1. The economics of institutional reform and development in China Gérard Roland UC Berkeley

2. Lecture 1. The Chinese Miracle. Stylized facts and puzzles.

3. 1. Introduction Chinese growth since the beginning of the reform process in 1978 has been very impressive. Three decades of very high growth in a country of over a billion inhabitants is akin to an economic “miracle” and is one of the most important economic events since England’s industrialization.

4. Real GDP grew at an average rate of more than 9% during 30 years. Real GDP per capita at more than 8%. Consumption at nearly 8%. Foreign trade as a % of GDP from less than 10% to more than 60%...

5. Fixed telephone (million) Mobile telephone (million) Auto production (million) Passenger cars per 1000 pop Urban housing per person (m 2 ) Super highway length (km) 1978--0.15-6.7- 19853.12-0.44-10.0- 19906.850.0180.51-13.7500 199540.713.631.451.3316.32,100 2000171.5384.532.072.9320.315,300 2003271.60269.954.445.4123.729,700 2005 July337.44363.175.07 (2004) 6.96 (2004) -- Table 2. Growth of various indicators. Source: Qian-Wu (2005)

6. Non-agricultural employment (million) TotalIndustryService 1978118.3569.4548.90 1985159.16103.8455.32 1990222.15138.5683.59 1995276.34156.55119.79 2000330.99162.19168.80 2003359.00160.77198.23 Source: Qian-Wu (2005). Table 3. Evolution of employment.

7. Chinese national standardWorld Bank standard ($1/day) Poverty population (million) % of rural population Poverty population (million) % of rural population 197825030.7%-- 1990859.5%28031.3% 1993758.2%26629.1% 1996586.3%13815.0% 1998424.6%10611.5% 200228-88- Source: Qian-Wu (2005). Table 4. Rural poverty reduction.

8. While the growth is impressive, not everything is rose. Income inequality has increased and many social problems, environmental problems.

11. Gini coefficientsConsumption inequality 19881995200319912003 National0.39 0.440.45Richest 20% to poorest 20% 2.023.95 Rural0.320.380.37Richest 10% to poorest 10% 2.425.66 Urban0.230.280.32 Table. Income and consumption inequality. Source: Qian-Wu (2005).

12. Puzzle 1. China’s transition success. This impressive high growth period is the result of the transition process from socialism to capitalism. China’s performance during the transition period is much better than that of other transition countries. Why did China do so much better than other transition countries?

13. China has high growth. Other transition countries had output fall and decline!

14. Differences between China and other transition countries. 1) China started off poorer. Sachs-Woo, 1992: Being an agricultural economy, China was facing the classical problem of development (transfer of rural labor force to urban industry) whereas other transition countries were facing issue of transfer of labor from SOEs to private sector. BUT ….. Other countries have been facing classical problem of development and have not had success. …While some “convergence à la Solow argument” may apply, it does not explain why East European countries had an output fall and long decline in the nineties. Still leaves open issue of why China did better than other transition countries.

15. China started off poorer. Blanchard- Kremer, 1997. China had less complex economy. More complex economies with institutional weaknesses should have larger output fall. China did not have any output fall. Does not explain either lack of any output fall or high growth.

16. Differences between China and other transition countries. 2) China did not introduce democratization Little academic work on this but much journalism. Issue nevertheless quite crucial. Main argument is that absence of democracy gave the Chinese government more freedom of maneuver to introduce painful reforms. Ironically, reforms were less painful in China compared to countries that democratized. Moreover, countries that democratized less or had anti- democratic backlash have tended to do less well (former CIS countries had longer output fall). TO SUMMARIZE: China’s transition success not clear in view of the overall transition experience.

17. Puzzle 2. High growth despite relatively low quality of institutions. China represents a puzzle for the new mainstream view in economics according to which quality of institutions is a main factor explaining high growth and differences in development. (Hall and Jones, 1999; Acemoglu, Johnson and Robinson, 2001). China does not rank highly in terms of institutional comparison.

18. 199020002003 PRCLStatusPRCLStatusPRCLStatus China 77N Free76 76 Czech ---12Free12 Hungary 22Free12 12 India 23Free23 23 Mexico 44P Free23Free22 Peru 34P Free33 23Free Romania 65N Free22Free22 Russia ---55P Free55 Singapore 44P Free55 54 Ukraine ---44P Free44 Table. Freedom house index of political freedom and civil liberties. Source: Qian-Wu (2005).

