Economic Dynamics and
Integration in Eastern Europe and Asia
Lecture
Winter semester 2017/18
Chair for Macroeconomic Theory and Politics Schumpeter School of Business and Economics Bergische Universität Wuppertal
Prof. Paul J.J. Welfens
• Office: M-12.08
• Email: welfens@wiwi.uni-wuppertal.de
• Office hours: Monday 12:00-13:00 (During Semester)
Thursday 11:00-12:00 (During Semester break) at EIIW
• Chair for Macroeconomic Theory and Politics:
https://welfens.wiwi.uni-wuppertal.de/index.php?id=3314&L=0
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David Hanrahan
• Office: M-12.10
• Email: hanrahan@wiwi.uni-wuppertal.de
• Office hours: by appointment
• Chair for Macroeconomic Theory and Politics:
https://welfens.wiwi.uni-wuppertal.de/index.php?id=6194
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Tian Xiong
• Office: M-12.11
• Email: xiong@wiwi.uni-wuppertal.de
• Office hours: Tuesday 14:00-15:00
• Chair for Macroeconomic Theory and Politics:
https://welfens.wiwi.uni-wuppertal.de/index.php?id=6011
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• ASEAN
• Catching up process of China Content
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ASEAN
6 11. 12. 2017 Source: http://asean.org/asean/about-asean/overview/
• ASEAN was established on 8 August 1967 in Bangkok, Thailand, with the signing of the ASEAN Declaration or Bangkok Declaration，by the Founding Fathers of ASEAN, namely Indonesia, Malaysia, Philippines, Singapore and Thailand.
• Brunei Darussalam then joined on 7 January 1984, Viet Nam on 28 July 1995, Lao PDR and Myanmar on 23 July 1997, and Cambodia on 30 April 1999, making up what is today the ten Member States of ASEAN.
• The association’s objective was to improve peace and prosperity through collective efforts. Until recently this was the main focus of regional economic integration in Asia.
ASEAN_ Introduction and History
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• To accelerate the economic growth, social progress and cultural development in the region through joint endeavours in the spirit of equality and partnership in order to strengthen the foundation for a prosperous and peaceful community of Southeast Asian Nations;
• To promote regional peace and stability through abiding respect for justice and the rule of law in the relationship among countries of the region and adherence to the principles of the United Nations Charter;
• To promote active collaboration and mutual assistance on matters of common interest in the economic, social, cultural, technical, scientific and administrative fields;
• To provide assistance to each other in the form of training and research facilities in the educational, professional, technical and administrative spheres;
• To collaborate more effectively for the greater utilisation of their agriculture and industries, the expansion of their trade, including the study of the problems of international commodity trade, the improvement of their transportation and communications facilities and the raising of the living standards of their peoples;
• To promote Southeast Asian studies; and
• To maintain close and beneficial cooperation with existing international and regional organisations with similar aims and purposes, and explore all avenues for even closer cooperation among themselves.
ASEAN_ Aims and Purposes
8 11. 12. 2017 Source: http://asean.org/asean/about-asean/overview/
• In 1992, the ASEAN Free Trade Area (AFTA) was launched, with the aim of creating a free trade area within 15 years.
• Since January 2002, AFTA has been in effect among the six original signatory countries: Brunei, Indonesia, Malaysia, Singapore, Thailand, and the Philippines. These six countries are expected to eliminate tariffs altogether by 2010, and the four latecomer countries (Cambodia, Lao PDR, Myanmar, and Viet Nam) are expected to do so by 2015.
ASEAN_ Introduction and History
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• The ASEAN Framework Agreement on Services (AFAS) was signed in 1995 to substantially reduce restrictions in service trade among the member countries.
• The ASEAN Investment Area (AIA) was adopted in 1998 with the objective of making the region more competitive, open, and conducive to investment through the liberalisation of investment rules and policies. There has been some progress on AFAS liberalisation, but progress on the AIA has been very limited (Kawai and Wignaraja 2008).
ASEAN_ Introduction and History
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Source: https://boa.com.ph/wp-content/.../08/asean-integration-july-2015-presentation.pptx
ASEAN_ Introduction and History
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• WHY AN ASEAN COMMUNITY?
• Need to intensify political cooperation, strengthen peace and security in Southeast Asia
• Enhance economic competitiveness of individual Member States, and of ASEAN as regional market and production base for global economic competition
• Need to narrow the development gaps
• Need to respond effectively to transnational threats to human security and new challenges in the 21st century
• Harness human resources and benefit from rich cultural diversity in the ASEAN region
• Gain international recognition and support for community-building
ASEAN_ Introduction and History
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ASEAN_ Introduction and History
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Opportunities Challenges
Huge market & A big amount of people Diverse cultures (regions, languages..)
