HOW DOES THE HOW DOES THE GROWTH AND GROWTH AND INNOVATION INNOVATION

STRATEGY OF CHINA STRATEGY OF CHINA AFFECT THE WORLD AFFECT THE WORLD

ECONOMY?ECONOMY?Robert Boyer

Presentation prepared for DIIS Presentation prepared for DIIS seminarseminar

Copenhagen, January 18th, 2010Copenhagen, January 18th, 2010

INTRODUCTIONINTRODUCTIONA new phase for the world A new phase for the world

economyeconomyThe need for a redeployment The need for a redeployment

of basic toolsof basic toolsThe diffusion of innovation-The diffusion of innovation-

led strategies: the need for led strategies: the need for an assessmentan assessment

THE LECTURE: THE LECTURE: THREE STEPSTHREE STEPS

1.1. In search of a new framework for In search of a new framework for the national / international macro the national / international macro economyeconomy

2.2. The growth regime of China: more The growth regime of China: more domestic competition than export domestic competition than export led. led.

3.3. The future growth regime : can it be The future growth regime : can it be endogenous innovation led?endogenous innovation led?

I.I. IN SEARCH OF A NEW IN SEARCH OF A NEW FRAMEWORK FOR THE FRAMEWORK FOR THE

NATIONAL / NATIONAL / INTERNATIONAL INTERNATIONAL MACROECONOMYMACROECONOMY

•The 90s : the United States, Japan and China and the stability of the world economyThe Americans: the consumers of

last resort

The Japanese: the savers of last resort

The Chinese: the manufacturers of the world

Figure 1 -Can two vicious circles make a world virtuous

configuration? Buys to China

US Invests in De-industrializes

Borrows to

in order to finance external deficitJapan

Tensions on the global financial

stability

Tensions on Asian integration

•The 2000s : Still another configuration for the world economyThe Americans: the consumers of last

resort…and beneficiary of world excess of saving

The Japanese: a recovery in response to the dynamism of Chinese imports of equipment goods and high-tech components

The Chinese: the manufacturers … and the savers of the world

Figure 2 – Towards a duopoly at the world level?

United StatesConsumer of last

resortCenter of financial

intermediation

Trade surplus China

As the engine of growth in Asia,

saver of the world

Financing of external / public deficit

Raw materials The rest of the World Raw materials

THIRD WORLD: boom of raw materials

EMERGING ECONOMIES: de-industrialization

DEVELOPED COUNTRIES: financialization and de-industrialization

•Macroeconomics becomes global: farewell to closed economy modelsFrom a closed economy model to the

interaction of two national economies: the US and China

A lasting overcapacity in manufacturing in China, hence a pressure towards price wars

An upward drift of the relative prices of oils and raw materials

•A possible explanation of the Alan Greenspan puzzle

Not any increase in long term interest rates in the US: the consequence of the excess savings of Asia

The moderation of core inflation: the definite impact of Chinese overcapacity in commodities

The surge of consumption prices: the under capacity in the production of raw materials

These are direct consequences of the America / Asia (China) duopoly

•A contrario, a drastic challenge of neoricardian international trade theoryThe mobility of frontier

technologies towards China

The quasi unlimited supply of labor in China

The size of the potential Chinese market

The role of increasing returns to scale

Consequently, the emergence of the hypothesis that manufacturing world prices are Chinese prices

Table 1

Countries China J apan Korea U.S. EU Local

Areas Brands Price Brands Price Brands Price Brands Price Brands Price

Tailand Sharp 20,544 LG 19,043 Philips 22,101 KLASS 15,540

Philippine TCL 20,738 J VC 34,188 Samsung 28,918 Philips 28,943

Indonesia Matsushita31,524 LG 24,124 Philips 38,554

Vietnam 25 360 26 897 28 372 27 896 23 981

India Konka 27,200 Matsushita44,880 Samsung 44,064 Philips 38,080 BPL 35,360

Singapore Sharp 26,865 Samsung 34,551 Philips 31,089

Hongkong Skyworth 28,893 Hitachi 40,588 Philips 43,859

China Haier 17,250Sharp 24,750 LG 17,400 Philips 26,700

Tailand Mitsubishi 85,874 LG 69,500 TRANE 80,620

Philippine Gelly 29,750 Matsushita43,048 LG 34,995 York 35,750

Air Indonesia Changhon 43,793 Toshiba 58,327 UCHIDA 41,292

Con- Vietnam 55 871 36 518 69 225 70 002 63 004

ditioner India Hitachi 60,928 Samsung 66,069 BlueStar 54,128

Singapore Sanyo 69,171 Samsung 48,399 Carrier 69,171

Hongkong Midea 36,628 NEC 51,562 LG 43,843 Carrier 45,431 Fortress 35,370

China Zhigao 28,200 Sharp 51,000 LG 40,200 Siemens 67,350

Tailand Astina 52,125 Hitachi 52,792 Samsung 73,114 Electrolux 63,662 ASTINA 52,125

