China´s growth miracle: lessons for Brazil

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China

´s Growth Miracle: Lessons for Brazil

Fernando Veloso

Ibmec/RJ

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Key Questions

Why did China grow so fast since 1978?

What is the role of reform in accounting for

China´s growth miracle?

What are the lessons for other developing

countries, and Brazil in particular?

What are the lessons from Brazil´s growth

experience for China?

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Outline

China´s Growth Facts

Structural Transformation

Interpretation of China´s Growth Miracle

China´s Reform Approach

Brazil´s Growth Facts

Comparison Between Brazil and China

Lessons of China´s Miracle for Brazil

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China´s GDP per Capita Growth Miracle

5000 6000 7000 8000 9000 G D P p e r ca p it a ( U S $ P P P ) 0 1000 2000 3000 4000 5000 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 G D P p e r ca p it a ( U S $ P P P )

(5)

China´s Convergence in GDP per Capita

Relative to United States

0.15 0.2 0.25 P P P G D P p e r ca p it a r e la ti v e t o U S 0 0.05 0.1 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 P P P G D P p e r ca p it a r e la ti v e t o U S PWT WDI

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China´s Labor Productivity Growth Miracle

10000 12000 14000 16000 G D P p e r w o rk e r (U S $ P P P ) 0 2000 4000 6000 8000 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 G D P p e r w o rk e r (U S $ P P P )

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China´s High and Increasing Investment Rate

30 35 40 45 50 in v e st m e n t ra te ( % o f G D P ) 0 5 10 15 20 25 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 in v e st m e n t ra te ( % o f G D P )

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China´s High Return to Capital

0.2 0.25 0.3 0.35 ra te o f re tu rn t o c a p it a l 0 0.05 0.1 0.15 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 ra te o f re tu rn t o c a p it a l

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Growth Accounting

The production function is given by:

k: Constructed with the perpetual inventory method using

PWT data for investment measured in international prices

h: Bils and Klenow (2000):

  _θ α α − = _it _it _it1 it A k h y TFP is obtained as a residual:

See Ferreira, Pessôa and Veloso (2011) for a recent

analysis of the evolution of TFP in Latin America

( )

_      − = = −ψ ψ θ φ 1 1 exp exp s s h α α − = 1 it it it it h k y A

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Data

Output per worker and investment rates: Penn-World

Table 6.3

Average educational attainment of the population aged 15

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China´s Growth in Physical Capital per

Worker

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China´s Stability in the Capital-Output Ratio

2 2.5 3 o u tp u t ra ti o 0 0.5 1 1.5 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 ca p it a l-o u tp u t ra ti o

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China´s Increase in Years of Schooling

6 7 8 9 y e a rs o f sc h o o li n g 0 1 2 3 4 5 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 y e a rs o f sc h o o li n g

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China´s Growth Accounting

contributions y k h TFP 1960-1977 0.022 0.013 0.011 -0.001 (56.6%) (50.0%) (-6.5%) 1978-2007 0.077 0.030 0.008 0.039 (39.3%) (10.0%) (50.8%) 1960-2007 0.056 0.023 0.009 0.023 (41.9%) (16.3%) (41.8%)

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China´s Alternative Growth Accounting

contributions y κ h TFP 1960-1977 0.022 0.006 0.018 -0.002 1960-1977 0.022 0.006 0.018 -0.002 (27.6%) (83.3%) (-10.9%) 1978-2007 0.077 -0.001 0.013 0.065 (-1.2%) (17.0%) (84.2%) 1960-2007 0.056 0.002 0.015 0.039 (3.2%) (27.1%) (69.7%)

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China´s Transitions

Transition toward a market economy

Transition from a rural to an urban society

“These two transitions are both far from

complete, and so China today carries with it

parts of the traditional, the socialist, the

modern, and the market, all mixed up in a

jumble of mind-boggling complexity”

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Structural Transformation

Since 1978, China has undergone a great structural

transformation that involved major shifts in the allocation of factors and output among sectors

The evidence about structural transformation cited in this

presentation was obtained from Brandt, Hsieh and Zhu (2008)

(2008)

Between 1978 and 2004, the agriculture share of total

employment declined from 69% to 32% (according to China´s NBS, it declined from 71% to 47% in the same period)

In the same period, the state sector´s share of

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Structural Transformation

TFP in agriculture increased at an annual rate of 5.38%

between 1978 and 2004

TFP in the non-state non-agricultural sector increased at an

annual rate of 4.33% between 1978 and 2004 annual rate of 4.33% between 1978 and 2004

By comparison, TFP in the state sector increased only

1.66% per year

Combined, the two structural transformations were

responsible for close to one-third of aggregate labor productivity growth between 1978 and 2004

(20)

