Productivity Slowdown and the Neo-Confucianism Economic Model

in China

Jiayin Liu (250713630)Prof. Han

ECON 3317March 16, 2015

Outline

1. Introduction2. Background3. Economic Model4. Human Capital in China: Social Mobility5. Neo-Confucianism Economic Model in China6. Conclusion

Introduction

• A gloomy macroeconomic outlook, particularly for Europe and the United States, has already had considerable impact on the Chinese economy.

• China’s export growth to key markets in Asia, Europe, and North America has slowed significantly since 2010.

• Revenues flowing to China’s industrial sector have slowed as a result.

Cited from China’s Productivity Imperative (2013)

Introduction

• China’s productivity growth has also fallen.

• Growth in total factor productivity has fallen from an annual average of 4.7 percent in 2001-07 to 2.8 percent in 2008-10.

• Market liberalization and privatization is no longer a significant factor

• The mass movement of labor from low productivity agriculture to higher productivity manufacturing is coming to an end

• The large influx of capital investment in recent years has resulted in a decline in capital efficiency; productivity growth is negatively affected due to the “crowding out” effect.

Productivity Slowdown

Productivity Slowdown (cont.)

• China’s productivity growth gradually climbed following China’s accession to the WTO in 2001, achieving an average of 4.7 percent in the period 2001-07.

• Productivity growth fell dramatically, however, during the global financial crisis, and improved only marginally in 2010.

• From 2008-10, the Chinese economy managed productivity growth of 2.8 percent, remaining well below the 2001-07 average.

• The experience of other East Asian economies demonstrates that capital-driven growth is not sustainable.

• Raising productivity is now therefore critical for China’s economic future.

• While China’s labor productivity has improved a lot over the past decade, it is still far from the productivity performance of developed countries.

Solow-Swan model

Solow-Swan Model is an exogenous growth model explaining long-run economic growth by taking account of – capital accumulation– labour (population) growth – productivity (technological progress)

Solow-Swan Model

Solow-Swan Model: TFP

• Total factor productivity (TFP), also called multi-factor productivity, is a measure of economic long-term technological change.

• In this case, capital and labour are tangible, while total-factor productivity is more intangible.

TFP accounts for technology and human capital.

Labor Factor

• Labor’s contribution to economic growth is shrinking.

• Growth in the size of the labor force has fallen since 2005, declining from an annual average of 1.7 percent in the period 2000-2005 to 1.05 percent in 2006-2014.

• Demographers forecast that the size of China’s workforce will begin a long-term decline from 2015.

Labor Factor• Labor costs have increased a lot, with average

wages more than doubling since the beginning of 2007.

Human capital: Household registry system

• Countries like Japan and Korea have undergone a labour movement from agricultural to urban industries.

• This has also happened in China. • However, this labour movement is made difficult in

China because of the “Hukou” policy, which is the Chinese government’s system of residency control.

• Hukou identifies a person as a resident of a city using a household registry document.

Human capital: Household registry system

• “Hukou” provides the individual with rights to housing, insurance, healthcare and education within their city of residence.

• “Hukou” limits the labor movements between cities, especially from rural areas to urban areas.

• As a result, it prevents workers from freely moving to and living in the city where they can create the most economic output.

• Therefore, the “Hukou” system has reduced Chinese productivity in recent years.

Human Capital: Social Mobility• “Social Mobility” is a socio-cultural factor

describing how human capital develops.• China’s social mobility is very low.– Household registry system– School system are funded locally– Growing corruption

Human Capital: Social Mobility

Locally funded education results in inequity– For example, schools in Shanghai stood out on

recent international tests as being among the best in the world.

– But smaller cities China devote far less resources to public education; the quality of education is also much lower.

– In rural areas the situation is worse.

Human Capital: Social Mobility

Growing corruption in China• On the World Bank’s Control of Corruption

cross-country index, China was at the 39th percentile in 2012.

• China is perceived to be more corrupt than 61% of countries.

• Corruption affects social mobility because it is easier for elite families to pass status and income to their children.

Human Capital: Social Mobility--corruption

• If one father earns 100% more than another, then how much more on average will his children earn relative to the other father’s children?

• Miles Corak answers this question by calculating the elasticity of inter-generational income.– In Denmark the answer is 15%– In U.S. it is 47%– In China the figure is 60%

Human Capital: Social Mobility

• Low social mobility undermines the legitimacy and efficiency of a market economy.

• If a large part of the population effectively has no chance to utilize their talents and get ahead, that will inevitably affect the society’s future innovation and productivity.

Human Capital: Neo-Confucianism in Japan

• Edo Neo-Confucianism (Shushi-Gaku) is the school of Neo-Confucian philosophy that developed in Japan during Edo period.

• It can be characterized as humanistic and rationalistic, with the belief that the universe could be understood through human reason, and that it was up to man to create a harmonious environment for himself.

• Individuals can achieve success through hard work, and the leader of the society should be outstanding in both professional area and ethical area.

Human Capital: Neo-Confucianism in Japan

• Yoshihiko Noda （ ( 野田 佳彦 )

• Prime Minister of Japan from 2011 to 2012. He is a member of Democratic Party of Japan.

• Noda is a son of a paratrooper in the Japan Self-Defense Forces.

• Unlike many prominent Japanese politicians, Noda has no family connection to Nagatacho (location of Diet of Japan and the Prime Minister’s residence).

• His parents were too poor to pay for a wedding reception.

