MacroeconomicsLecture 17

The Economic Growth in China

Questions to the mainstream growth theoryIs full employment a necessary assumption to explain the economic growth? Must economic growth be supply-driven? Could it be demand-driven? Can the mainstream growth theory be able to explain China’s economic growth?

The Basic Properties of Chinese Economy

A developing countryLess capital stock (facilities) per capita; Dual structure in urban and rural area, indicating unlimited supply of labor from countryside: labor resources are not fully employed. Inequality in regional development Convergence hypothesis indicates that …….

The Basic Properties of Chinese Economy

A larger economy (in terms of population)

May have some advantages comparing to small developing economy? It is a market economy for most industries (no planning); Co-existence of private and state enterprises for most industries; Financial industries are still state-owned.

A transition economy

High growth in China, an expression

A Framework for analysisMust consider from both demand and supply perspective. Unemployment in economic resource (labor and capital stock?) is a simple observation. Must consider the investment

High growth in China, an expression

High growth from demand perspectiveConsumption Growth versus GDP Growth

High growth in China, an expressionInvestment Growth versus GDP Growth

High growth in China, an expressionInvestment versus Consumption

High growth in China, an expression

High growth from supply perspectiveHigh growth in investment indicates fast accumulation of capacity (facility) Labor supply is unlimited

High growth in China, an expression

Major conclusion

The higher growth in investment is the major driving force to the high growth in China Investment not only creates demand via multiplier. Investment also creates capacity. Meanwhile labor supply is unlimited.

Can we regard such explanation as being a demand driven (driven by demand for investment) perspective?

Why investment is so high in the past?Stable political system, no significant upheaval and revolution The advantage of larger country More investment opportunities (upgrading exists everywhere).

Why investment is so high in the past?

The advantage in resource for investmentCheap labor due to the unlimited supply Cheap land provided by local governments for attracting investment Cheap financial resource for investment (see the table in the next page)

Why investment is so high in the past?中国与部分发达国家有关金融数据的比较 中国 美国 德国 实际利率(%) 2.1418 3.4757 4.1092(1980-2001) (1964-2003) (1970-2003)

法国 4.5654(1980-2003)

货币供给增长率 名义 GDP 增长率

0.2006(1985-2001)

0.0712(1964-2003)

0.0626(1975-2003)

0.0601(1980-2003)

0.1606(1981-2001)

0.0725(1964-2003)

0.

0564(1970-2003)

0.0619(1980-2003)

The quality of economic growth in the past

A DialogA:How are you doing these days? B:Good, I have recently built a factory to produce steel. C: What? Do you think you are capable for making steel? This seems to request higher technique. B: What not? Anyway we use the traditional way to produce. No high technique is needed.

The quality of economic growth in the past

A Dialog (continued)A: Where is the factory? B: In Jing Shang. There is a special development place for business investment. The land there is very cheap. A: But how about workers B: That is easy. So many farmers in the rural area. They are not expensive.

The quality of economic growth in the past

A Dialog (continued)A: But you must need some engineers? B: No, we do not need. We use the traditional way. A: How about money, do you have enough money to build a factory? B: Not really much. Most of them can borrow from bank.