Efficiency Gains in Manufacturing

In the period 1998-2005, the reduction of distortions to

efficient factor allocation among Chinese manufacturing establisments contributed to an increase in TFP of 2% per year (Hsieh and Klenow, 2009)

year (Hsieh and Klenow, 2009)

However, there are still sizable potential efficiency gains

from better resource allocation among manufacturing firms in China

The elimination of resource misallocation among firms

could boost Chinese manufacturing TFP by as much as 115%

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Limits to Further Efficiency Gains

“China may have succeeded in ‘growing out of the plan’

by the end of 1980s (Naughton, 1995), but the process of growing out of the state sectors has proved much harder. Even as its share of output and employment declines, the Even as its share of output and employment declines, the legacy of the state sector survives through the continuation of its preferential access to credit flows.” (Brandt et al., 2008)

Credit market distortions reduce the growth rate of TFP

and induce domestic savings to be invested abroad (Song et al., 2011)

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Interpretation of China´s Growth Miracle

Chow (2010): Three fundamental factors:

Distance to the technological frontier (growth opportunity)

Market institutions (incentives)

High-quality human capital, including entrepreneurial ability

(capability)

Kehoe and Ruhl (2010), based on Kehoe and Prescott (2002):

Distance to the technological frontier allows for catch-up

growth through technology adoption

Government policies and institutions determine the

equilibrium distance to the frontier

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China´s Increase in Trade

50 60 70 80 tr a d e s h a re ( % o f G D P ) 0 10 20 30 40 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 tr a d e s h a re ( % o f G D P )

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Important Reform Policies and Institutions

Household responsibility system

Dual-track price system

Township and village enterprises

Reform of state-owned enterprises

Improvements in the legal status of private

enterprises

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Interpretation of China´s Reform

There are conflicting interpretations about China´s reform

Success of incremental reforms that tailored institutional

inovations to China´s specific circumstances (Qian (2003), Lin, Cai and Li (2003), Rodrik (2009))

Successful rural reforms in the 1980s, reversal in the 1990s

towards urban and state-biased policies (Huang, 2008)

Success despite cumulative market distortions (Young,

2000)

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Summary

Significant TFP growth in agriculture and in the non-state

non-agricultural sector

TFP growth in the state sector was much lower

Reallocation of resources towards the non-state sector

increased TFP and growth

There are still sizable potential efficiency gains from better

resource allocation among manufacturing firms in China

The legacy of the state sector through state-owned

enterprises and credit market distortions reduce TFP growth

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Brazil´s GDP per Capita Growth Miracle and

Disaster

8000 10000 12000 G D P p e r c a p it a ( U S $ P P P ) 0 2000 4000 6000 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 G D P p e r c a p it a ( U S $ P P P )

(28)

Brazil´s Convergence and Divergence in GDP

per Capita Relative to United States

0.25 0.3 0.35 0.4 P P P G D P p e r ca p it a re la ti ve t o U S 0 0.05 0.1 0.15 0.2 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 P P P G D P p e r ca p it a re la ti ve t o U S

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Brazil´s Labor Productivity Growth Miracle

and Disaster

15000 20000 25000 G D P p e r w o rk e r (U S$ P P P ) 0 5000 10000 15000 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 G D P p e r w o rk e r (U S$ P P P )

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Brazil´s TFP Growth Miracle and Disaster

100 120 140 160 180 T F P ( 1 9 6 0 = 1 0 0 ) 0 20 40 60 80 100 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 T F P ( 1 9 6 0 = 1 0 0 )

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Two Growth Accelerations

Growth Miracle (1968-1973) was a TFP miracle

PAEG stabilization and reform program (1964-1967) explains

most of TFP growth (Veloso, Villela and Giambiagi, 2008)

Domestic credit to the private sector increased from 17% to 44%

of GDP between 1968 and 1973 of GDP between 1968 and 1973

Growth acceleration between 2004 and 2007 was due to

TFP

Real Plan and reforms in the 1990s and early 2000s may be

associated with acceleration in the growth rate of TFP

Domestic credit to the private sector increased from 29% to 48%

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Increase in the Capital-Output Ratio

2 2.5 3 o u tp u t ra ti o 0 0.5 1 1.5 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 c a p it a l-o u tp u t ra ti o

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Increase in the Relative Price of Investment

1.2 1.4 1.6 1.8 2 p ri c e o f in v e st m e n t re la ti v e t o o u tp u t 0 0.2 0.4 0.6 0.8 1 1 9 6 0 1 9 6 2 1 9 6 4 1 9 6 6 1 9 6 8 1 9 7 0 1 9 7 2 1 9 7 4 1 9 7 6 1 9 7 8 1 9 8 0 1 9 8 2 1 9 8 4 1 9 8 6 1 9 8 8 1 9 9 0 1 9 9 2 1 9 9 4 1 9 9 6 1 9 9 8 2 0 0 0 2 0 0 2 2 0 0 4 2 0 0 6 p ri c e o f in v e st m e n t re la ti v e t o o u tp u t