Philippine Haier 31,738Matsushita 34,748Samsung 37,050 Kelvinator 34,750

Indonesia Dast 26,492 Toshiba 42,920 UCHIDA 33,300

Refri- Vietnam 55 871 36 518 69 225 63 004 70 001

gerator India LG 97,920 Whirlpool 92,480 Godrej 69,360

Singapore Mitsuishi 67,786 Hoover 69,171 Fisher&P 82,950

Hongkong Hualong 38,986Sanyo 43,702 Samsung 48,418 Kelvinator 45,509 Fortress 40,715

China Changling 35,175 Matsushita40,350 LG 37,350Elecrion 39,300

Sources: The surveys by J ETRO overseas offices in August 2002. Maruya (2002).

Comparison of the Prices of the Chinese, J apanese, Korean, U.S./EU and Local Brands in Asian Markets(Units: J apan Yen）

Color TV

21Inch（ ）

Products

Figure 3 – Unit production costs in China and the rest of the world

Source: Artus (2009), Flash, n° 536, p. 9, 4 décembre.

II.II. CHINESE GROWTH : A CHINESE GROWTH : A DOMESTIC COMPETITION DOMESTIC COMPETITION

LEDLEDMORE THAN A TYPICAL MORE THAN A TYPICAL EXPORT LED REGIMEEXPORT LED REGIME

1. The Chinese institutional forms in historical perspectiveIntroducing progressively market incentives into a rather centralized economic system- Increasing the production for the market before down sizing the nationalized sector

Figure 4 - The example of the steel industry

Source : Naughton Barry (2006) The Chinese Economy, p. 93

- A quasi minimalist public spendingFigure 5 - the two phases of State

public spending

Source : Naughton Barry (2006) The Chinese Economy, p. 102

A pragmatic and sequential extension of local successful experiments

A large decentralization of public policy

A crucial step: the decentralization of decisions at the provincial level- The example of public spending

Figure 6 - The long term evolution

Source : Lou Jiwei (2007) The reform of intergovernmental fiscal relations in China, p. 159

Figure 7 - an international comparison

Source : Lou Jiwei (2007) The reform of intergovernmental fiscal relations in China, p. 165

- The structure of a quasi federal state?

The foundations of local state corporatism (Oi 1992)…

…a core hypothesis to understand the specificities of Chinese growth

2. The macroeconomic growth regime: domestic competition ledBasically, a series of pro growth socio-political alliances

Capital accumulation is the major tool for sustaining this alliance

Figure 8 - Macroeconomic Structure of the Chinese Economy

Source : Minqi Li (2007) “US., china and the unravelling

of global Imbalances”

October, PERI WP, p. 43

A built in propensity to overcapacity and excess in credit financing on top of retained profits.

Hence a domestically generated fierce competition in order to capture increasing returns to scale

An implicit society wide compromise: enjoy the dividend of growth in counterpart of the ruling of the Communist Party

The dynamism of exports: the logical outcome an unbalanced distribution of income

Source : Minqi Li (2007) “US., china and the unravelling

of global Imbalances”

October, PERI WP, p. 44

Figure 10 - A genuine institutional architecture for an exceptional growth

CENTRAL STATE

Undervalued exchange rate

Tentative restrictive Monetary

policy

Public budget

Local meso-

corporatism 1

Competition led growth

Poor welfare

Laxist credit

Overcapacity

Local meso-

corporatism 2

Local meso-

corporatism 3

3. Some quite unorthodox features of this institutional architecture and growth regimeGuanxi and Communist Party as a

multilevel coordination processes, quite imperfect substitutes for legal, formal rules

Corruption: converting formally collectivist institutions into capitalist ones. It is not necessarily an obstacle to development!

