outside. I’m talking about strategy issues as opposed to technical content.
Now people talk about the role of the Communist party and we were talking a little bit earlier on with the Vice President. There was a State elite which worked to define strategies, priorities; and this elite was deeply committed to improving people’s lives. It had a development vision. It was not what is referred to in the literature as a grabbing hand. And I talked about the piloting of scaling up. And finally on this point if you see how things have moved, there’s been a fascinating way of building constituencies for reform and compensating individuals. There’s never been a big dramatic shift from one point to another. In any change there are losers and winners, so how do you design a strategy to move them forward?
On the vision side, rather than big bang, a dual track was followed. There was not a shift dramatically from the state owned enterprises to the market sector in one go. But it was a gradual thing. The role of the state in non-agricultural employment is coming down. The private sector is going up. This is actually being done as a very conscious strategy. You have the market track along with a fixed planned track – two tracks. And it was permitted to outgrow the planned track by harnessing the market forces in its own dynamism. And of course there was a transition period to shift people away from the state owned enterprises to the market sector, and it was not meant to be immediate and dramatic, this is what the big bang tried to do in Russia.
The role of capacities. I think you know this very well. A lot of emphasis on education and capabilities. I think Amartya Sen was one of the leading contributors to the human development concept. There’s been a lot of literature on the relationship between human development investment and growth. I want to talk about the second part which I call organizational capacities. It was very interesting how the sequencing went – how economic reforms were connected to institutional transformations. Capacity building was a continuous priority. How research based management was introduced in China. If you’re a provincial official and have targets for your provinces and you really hustle and work very hard to achieve them – your future career depends on them. And those who don’t meet them, their future career also gets affected by them. Very strong results orientation.
This is investing in human development. Literacy rates have gone up dramatically in China. And this was not just in the past two decades, this started up in the 60’s as you can see. And the big jumps were late 70’s onwards. And this is very interesting. I think China had a very pragmatic approach to economic policy making and transformation. Deng Xiaoping, of course all the planners associated, saw that it was vitally important to reorganize the bureaucracy as a first step, as a precondition to reform. Remember what I said about Russia and misalignment. And this was a two year period. The reforms were introduced in the late 70’s, early 80’s and immediately they started changing a couple of things – age of the ministers, governors, mayors, department heads. In two years the average age was brought down. This meant thousands of people, because they felt that without that the reforms will not succeed. And secondly, it’s education levels. People with university degrees went up dramatically in two years – ministers, governors as you saw. And look at the emphasis at the provincial, grassroots level – mayors, county division chiefs. There was a view that unless people’s attitudes and their knowledge changes, reforms have no chance to succeed.
There’s a thing called social capital and again there’s a lot of debate in economics on what it means. It’s basically means how people hold together and if people hold together, well you have good social capital. Here, maybe I’ll make some provocative statements.
This investment in health and education in the 60’s and 70’s was critical in my view to keeping this cohesion together. And the link I mentioned between human development investment and economic growth is also well established. And in some ways you have this issue of historic equality and I‘d like to make a provocative statement – that without the foundations laid by Mao, Deng’s reforms would not have succeeded. Because what happened in the first stage was that the equality structure was totally transformed. And there was an equality which allowed policies to take full fruit. Mindsets were changed and also since many things had not succeeded, including the Great Leap Forward and others, people wanted something that worked. So there was certain pragmatism which was being built up. And some in society became more responsible to form a new incentive. And these issues which are difficult to quantify at times are far more important than fixing the market or market imperfections, which of course occupy economists a lot.
So what you had was an attempt to alighn – align institutions, align policies, no one can say the policies were first best policies, as economists like to say, or even second best; but they were appropriate. They were connected to a Chinese condition in a Chinese context. And therefore sequencing the relationship between policy and institution becomes very important and probably needs much more study. But detailed policy content may be initially of second importance, as a more fundamental transformation becomes much more important – the length, the condition for real sustainable growth.
And as the institutional framework becomes more refined, which is where we are coming to now, getting policies right becomes more important. Because the structural adjustments and conditions are being settled and you have to now bring policies to the next stage. And of course capacities then have to align to the new policies.
So in all of this clearly China has gotten something right. And here is the GDP per capita comparing China and Western Europe. And you see the real, almost vertical jump which is taking place. And you know the interesting thing that all of these structural changes and the constant adjustment as you go along; never aiming for the best, but trying to bring things together, keep moving forward.
Another thing which is very interesting – whenever there was a crisis, and there have been several points of crisis, the Chinese government has responded by additional reforms, not fewer reforms. Typically what happens is that whenever there’s a crisis, politicians and policy makers step back because some of the risks are too high, but in the case of China it was the other way around.