Steady economic growth Huge development gap (economy, labour…) Vast natural resources Low position in the GVC
Abundant trade and FDI Unsustainable economic growth mode Young educated labour force
Highly connected regions
FTAs with major regional economies
ASEAN_ Introduction and History
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ASEAN Charter (“Constitution”)
• Provides legal status and institutional framework for ASEAN
• Codifies ASEAN norms, rules and values
• Sets clear targets for ASEAN
• Presents accountability and compliance
• Committee of Permanent Representatives (CPR)
• Convening of ASEAN Summit twice a year
• Establishment of the ASEAN Intergovernmental Commission on Human Rights (AICHR)
• Ambassadors to ASEAN
• ASEAN Economic Community (AEC)
ASEAN_ Introduction and History
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ASEAN ECONOMIC COMMUNITY
ACHIEVEMENTS IN 2015
• Tariffs near zero
• ASEAN Trade in Goods Agreement
• ASEAN Framework Agreement on Services
• ASEAN
Comprehensive Investment Agreement
• Movement of professionals
• Trade facilitation
• ASEAN Exchanges 1. Single Market
& Production Base
• Competition policy and law
• Consumer protection laws
• International IP protocols
• ASEAN Highway Network
• ASEAN Single Shipping Market
• ASEAN Power Grid
• Trans-ASEAN Gas Pipeline
• Principles for PPP Frameworks
• ASEAN Open Skies Policy
• Telecommunication infrastructure
2. Competitive Economic Region
• ASEAN Business Incubator Network
• ASEAN SME Guidebook
• Initiative for ASEAN Integration (IAI)
• ASEAN Framework for Equitable Economic Development
• ASEAN Equitable Development Monitor Report
3. Equitable Economic Development
▪ “ASEAN+N”
▪ Regional
Comprehensive Economic
Partnership (RCEP)
▪ upgrade ACFTA
▪ AHKFTA, AHKIA negotiations
▪ AJCEP
▪ AIFTA
4. Integration into Global Economy
ASEAN_ Economic Dynamics and Integration
16 11. 12. 2017 Source: http://asean.org/storage/2017/06/AEIB_No.01-June-2017_rev.pdf
ASEAN_ Economic Dynamics and Integration
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Source: http://asean.org/storage/2017/06/AEIB_No.01-June-2017_rev.pdf
ASEAN_ Economic Dynamics and Integration
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Source: http://asean.org/storage/2017/06/AEIB_No.01-June-2017_rev.pdf
ASEAN_ Economic Dynamics and Integration
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Source: http://asean.org/storage/2017/06/AEIB_No.01-June-2017_rev.pdf
ASEAN_ Economic Dynamics and Integration
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Source: http://asean.org/storage/2017/06/AEIB_No.01-June-2017_rev.pdf
The catching-up process of China
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• Smith - Increasing returns to scale caused by division of labour
• Allyn Young - extended this argument
• Malthus - Effective demand must grow in line with productive potential if profitability as the stimulus to investment is to be maintained.
- Population will grow geometrically
• Ricardo-Growth and development is a function of capital accumulation and this depends on re-invested profits.
• Harrod-Domar Model - the importance of savings and investment as key determinants of economic growth
• Rostow-Stages of Growth - 5 stages--traditional society, preconditions for take-off, take-off, drive to maturity and the age of high mass consumption
.
• Solow’s Growth Model - differs from the HD model in including a second factor of production - labour.
• Endogenous Growth Theories – overlapping 3 models (Human capital, Technical progress, Externalities)
Review_Theories of growth
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• Human capital (Lucas, 1988) – recognised that investment may be in human or physical capital
▪ Complementarity between H and K would help to maintain O/K ratio during growth though still diminishing returns to O/(H+K)
• Technical progress – recognition that tech progress is embodied in physical capital.
▪ Investment can be instrument of technical progress
▪ Romer (1990) emphasised R&D as determinant of tech progress
▪ Human capital (if used in production of knowledge rather than goods) can lead to tech progress.
▪ Grossman and Helpman (1991) argued that countries differ in ability to adapt existing technology.
Endogenous Growth Theories
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• Externalities:
▪ Romer (1986) argued that tech progress can be seen as a positive externality generated by total capital stock of economy.