19. Country/Region20042002200019981996 Singapore95.792.398.999.599.4 Hong Kong90.384.790.490.890.4 Japan89.988.390.990.388.0 Hungary78.777.678.676.275.3 South Korea68.676.573.876.881.9 Malaysia64.767.971.176.882.5 Turkey54.653.159.965.958.4 Thailand51.760.269.069.271.1 India50.755.662.067.056.6 Romania48.352.051.949.744.0 Brazil46.945.953.556.846.4 Mexico45.947.446.040.054.2 China40.648.548.752.437.3 Peru31.936.738.537.340.4 Russia29.521.418.722.719.9 Ukraine23.221.426.223.228.3 Source: Kaufmann et al. (2005). From Qian (2005). Table. Rule of Law Index.

20. Country/RegionRanking Singapore2 Hong Kong7 Japan10 Thailand20 Malaysia21 South Korea27 Hungary52 Peru71 Mexico73 Romania78 Russia79 China91 Turkey93 India116 Brazil119 Ukraine124 Source: World Bank 2006, Doing Business report. From Qian (2005). Table. Ease of Doing Business.

21. Country/Region20042002200019981996 Hong Kong99.589.398.4 98.9 Singapore99.0 100.0 99.4 Hungary86.784.288.288.074.6 Japan83.778.181.869.082.3 South Korea71.975.569.558.278.5 Mexico68.066.876.575.574.0 Malaysia64.569.464.270.182.9 Brazil58.163.364.757.160.2 Peru57.162.273.381.576.2 Thailand51.264.877.556.069.6 Romania49.855.135.858.230.4 Turkey48.855.655.180.471.3 China35.037.836.942.947.0 Ukraine33.527.011.217.923.8 Russia30.543.45.331.5 India26.643.438.541.844.2 Source: Kaufmann et al. (2005). From Qian (2005). Table. Regulatory quality.

22. Country/Region2004 Rank2004 Score Finland19.7 Singapore59.3 Hong Kong168.0 Hungary424.8 Mexico643.6 Thailand643.6 Peru673.5 China713.4 Turkey773.2 Romania872.9 Russia902.8 India902.8 Ukraine1222.2 Source: transparency International. Table. Corruption perceptions.

23. Qian (2005). Figure. Institutional quality and GDP per capita.

24. China’s institutional quality, corrected for income per capita is not that low. There have been significant improvements since the beginning of the reform period on the legal and political front. Still, the coexistence of strong growth and weak institutional quality is a puzzle. How to explain high growth despite low quality of institutions in comparison to international norms? Possible answers we will investigate: 1.Transitional institutions were created at different points during the transition process that were very imperfect but helped move the reform process forward and thus operate large scale resource reallocation and creation of markets. 2.Meritocratic administration fundamental in explaining sustained growth. Success in transition and in growth are linked but useful to look at them separately. High growth presupposes successful transition but successful transition does not automatically imply high growth.

25. Explaining the growth success Lecture 2. We will look at the basic sources of growth over the last decades to understand better the anatomy of growth in China and see what the macro-indicators tell us. Traditional growth analysis will give us anatomy of growth but will not give us detailed causes of the Chinese success and we will need to dig in more deeply in understanding the causes and consequences of the institutional changes associated with China’s transition process.

26. Explaining the transition success. Lecture 3. Chinese gradualism. Experimental approach to reforms and flexibility of administrative organization played a very important role in a) getting reforms started, b) providing flexibility for reversal in case of failure. Chinese M-form organization made experimentation much easier since it could be done at a small scale without disturbing the rest of the economy. Chinese gradualism was criticized in the 1980s but proved more successful than East European “big bang” approach.

27. Explaining the transition success. Lecture 4. The dual-track approach to price liberalization. Price liberalization at the margin helped prevent the output fall, protected existing rents and acted as Pareto-improving reform. Was criticized for some of the rents it generated. Represents a general political economy device for creating reform without losers.

28. Explaining the transition success. Lecture 5. Fiscal decentralization and incentives of bureaucrats. Reform of organization of government and provision of incentives to bureaucrats played important role in creating support for growth. Local and provincial governments became interested in promoting reform and growth.

29. Explaining the transition success. Lecture 6. Meritocracy and yardstick competition. Leaders with more success in growth got faster promotion. Organization of government facilitates yardstick competition. Promotion within government administration a strong incentive for elite members.