The thing which maybe we have not highlighted too much is that there is a lot of room given for local experimentation – China was highly decentralized as an environment. And if something wasn’t working it was scaled down; but provincial level officials had a lot of flexibility to do that. So this has clearly produced something useful and at the same time the fundamentals are doing better. The tax base has expanded to about 20% of GDP now. Quite remarkable for a developing country. Higher than most developing countries, which means you are moving into a different kind of economy and society. Much of the economy is now highly competitive, markets are becoming more important., trade has been liberalized, the economic expansion remained strong last year. Despite attempts by the government to slow it down, the economy grew by 10.7 percent. And yet, remarkably, inflation remained low.
If you are a traditional economist, economic planner, you will look and worry about macroeconomic and macroeconomic balancing. And you worry about inflation. But China put a lot of emphasis on creating the conditions and changing the supply response, producing growth and output, and in the end they seem to be doing that.
One think I haven’t talked about which is quite important is population growth. I think it will be incorrect to say that without this managed population growth rate China would have succeeded so much. The estimates are that instead of 1.3 billion China would have had between 1.5 and 1.6 billion. Clearly, the per capita growth would have been far less.
So in a sense, we come to the second part of our explanation. We’ve talked about the context, we’ve talked about how China has been doing and I want to talk a little about some of the challenges that are emerging. The substantial rise in income and non-income inequality; the rural population increasingly elderly, female, and vulnerable; rural-urban and other gaps are reducing social cohesion so the social capital is being affected. Migrant workers – there’s a challenge in terms of their rights. China is in the unusual situation where they’re still a developing nation, but there’s an aging population which is more characteristic of more advanced societies. And there are bitter signs that the poorest are no longer taking part in growth.
And there’s the recent table here by the World Bank that maybe the very poorest segment of the poor may be slipping backwards even though poor generally may be doing better. The fiscal burden remains heavy on local levels. If you are in Shanghai, you keep most of the money; it’s great because you can afford good health and education services. But if you are poor Gansu, it’s not so great because you are relying on the center for transfers of resources. And the feature of the previous success, which was heavy decentralization, needs some correction now because the state is needed much more in balancing these matters.
And again just to give some figures here, 80% of the rural population and 50% of the urban population are entirely uninsured for medical costs. Out of pocket spending on medical costs – 60% nationally, and 90% in rural areas. This is the challenge in front of China. 70% who refuse hospitalization cite cost as a major reason, and health costs are now responsible for 33% of new poverty. The maternal mortality rate in shanghai is 9.6, in Guizhou it’s 111.0, and Tibet even higher. Migrant women represent only 10% of urban pregnancies, but two-thirds of maternal mortality, and that is the current reality which is in front of us.
And in some ways these are challenges which the Chinese government is very aware of, but in my view, I think we are starting on a third phase of Chinese growth and development. People ask me the question – will this growth rate continue – and my answer is simple, yes. For the very simple reason that there are still inefficiencies in the system. As we get better policies, inefficiencies will be corrected and growth will continue on that score. If you look at the 11th five year plan, there’s a very conscious link between new shifts of balancing development, reducing urban-rural gaps, but also links that with new institutions. There’s a clear recognition that you must adjust current institutions to deliver on the future promise. The current institutions as they are constituted need to be adjusted to manage a more balanced development. This is not happening right now. And unification of the rural and urban economies will bring many benefits of scale and efficiency when the time comes. Right now they are segmented, and I know there is a lot of debate on how to unify the services part; but actually we need to unify the production systems part.
And structurally marketization is making traditional economic and institutions increasingly more important. Look at the stock market – better regulation, better transparency is needed. It was not an issue before. If you look at the coastal regions, 80% to 90% of new growth is market driven. Look at the figures for the Dongbei provinces which are in the Northeast – only 40% of the new growth is market driven. So as these other parts catch up, there’s going to be a lot of potential built into this thing. And given the strong economic fundamentals, if realignments succeed, this may well be only the beginning; so I’m at least an optimist on China on those scores. So what Deng Xiaoping foresaw on Xiaokang to achieve by 2020 is likely to happen.
As China developed the first stage of reform, this is where we are right now. Some features key to previous successes have to be revisited. And I highlighted some of them, institutional arrangements, emphasis on the unification of production structures. Policies are moving in the right direction. Xiaokang – all around development to be achieved by 2020. It’s very similar to the UN’s Millennium Development Goals. The “new socialist countryside.” The challenge now is no longer what to do but how to effectively make it happen.