- Constant or diminishing returns to scale for individual producers but increasing returns for economy as a whole.
- Capital accumulation tech progress increase O/L ratio
◦ Human capital can help develop new ideas etc.
▪ Externalities can also take form of complementarities
- If one person invests, this can increase incentive for others to invest etc.
▪ A production function that does not incorporate diminishing returns remains a straight-line function.
▪ Such a straight-line function indicates that output per head can grow indefinitely so long as capital is increasing.
Endogenous Growth Theories
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• The East Asian region has provided the most successful examples of transition from developing to developed economies status in the 20th century.
▪ Japan
▪ 1st round of Tigers – Hong Kong, Singapore, Taiwan, South Korea
▪ 2nd Round – Malaysia, Indonesia, Thailand
▪ Now, China
• Officially, the Chinese economic model = ‘Building socialism with Chinese characteristics’ or a ‘socialist market economy’
▪ Markets are important for the functioning of the economy,
▪ but public ownership, direct government interference and state-led industrial policies remain integral part of the system.
▪ export-led development strategy, following the NICs in Asia.
• state has dual function: owner of large public enterprises and powerful regulator of the economy.
China_Introduction
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• Chinese agriculture traced back to 7000 BCE
▪ Rice cultivation began in Yangtse delta in ~ 6000 BCE
▪ During Zhou period, some evidence of communal system of agriculture
• List of inventions is long and well known:
potter’s wheel and pottery, walled settlements, silkworm rearing and production of silk, metal agricultural tools, bronze implements and iron and steel, metal coins.• Taxes in some areas
• Trade began though generally traders looked down upon because of feeling that they did not produce anything.
China_History
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• Maddison calculated that per capita incomes in Europe overtook those in China in the 14th century.
▪ However, because of China’s populations, even in 1820, the country accounted for 33% of world economy compared with 24% for W.
Europe.
▪ By mid-18th to early 19th centuries, the stagnation became apparent.
• Partly it was caused by population increases (from 65 - 400 mn in China between 1400-1800) population became a burden.
▪ Frequent famines
▪ Civil unrest
• Rejection of Western technology came from the top keeping it backward.
China_History
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• By mid-19th century, China was prey to imperialist ambitions of Europe.
• 1st Opium War (1839-42) – ended with Britain capturing Hong Kong
▪ This facilitated the trade of opium for tea.
• China was weakened by internal strife and could not resist external pressure.
▪ In 1860, it handed over large part of Russia.
▪ Allowed the legalisation of opium trade
▪ Opened up to foreign trade more generally.
▪ Faced troubles with Japan and Korea.
• There was then a scramble for Chinese trade concessions
▪ Together with this, there was an increase in FDI
▪ However, investors found it hard to make profits in China because Chinese consumers not interested in Western products.
• Per capita GDP in 1950 was 75% of its 1820 level at a time when incomes in Europe and USA were rising fast.
China_History
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• The Chinese experience of development is distinguished by its focus on a tangible (if moving) target – the standard of living of the developed world.
• Like most developing countries, it had an aim - that of catching up with the developed world in the shortest time possible while minimising
social costs.
• Thus, Chinese economic policy aimed to ‘steadily transform China from an agricultural into an industrial country and to build China into a great socialist state’ (Mao Tse Tung, quoted in Singh, 1979).
• To achieve this, the state in China took on a more consciously developmental role than most early developers.
▪ Strategy: administrative planning of the resource allocation
China_History
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1
st5 year plan (1953-7) aimed to turn the existing mixed economy into a socialist economy.
▪ Twin aims – shift from primary production into heavy industry and to bring state ownership of means of production.
- Growth rate ~ 9-10% p.a.
- Industrial production grew by 17% p.a.
- Even agriculture grew by 4.5% p.a.
- Agriculture was collectivised and 90% of farms were part of co- operatives.
▪ But, though there was an increase in non-farm employment, this was not sufficient to employ all who were looking for work. So, there was an increase in unemployment.
China_Catching up process
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Great Leap Forward (late ‘50s)
• Aim – to catch up with the West.
• Agriculture – co-operatives were combined into communes which often had some (though relatively traditional) industry.
▪ The aim was to exploit economies of scale but this wasn’t easy and so there was violence in an attempt to increase output.
- Result was famine (1958-61) in which 38 mn people died.
• Industry – problems because many projects were started but few completed.
• By 1961, the Great Leap Forward was known to have failed.
China_Catching up process
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• Deng Xiaoping and Liu Shaoqi put forward new strategy with agriculture being given central place.
