ESRC Rising Powers Workshop 2 China and Low Income Countries: Actors,

Models of Interaction, and Analytical Innovations

September 24 2010London, England

Session 5 China’s Development Strategy

and Lessons for African Countries

Cheng Enjiang and Zhang DeliangInternational Poverty Reduction Centre

in China (IPRCC)Beijing, China

Introduction

1. Economic Development Strategies in China

2. China and the Developing World3. The lessons for African Countries4. A Summary

1. China’s Development Strategy (I)

• Economic Growth and Povery Reduction• From 1979 to 2008, the average GDP growth rate 9.8%, compared

with a world average of 6.8%, China’s share of World output increased from 1.8 to 6.8%, ranking 3rd after USA and Japan.

• By 2008, China’s GDP per capita reached 2,770 USD, entered low middle income countries, by the World Bank standard, over 3000 US$ by 2009;

• The number of absolute poor fell from 250 million to less than 15 million, in the last 25 years, China’s contribution to global poverty reduction 2/3.

• Remaining Challenges: regional disparities remain, income gaps widening; poverty depth index increased, while the government has focused on the head counting index, and the core poor often in the remote and environmentally fragile regions

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1. China’s Development Strategy (II)

• Features of the Chinese Economic System• A hukou (permanent residential) system separates the

rural and urban population and social benefit and services;• Very small size of farms and changing comparative

advantage in agriculture: low labor productivity and surplus labor force in agriculture;

• The regional disparities, coastal, central and Western regions, disbarities between urban and rural incomes;

• The role of the Governments: at both the central and low levels, goals and performance assessment, SOEs, means for growth (taxation, land supply, infrastructure development), the fiscal arrangements

1. China’s Development Strategy (Ⅲ)

• Agricultural Development, a sector where China does not have a compartative advantage:

• Late 70s to the early 1990s: Agricultural development for growth and poverty reduction, fuelled by a household responsibility system, a sudden shift of resources from heavy industries (including defence) into agriculture (increased farm prices, increased farm input) plus infrastrucre and extension sercvices, and a large domestic market for farm goods), in essence a low level of tax on agriculture;

• Trade protection for Agriculture, China did not enter WTO until the late 1990s, the domeastic market for agriculture was therefore not open up, so a large domestic market for farm goods was maintained

1. China’s Development Strategy (Ⅳ)• Agricultural Development, a sector where China does

not have a compartative advantage: • since 2003 and 2004, Government shifted clearly from taxing

to protecting agriculture, especially for grain production: inclusive agricultural and rural support programs, waiving of agricultural and land taxes, exemption of school fees and some support for the chidlren from the poor families; rural support and poverty reduction

Developmemnt of Manufacturing industries• Late 80 to the new century: Rapid development of export

based labor intensive manufacturing industries in the coast regions of China where China has a comparative advantage,

1. China’s Development Strategy (Ⅴ)

Developmemnt of the Manufacturing industries• Development of Special Economic Zones and other

areas for atrracting off shore investment: capital, market access, technologies and management

• Attracting migrant labourers from inland areas at relatively low wages, supported by land at home

• To atrract capital investment, by providing cheap land, good infrastructure, the wages for migrant workers have been kept low

1. China’s Development Strategy (ⅤI)

• Developmemnt of the Manufacturing industries• Achievement of the Economies of Scale, versus TVEs

development in poor areas, Mid 80s to late 90s, huge size of the factories, keep costs low, failure of TVEs

• Regional Development Strategy: Western development strategy, old industrial base

• Maintain An Independent Macro Economic Policies:• monetary policies: state control over interest rate,

occasionally direct control over credit, managed exchange rate, control over capital flows

• A balanced central budget, local governmens not allowed to borrow

1. China’s Development Strategy (ⅤII)

• Is the Growth Model Sustainable • An increas in wage demand, land price and

awarenesss for energy use and environment, pressure on profit from low value added manufactuering industries

• External Presure on China’s export and pressure for currency appreciation;

• Increasing Income Disparitieis within the Country;

• Post Global Financial Crisis, over liquidity of the economy, the risk of an asset bubbiles

Limitation of the Existing Strategy Toward a New Strategy

Emphasis on Export Oriented Manufacturing

Reduce Preferential Climate for Exports

Over Emphasis on Investment Activities Control Over Investment

Labour and Energy Intensive Growth

Strengthen Knowledge and Tech. Intensive Growth

Low Gtrowth in the Service Sector

Develop Public and Private Sources of Service Sector Growth

Low Social diviodend from Growth for Many

More Employment and Better Service

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图一: 中国三产占GDP比重

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2. China and the Developing World (I)

• Possible Chinese policy Changes and Economic Adjustment Updrading of the Munufacturing industries in

China, where to moving to, low value added labour intensicve industries

An expected increase in domestic consumption in China, increases in wages, reduced export, a more balanced trade and reduced investment;

An increase in the employement and output from service industries, health, education and sociao welfares,

2. China and the Developing World (II)

• Possible Chinese policy Changes and Economic Adjustment

• More immediately: • An increase in rates of interest in China, discussion for a

change in the deposit rate, and lending rate increase as well, US interest, global demand for exports, implications

• Exchange rate appreciation, on a managed and gradual basis, together with an increase of wafges in China

• A note on the increase in inrterest rate and appreciation: balance, SOEs, a weak banking sector, and the asset bubbles and income distribution, a political and economic decision

2. China and the Developing World (III)

• More immediately: • Use of Chinese foreign currency reserves,

diverificatiuon from US rtreasure bills, and diviersify into FDI, such as into Africa or South American countries to secufe the supply of energy and raw materialsd?

• The effects of variables on the Global growth rate, global demand, FDI and export

3. The Lessons and Opportunities for African Countries (I)

• A reminder for Chinese Lessons• Differences

• Political and Admistration, in economic management: many top down approaches; development and transformation from central planning;

• Education and an industrial workforce, language, surrounding environment (Four Little Dragons)

• Size and Domestic Market, a big country senario• Two Sides of the Lessons

• Posirtive and negative Sides• Timing

• Not possible to repeat with a changing global market and environment

3. The Lessons and Opportunities for African Countries (II)

• Lesson 1. At low income levels, Agriculture is crucial for growth and poverty reduction• The government shall allocate more resource

for agriculture, including investment in infrastructure, some agricultural support programs in terms of price support, tech extension and insurance;

• The government could make effort to provide a domestic market for farm goods, some trade protection at low income levels;

3. The Lessons and Opportunities for African Countries (Ⅲ)

• Lesson 2 • The development of manufacturing industries is

important for jobs and growth, the lessons from the service industry in India, the size, infrastructure and supply chain matter, here the government has an important role to play

3. The Lessons and Opportunities for African Countries IV)

• Lesson 3• Independent Macro and Trade Policies, a balanced

budget and a domestic market for farm goods• Lesson 4• Technoloy is the key for growth, market for technology,

Trade and investment would be more important than aid.

Thanks!

Q & A

ESRC Rising Powers Workshop 2 China and Low Income Countries: Actors,

Models of Interaction, and Analytical Innovations

September 24 2010 London, England