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Policy Distortions in the Investment Sector

In the seventies there was a significant increase in the share of

state-owned enterprises in the production of intermediate and capital goods

In the seventies Brazil also implemented an import-substitution

program in the investment goods sector

Preferential access to credit from government banks

In 1977, Brazil initiated policies that culminated in an import ban (zero

quota policy) on foreign produced computers in the eighties

The increase in the relative price of investment may be associated

with a decline in investment-specific TFP due to policy distortions (Greenwood et al. (1997), Restuccia and Urrutia (2001), Hsieh and Klenow (2007))

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Summary

The Brazilian growth miracle and the recent growth

acceleration are accounted for by TFP

Both episodes are associated with an increase in the GDP

share of the domestic credit to the private sector share of the domestic credit to the private sector

Both episodes were preceded by stabilization and reform

policies

The TFP collapse seems to be associated with an increase

in the participation of the state sector in the production of capital and intermediate goods

(36)

China´s Convergence in GDP per Capita

Relative to Brazil

0.6 0.7 0.8 0.9 1 P P P G D P p e r ca p it a re la ti ve t o B ra zi l 0 0.1 0.2 0.3 0.4 0.5 0.6 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 P P P G D P p e r ca p it a re la ti ve t o B ra zi l PWT WDI

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Ranking of Quality of Education – PISA 2009

Countries Reading Mathematics Science

Brazil 53 57 53 Shangai - China 1 1 1 South Korea 2 4 6 South Korea 2 4 6 Finland 3 6 2 United States 17 31 23 Argentina 58 55 55 Chile 44 49 44

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China´s Convergence in TFP Relative to

Brazil

0.6 0.7 0.8 0.9 T F P r e la ti v e t o B ra zi l 0 0.1 0.2 0.3 0.4 0.5 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 T F P r e la ti v e t o B ra zi l

(39)

Low TFP Relative to the United States

countries TFP relative to

the United States

Brazil 0.63

China 0.52

India 0.56

Chile 0.86

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Inefficiency in Resource Allocation

As mentioned before, Hsieh and Klenow (2009) calculated that the

elimination of resource misallocation among firms could boost Chinese manufacturing TFP by as much as 115%

Using a methodology similar to Hsieh and Klenow (2009), Ferraz and

Monteiro (2009) showed that the elimination of inefficiencies in factor allocation among firms would increase Brazilian manufacturing TFP in allocation among firms would increase Brazilian manufacturing TFP in at least 49%

The efficiency gains would be probably greater since the data only

include firms with at least 30 workers

But the major inefficiency seems to be in the service sector, especially

in the informal sector

De Vries (2009) calculated that the potential TFP gains in the Brazilian

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Excessive Regulation - Doing Business 2011

Ease of Doing Starting a Closing a Enforcing Paying Getting Business Business Business Contracts Taxes Credit Brazil 127 ₁₂₈ ₁₃₂ ₉₈ ₁₅₂ ₈₉ China 79 ₁₅₁ ₆₈ ₁₅ ₁₁₄ ₆₅ China 79 ₁₅₁ ₆₈ ₁₅ ₁₁₄ ₆₅ India 134 ₁₆₅ ₁₃₄ ₁₈₂ ₁₆₄ ₃₂ Chile 43 ₆₂ ₉₁ ₆₈ ₄₆ ₇₂ South Korea 16 ₆₀ ₁₃ ₅ ₄₉ ₁₅ United States 5 ₉ ₁₄ ₈ ₆₂ ₆

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Lessons for Brazil

Distance from the technological frontier allows for fast

catch-up. Since Brazil´s GDP per capita corresponds to only 23% of that of the United States, there is still great scope for catch-up growth through technology adoption

Importance of openness to explore comparative advantage,

create competition and adopt technologies from developed countries

Importance of quality of human capital (including

entrepreneurial ability) to be able to create and take advantage of growth opportunities

Markets are a central component of a successful growth

(43)

Lessons for Brazil

Policies that reduce barriers to the efficient

allocation of resources among firms can have

large effects on TFP

Incremental policy reforms can be successful if

targeted at the binding constraints for growth

Decentralization and competition are important

elements of an effective growth policy

Policies have to be consistent with comparative

advantage

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Lessons for China

A growth miracle can become a growth disaster

The transition from a low-income to a middle-income

country involves a structural transformation that increases significantly the complexity of the economic system

significantly the complexity of the economic system

As a consequence, its institutions have to be adapted to the

new circumstances, which involves formal institutions

(45)