▪ Investment in agriculture especially in new machinery.
▪ Communes in place but farmers could lease land from them and revert to their own production.
▪ This liberal approach extended to industry. 30 mn workers sent back to villages.
▪ New industries including petrochemicals were developed.
China_Catching up process
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Cultural Revolution (1966-76)
• put forward by Mao to reverse the bourgeoisie and capitalist reforms of Deng, Liu and others.
▪ Terror on frightening scale
▪ Re-run of policies of Great Leap Forward
▪ workers, managers etc. who were accused of being capitalist were deposed.
▪ Output slumped and capital imports stopped.
▪ Some stabilisation of economy in early 1970s because of military expenditure.
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Results
• GNP grew at more than 5% in China until 1974 though since then, it has grown even faster (at 9.77% between 1980-90 and 10.65% since then).
• industry grew faster (10.5% per annum between 1953 and 1974) than agriculture (2.4% p.a. during this period).
• Though GNP per capita grew at 3.4%p.a. during this period, in reality living standards improved faster through direct redistribution undertaken by the state.
• Attempts at redistribution through investments in health, education and employment were highly successful.
▪ by 1981, life expectancy was 68 years and infant mortality was only 37 per 1000 live births.
▪ Literacy rates in 1982 were 96% for males and 85% for females in the 15-19 age group.
China_Catching up process
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• By the late 1970s, however, the problems with a planned economic system were becoming apparent.
• The informational burden of planned resource allocation is exceptionally heavy. Gathering the vast amounts of data required in the short time available, processing and analysing it and making decisions based on it is very difficult.
• Secondly, there were problems of motivating individuals in the absence of monetary incentives.
• Finally, measuring output through physical targets reduces the sensitivity of the system to costs. Cost, quality and variety were therefore sacrificed in favour of meeting output targets.
• Growth was achieved in a wasteful manner with a large and increasing amount of capital.
▪ Thus, while 100 Yuan of accumulation resulted in a growth in national income of 57 Yuan in 1963/5, this decreased to 26 Yuan in 1966/70, only increasing to 41 Yuan in 1981/5 (Nolan, 1990).
• In response to these problems, China undertook the marketisation of its economy from the late 1970s.
China_Catching up process
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China’s Marketisation
• China began to reform its economy in 1978 in a slow, experimental manner.
• Price liberalisation was gradual and a dual-track price system, in which both market and administered prices are used, still operates in China.
• China opened itself up to increased foreign trade with a new exchange rate regime
▪ In 1994, the earlier dual exchange rate regime (official and market exchange rate) was merged into one and operated as a managed float.
▪ formal trade barriers and tariffs were decreased.
• Made efforts to increase foreign direct investment
▪ By setting up Special Economic Zones (SEZs)
▪ Huge increase in FDI – in 2005, China attracted $60.3 bn of FDI, whereas India had
$6bn and USA had $106bn.
▪ Note: some problems with these statistics because quite a lot of this FDI is from Hong Kong.
China_Catching up process
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• Agriculture: de-collectivised but community ownership of land was retained.
• Industry: reforms of state-owned enterprises (SOEs) and the township and village enterprises (TVEs).
• Unlike in much of Eastern Europe, the Chinese leadership went in for ‘planned economic reform’.
▪ The Chinese leadership saw ‘a strong state as a functional necessity for economic advance’.
▪ slow, experimental, cumulative approach rather than a ‘big bang’
approach.
▪ decision-making process in China is being decentralised relative to the one that existed in the pre-1978 period.
China_Catching up process
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Results
• Since these reforms, China’s growth ~ 9.5% p.a.
▪ Between 2001-5, China accounted for one-third of world economic growth.
▪ 2013 = 7.7% p.a. (considered by some to be more sustainable)
• Since 2004, commodity prices across the world have increased, driven by China’s demand for raw materials and energy.
• 2002/3 – China accounted for
▪ 50% of the increase in demand for cement
▪ 60% of increase in demand for alumina
▪ 50% for aluminium
▪ 80% for steel
• This was true for oil demand as well and the increased demand was caused by
▪ Fast growth of output and industry
▪ Oil intensity of growth being high.
China_Catching up process
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• Per capita income of rural households trebled between 1978-85.
• Between 1978-2000, gross value of rural output increased 17-fold.
• Trade reforms with an open door policy
▪ China admitted into the WTO in 2001.
▪ In 1978, exports + imports accounted for less than 10% of GDP in China and China’s share in world trade < 0.6%.