And China’s too large and too complex to manage easily, so I really am absolutely awed and impressed by the competent leadership in China and the sheer emphasis on capacity building for those leaders. But perhaps we need to move to a phase where strengthening rule of law and scientific development become much more important. I have not talked about the environment and I have at least one colleague here who has been sent from the ministry of environment, from SEPA. I want to say something which is not there. I am absolutely clear and I know that Chinese leaders are clear that in order to sustain development, the environmental reality needs to be brought into the way we look at economic policies and development, and I’ll be happy to talk more about it in the question and answer session.
In my view the Chinese reform shows the importance of alternative approaches, country led approaches, homegrown approaches. There’s no shortage of this. Each country has to do the difficult job itself first – debate, discuss internally what works, what doesn’t. It can draw on international experience, but one can not replace the other. So alternative approaches to development are quite profound, and China is a great example. It goes far beyond the Washington Consensus and I would like to increasingly call it now the “Beijing Consensus.”
Now on delivering on Xiaokang. I can not resist saying something about this. I think when you talk about health, about education, on many other things, it’s clear the central government has to play a larger role on how the budgets are transferred, on the way responsibility for healthcare is settled. What is the role of the state in providing basic healthcare for all citizens? What is the role of states in providing basic social security? These are the two essential reasons why people save. This is why Chinese people save. I did not talk too much about that.
So new challenges require new policies which, in turn, require additional and new institutional features. We are at the point where I think this is the right time for a new, universal basic social security package. I know there’s been some debate on this and the debate in China seems to be moving very quickly on this. This whole question of rebalancing local, central and inter-provincial fiscal relationships, we have a program with the ministry of finance and People’s Bank of China on this. And how to make fiscal systems and monetary systems pro-poor, pro-people? Right now they are actually pro-rich and pro-urban. That is the reality right now when you do the analysis on it. Removing the dichotomy between urban and rural systems, I’ve already talked about. And perhaps start introducing human development targets. We have a program with NDRC assessing Xiaokang and having a broader range of indicators assessing how the country is doing in moving forward not just on economic growth, but also on health on social development and the environment. And fundamentally administrative structures need to be probably re-looked at, reorganized to raise efficiency and effectiveness, enhancing transparency and participation.
What could be the sum of the lessons for other countries? And this also interests me being a Pakistani and being an informal advisor to my own government on these matters. I’ve been trying to learn from China to see how other governments like that can learn. The first fundamental thing is ownership, and I’ve been saying a little bit about that. Unless leaders and people in each country are willing to do the hard work of sorting their differences out, the rest is not possible. Second – public policy is vital in creating the individual and social capacities to generally sustain reform and growth. Third, perfect policies and perfect things only exist in a perfect world. In an imperfect world, we have to come together and find the second and third best solution which moves things forward and continue to move forward.
Encouraging experimentation, scaling up initiatives. Even if they don’t fit into some planners or some economists preset ideas is fine as long as they’re working. Long term commitment to reform and development is absolutely critical. And how do you achieve in other societies – the government may change after four or five years. We need a long term vision of reform which may need to go beyond single parties or single governments. Building constituencies for reform. I think what is clear is that as human beings, if we feel that our future is not right, people respond and react to it. As human beings, that’s what people do. So those that are losers in a policy shift or change have to be somehow talked about, taken care of; so that social capital, social cohesion can be maintained and progress can be deepened. And a final comment, of course population. It’s not a sexy topic to talk about, but I think it’s quite important.
Posts
For all those doubters - the USA will always remain a huge growth engine for the global economy. In 1950 the population of the USA was only 150 million - it's now 300 million - by 2050 it will be 450 million. You do not have such population growth in a country with huge natural and intellectual resources without a big increase in GDP. Remember productivity and GDP growth in the USA has been higher in the last 5 years than almost all developed countries. The huge wealth of the babyboomers will be heading to the coasts of Florida, Carolina and California to retire - so the trick is to find coastal property with sea views that is not susceptible to flooding from sea-level rises, erosion and hurricanes.
population growth and the European and 
South Africa
The reason is its minerals mining. 
regenerating and the City fringes are expanding towards Shoreditch. New small businesses in services, media and finance are moving in. £5 billion will be spent in the nearby 
consider that in the time it takes to fly to 
market has helped fuel steep house price rises towards the end of 2006 in the expectation of continued rises in 2007 when this money is banked – mostly between end January and early April. 
economy and house prices dropped in London – this would imply the North, West and Midlands would be sent into recession with house prices crashing. So what this means is, the Bank of England would need to keep rates at an appropriate level to keep the north growing (not in recession) but cool 
