Global Classroom Lecture

Poverty Alleviation and

Economic Growth in China

By
Geng XIAO
gxiao@brookings.edu
gxiao@tsinghua.edu.cn

Chinas Legacy and Reform Strategy

Legacy of the Chinese Civilization

and the China Puzzle

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

What was Chinas historical economic performance?

Compared to the Roman Empire 2000 years ago

Compared to Europe about 600 years ago

Chinas lead in technological invention included:

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

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 Xiaopings reform
beginning in 1979?
Source: Angus Maddison, Monitoring the World Economy 1820-1992.

Explaining China Puzzle

and European Miracle

Domestically unchallengeable Chinese central power led to

high-risk inward-looking policies
In 1434, Ming Emperor destroyed Chinas 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
Chinas disastrous and humiliating loss in the Opium War in the mid19th 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

Three Pillars of Chinas 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

Striking Similarity between Meiji Reform in 1867

and Deng Xiaopings 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.

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
Chinas population profile is similar to Japans but about 25 years younger,
with working age population now among the highest in the world at about
70%
With one-child policy Chinas 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

Chinas Achievements in Poverty Alleviation and Growth

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.

Both Rural and Urban Income Grew Rapidly with

Significant Rise in Living Standard for Every Chinese
Growth of Real Per Capita Household Income

Rural Net Household Income

Urban Disposable Income

Income in Constant 2004 Prices (RMB)

1978

(About 500)

1,701

1985

1,343

2,728

1991

1,585

3,612

2004

2,936

9,422

Average Annual Growth Rate (percent)

1978-1985

(About 15%)

7.0%

1985-1991

2.8%

4.8%

1991-2004

4.9%

7.7%

In 2004, one RMB was worth $0.12 at the official exchange rate, or $0.55 at PPP.

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

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.

China Achieved Dramatic Improvement

in Human Development Index
(Life expectancy, Literacy, Education, and GDP per capita)
Comparison of Human Development Index 2003

Nations

0.91

Hong Kong

0.92

0.77-0.78

Thailand

0.78

China 2003

0.75

China 1999

0.72

Chinese Provinces

Shanghai

Shandong, Hebei, Jilin

Shanxi, Hunan, Chongqing

Guizhou

China 1990

0.63

India

0.60

Tibet

Myanmar

0.58

China 1980

0.56

Pakistan

0.53

0.64

0.59

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

The Role of Public Investment in Chinas Growth

Chinas Green Revolution Started Long before Dengs

Reform and Never Stopped since 1949

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

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.

Chinas Cheap Talents Are Fuelling its Industrial

Productivity Catching Up

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

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.

Demographic Gifts to East Asian Miracle

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

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.

Chinas Open-Door Policy

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.

China and its Asian Neighbours:

Gaining Export Market
S h a r e in W o r ld E x p o r t s o f M a n u f a c t u r e s 1 9 9 0 a n d 2 0 0 0
1990
W o r ld

2000

G a in / L o s s

1 0 0 .0 %

1 0 0 .0 %

D e v e lo p e d c o u n t r ie s

8 0 .4 %

6 9 .4 %

-1 1 .0 %

D e v e lo p in g c o u n t r ie s

1 7 .5 %

2 7 .4 %

9 .9 %

1 2 .6 %

1 9 .9 %

7 .3 %

C h in a

1 .9 %

4 .7 %

2 .8 %

A s ia - S ix *

9 .1 %

1 2 .2 %

3 .1 %

O t h e r A s ia

1 .6 %

2 .9 %

1 .3 %

A s ia

S o u rc e : W T O ; *A sia

six : T a iw a n , H o n g K o n g , K o re a , M a la y sia , S in g a p o re , a n d T h a ila n d ;

S ig n i fic a n t r e -e x p o r ts e x c l u d e d .

Foreign Invested Enterprises Are Driving Chinas Exports

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

More than Half of Chinas Imports Are for Re-Exports

Relating to International Supply Chain

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

Chinas Trade and FDI: Concentrated

in Nine Coastal Provinces
Concentration of Trade and FDI in China's Coastal Provinces

Region
China Total

Population
(%) GDP (%)

FDI (%) Trade (%)

GDP per
capita
(US$)

100.0

100.0

100.0

100.0

1,008

Top 9 Provinces by FDI

31.7

51.8

84.6

89.4

1,647

E.China (Shanghai, Zhejiang, Jiangsu)

S.China (Guangdong, Fujian)
N.China (Beijing, Tianjin, Liaoning, Shandong)

10.6
8.8
12.2

19.9
14.0
17.9

28.9
34.2
21.4

29.2
40.9
19.2

1,882
1,600
1,477

Middle 12 Provinces by FDI

Bottom 10 Provinces by FDI

49.9
17.7

37.4
10.8

13.6
1.8

7.7
2.9

756
614

Source: Statistical Yearbook of China, 2002.

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.

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.

Chinas Market-Oriented Reform Policy

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.

Migration and Floating Rural Population Are Driving

Rapid Urbanization in China

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

Good Infrastructure and Relaxation on Labour Mobility

Created Probably the Greatest Waves of Rural-Urban
Migration in the Worlds History

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

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.

What Happened to Chinas SOEs?

Privatization of the small to get rid of state liabilities
Centralization of the large to secure state monopoly profits

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

Rapid Privatization of SOEs during 1995-2005

Number of SOEs in Large and Medium-sized Industrial Enterprises

Source: National Bureau of Statistics.

SOEs Performed Worse than NSEs

but Still Dominated in Large Enterprises
and in Monopoly Sectors
Structure and Performance by Ownership of Top 500
Chinese Enterprises in 2006 %
Ownership

No. of
Firms

Profits

Assets

Employees

Taxes

Return on Assets

State

69.8

87.94

93.63

89.32

92.69

1.40

Collective

5.80

2.22

4.15

2.35

1.67

0.80

Private

17.8

7.08

1.73

7.00

3.94

6.08

Foreign

6.6

2.76

0.48

1.33

1.70

8.48

Return on Assets
%

Return on Equity
(%

Top 500 Chinese Enterprises

1.82

10.07

Fortune 500 Companies

1.79

16.13

Source: Chinas Top 500 Enterprises, 2007.

Reading List
1.
2.

3.

4.

5.
6.
7.

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 Chinas economic reform.
Policy Research Working Paper, WPS4253, The World Bank, 2007.
http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2007/06/13/00
0016406_20070613095018/Rendered/PDF/wps4253.pdf
Cheong, Young-rok and Geng Xiao. Global Capital Flows and the Position of China:
Structural and Institutional Factors and their Implications, Chapter 8 in Chinas Role in Asia
and the World Economy - Fostering Stability and Growth, Forum on Debt and Development,
December 2003.
http://www.fondad.org/publications/china
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: Chinas
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.