▪ By 1990, X+M = 30% of GDP and
▪ By 2002, X+M = 50% of GDP.
• By 2004, China’s exports were larger than those of Japan. Only USA and Germany were higher.
▪ Share of world markets = 6.5%
- This included significant trade in ICT so that by 2004, China overtook USA in trade in the ICT sector.
China_Catching up process
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• 2006
▪ 11th Five-Year Plan (2006–2010) - Innovative-country strategy
• 2013
▪ 12th Five-Year Plan (2011-2015)
▪ Belt and Road Initiative
• 2015
▪ 13th Five-Year Plan (2016-2020) - "Made in China 2025"
China_Catching up process
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13
thFive-Year Plan (2016-2020)
• Innovation: Move up in the value chain by abandoning old heavy industry and building up bases of modern information-intensive infrastructure
• Balancing: Bridge the welfare gaps between countryside and cities by distributing and managing resources more efficiently
• Greening: Develop environmental technology industry, as well as ecological living and ecological culture
• Opening up: Deeper participation in supranational power structures, more international co-operation
• Sharing: Encourage people of China to share the fruits of economic growth, so to bridge the existing welfare gaps
China_Catching up process
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Special Economic Zones
• From 1979 to 1991 an open coastal belt, covering 289 cities and counties, an area of 0.32 mn sq kms, and a population of 0.2 bn was developed as special economic zones (SEZs).
• Included the provinces of Guangdong (Shenzhen, Zhuhai, Shantou) and Fujian (Xiamen) close to Hong Kong, Macao, and Taiwan.
▪ In 1988, Hainan island became the fifth and largest SEZ with a population of 6 million and an area of 33,920 km2.
• SEZs: designed to attract FDI, market regulated and have a high level of autonomy.
• Coastal Open Cities (1984) – like Dalian, Tianjin, Guangzhou, Zhanjiang.
▪ selected because of their rich natural and human resources, sound industrial foundations and location advantages in terms of transportation and communications.
• Coastal Economic Development Areas: like Changjiang (Yangtze River) Delta, Zhujiang (Pearl) Delta, and the delta area that covers Xiamen, Zhangzhou, and Quanzhou in Southern Fujian and Liaoning Peninsula and Shandong Peninsula.
▪ consist of about 204 counties and towns.
▪ Like SEZs and COCs, CEDAs are designed to benefit from foreign trade and FDI.
▪ designed to absorb foreign capital and technology, promote scientific and technological development, gain managerial experience, produce higher quality products.
China_Catching up process
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Changing FDI policy since 2006
• emphasis on FDI quality may reduce future FDI inflows.
• Emphasis on technology intensive FDI
• new restrictive rules on mergers and acquisitions (M&A)
• more restrictive rules on foreign investment in the banking sector
• new ‘Monopoly Law’ entered into force (2009), which might be used to control Sino-foreign M&As.
• major amendment to the Patent Law (2009) for better protection of intellectual property rights.
• Shift in geography towards EU and from the US rather than from neighbouring Asia, because the former are home to the high-tech companies China wishes to attract.
China_Catching up process
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Sources of Comparative Advantage
• Comparative advantage arises from:
▪ Technology
▪ Factor Endowments
▪ Preferences for domestic consumption
▪ Economies of scale
• Free trade theories therefore maintain that production according to comparative advantage will decrease costs because it allows countries to produce goods that they are most efficient at producing. Consumers benefit because they now have greater choice.
China_Catching up process
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• ‘Vent for surplus’ argument: which is especially important in the case of perishable natural resources like mental resources.
• Dynamic gains from trade: stimulus to competition, acquisition of knowledge and new ideas, together with the dissemination of information, the possibility of accompanying capital flows and increased specialisation leading to more roundabout methods of production and changes in attitudes and institutions.
China_Catching up process
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Trade as an Engine of Growth
• Why might exports be expected to increase overall growth rates?
▪ exports allow capacity utilisation and technological improvement
▪ Foreign trade multipliers are generally quite high
▪ Exports face competition encourages innovativeness and efficient management increases factor productivities.
▪ if exporting sector is intermediate input into other activities, then its improved efficiency also benefits the domestic economy.
- through changes in incomes and costs
- These effects are maximised when the linkages between the exporting sector and the home economy are strong.
▪ Foreign exchange earnings and improving the trade balance.
China_Catching up process
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Appendics
47 11. 12. 2017 Source: http://tompepinsky.com/2014/03/26/mh370-whats-up-asean/
48 11. 12. 2017 Source: geology.com
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Thank You for
Your Attention!
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