Human Capital: Neo-Confucianism in Japan

• He went to Waseda University( 早稲田大学 ) , which is one of the most prestigious universities.

• He entrolled in School of Political Science and Economics in 1980 and was later accepted into the prestigious Matsushita Institute.

• This institution was founded to groom future civic leaders of Japan.

Human Capital: Social Mobility in Japan• Therefore, Japanese believe in a fair competition

mechanism. Individuals become motivated. • This contributes in the economic development.

Human Capital: Example

• The 'China Dream' Deferred: How The Lack of Social Mobility Limits Ambitions

• A study of four archetypal bank interns illustrates how difficult it is for the humbly born to advance in Chinese society.– interns from poor rural areas – Interns from party official families– Interns from entrepreneur families– Interns raised by urban professionals

Human Capital: Neo-Confucianism in China

• Rockefeller (Rich Business)• Churchhill (Government Official)• Billy Bob (Countryside) • DiCaprio (Yuppie)

Human Capital : Social Mobility

China has a real opportunity to pursue socially just and economically efficient policies. – Dismantling the “hukou” system– Fiscal reform to ensure possible equal resources

for education for all area– Political reforms to strengthen rule of law and

limit corruption

Human Capital: others

• Chinese style education provide workforce with graduates from universities with only theoretical knowledge, and not the practical skills that would attract them to employers.

• In Chinese culture, it is critical to have a “decent” job and life style. Work requiring hard labour is devalued.

• With the demographic ageing, there will be fewer people fill in.

Why China could not carry on with Neo-Confucianism influence?

1. Communist ideology2. Culture Revolution3. So called “ Socialism with Chinese

characteristics” is actually “Capitalism with Chinese characteristics”

Documentary: The People's Republic of Capitalism

Communist Ideology

• Communist ideology replaces private property and a profit-based economy with public ownership.

• Communal control of the major means of production (e.g., mines, mills, and factories) and the natural resources of a society.

Cited from Encyclopedia

Culture Revolution

• In 1966, Mao launched what became known as the Cultural Revolution in order to reassert his authority over the Chinese government.

• The Cultural Revolution continued until Mao’s death in 1976.

• During that period of time, there were various anti-Confucian propaganda campaigns.

Socialism with Chinese characteristics

• 1979, Deng Xiaopeng • Socialism adapted to Chinese conditions. It is

the official ideology of the Communist Party of China (CPC) based upon “scientific socialism”.

• However, it has actually adopted capitalist elements.Documentary: The People's Republic of Capitalism

Socialism with Chinese characteristics

• Socialist market economy is the current economic model in China

• The ideological rationale is that China is in the primary stage of socialism, an early stage within the socialist mode of production, and therefore has to adapt capitalist techniques in order to thrive.

• Primary effect: private ownership is allowed– State-owned enterprise– State-holding enterprise– Privately owned enterprise– Urban Collectives– Township-Village Enterprise

Can China develop a Neo-Confucianism economics model?

1. Conglomerate companies—business structure2. Amakudari System 3. Government role4. Neo-Confucianism Culture vs. Competitive

Culture. 5. Corruption problem in China

1. Business Structure in Japan and China

• Japan: ConglomeratePrivate sector is very large; funds are used to take care of the economy and social responsibility.

• China: Families business Structure. – Bamboo Network– Chinese companies overseas have a prominent

role in the private sector of Southeast Asia.– They are usually managed as family businesses

with a centralized bureaucracy.

2. Amakudari System

• If it is unlikely for China to form conglomerates, it is unlikely for the Amakudari system to work in China.

• Corruption will make it difficult for Amakudari to be practiced in China.

3. Government Role

• Because the leading ideologies are different in Japan and China, government plays different roles. – China: the government has played a predominant

role in the economy. Stated-owned company still predominant (30% of total are hold by SOE)

– Japan: Government relies on the private sector for support

3. Government Role

Neo-Confucianism Culture vs. Competitive Culture.

• Japan: Neo-Confucianism Culture • China: after decades of cultural uncertainty,

the Chinese people have developed a competitive mentality.

5. Corruption Problem in China• General lack of transparency • “Guanxi”-relationship• Corruption in China is concentrated in the sectors like

– infrastructural projects, – sale of land user rights,– real estate,– government procurement,– financial services, – heavily regulated industries.

• The direct costs of corruption in 2003 could be as much as $86 billion—the indirect costs are incalculable.

• The odds of a corrupt official going to jail are less than 3 out of 100, which makes corruption a high return, low-risk activity.

Cited from Corruption Threatens China’s Future

5. Corruption Problem in China

• Zhou Yongkang • Ex-security chief • Zhou is the most senior Chinese official ever to face corruption charges.• Zhou was accused of several crimes, including – serious violations of party discipline– accepting large sums of bribes– disclosing party and state secrets– committing adultery with several women

Corruption Problem in China

• China's leaders have recently acknowledged the corruption problem.

• Xi recognized that corruption threatens the stability of the entire political system.

• Zhou Yongkang case is just the start. • Xi has made combating corruption the

government's top priority.

Hope may raise from here?

Conclusion

• Chinese society is a mixture of Communism and unspoken Capitalism.

• It is unlikely for China to develop a Neo-Confucianism economics model like Japan and Korea did.

• It is likely that the Chinese economy will continue to lean towards capitalism.

• Some sort of social reform or even revolution is needed.

Conclusion

Policies like: • Dismantling the “hukou” system• Fiscal reform to ensure possible equal

resources for education for all area• Political reforms to strengthen rule of

law and limit corruption