A genuine mixed economy: the false opposition between private and public firms, since they are densely connected

The diversity and fuzziness of property rights help in the evolutionary process of catching up

The multinationals are part of this pro growth alliance and contribute to over accumulation

Foreign relations are more governed by the appropriation of frontier technologies than mercantilist objectives!

4. Imbalances and contradictions of this socio-political regimeA waste of capital due to over accumulation at the detriment of a general increase of standards of living

Figure 11 - A high but declining profit rate

Source : Minqi Li (2007) “US., china and the unravelling of global Imbalances” October, PERI WP, p. 45

Q/K

Pro/Q

Pro/K

A financial volatility and fragility in spite of an impressive restructuring of bad debts, constantly recreated by over accumulation

•A typical bubble

Source : Artus Patrick (2008) « Au coeur de la bourse Chinoise », Flash n° 308, p. 2

Figure 13 - The price/earning

ratio

Figure 12 - The stock market global indexes

The choice of the exchange rate regime imply large trade surplus, accumulation of reserves…

… An excessive liquidity, source of speculation, and inflation…

... And it implies the risk of protectionist backlash

Figure 14 - The explosive Chinese trade surplus

Source : Artus Patrick (2007) « Avec l’abondance de liquidités… », Flash n° 468, Décembre, p. 2

The very success of China creates structural unbalances at the world level

...In the adjustment of saving and investment

...The run for appropriating natural resources

…The geopolitical hegemony of the US

The progressive loss of control by the political authorities of a complex, contradictory and divided society and economy...

An evidence: on 2007-2008 a typical dilemma of Chinese economic policy:

- fighting inflation- without killing the dynamism of growth

The social and domestic imbalances are acute- social inequalities, - dual citizenship, - housing, heath care, aging - fighting inflation

And the call for an harmonious society and endogenous innovation is not easy to implement

III. WILL THE FUTURE III. WILL THE FUTURE GROWTH REGIME OF GROWTH REGIME OF

CHINA BE INNOVATION CHINA BE INNOVATION LED?LED?

1.1. An explicit recognition by An explicit recognition by public authorities about the public authorities about the design of a design of a nationalnational system of system of innovationinnovation

The legacy of the past: a Soviet-The legacy of the past: a Soviet-type of SSI, with typical problems type of SSI, with typical problems for linking basic research, for linking basic research, innovation and economic activityinnovation and economic activity

A continuous flow of A continuous flow of organizational and institutional organizational and institutional reformsreforms

• Building connections between Building connections between research and industryresearch and industry

• Opening to world technologyOpening to world technology

• Various incentives for innovation at Various incentives for innovation at the firm levelthe firm level

A fast increase in the volume of RD… but still a A fast increase in the volume of RD… but still a limited size in international perspectivelimited size in international perspective

Source: OECD « »Main Science and Technology indexes”, 2008.

Table 2 - Total R&D expenditures

Table 3 - R&D expenditures by firms

2.2. A large pool of researchers…But low A large pool of researchers…But low productivity in terms in patentingproductivity in terms in patenting

Source: OECD « »Main Science and Technology indexes”, 2008

Table 4 - Fraction of total population and absolute number

Table 5 - Density and number of triadic patents

3.3. Presently, a clear external dependency for Presently, a clear external dependency for high tech products and technologies…high tech products and technologies…

Table 6 - Position on high tech technologies (% of world trade)

……A high import content of high tech A high import content of high tech Chinese exportChinese export

Table 7 - Import content of exports

4.4. A productivity revolution in the A productivity revolution in the manufacturing sector due to the import of manufacturing sector due to the import of technological frontier investment goods…technological frontier investment goods…

Lau (2004), p. 5

5.5. How much national is the Chinese How much national is the Chinese System of Innovation?System of Innovation?

A significant dependence with respect to the A significant dependence with respect to the flow of technologies within multinationals…flow of technologies within multinationals…

Gaulier, Lemoine, Ünam-Kesenci (2005), fig. 11, p. 42

High tech trade in % of total trade for each category of firm

……The contribution of Chinese firms to high tech net The contribution of Chinese firms to high tech net exports is negativeexports is negative

But a clever use of international collaborative But a clever use of international collaborative research…research…

Schaaper Martin (2004), fig. 60, p. 59

Percentage of patents with foreigners at EPO

……and a significant pool of Chinese and a significant pool of Chinese students and researchers abroadstudents and researchers abroad

Schaaper Martin (2004), fig. 37, p. 37

Number of Chinese students enrolled in the US, Japan, EU

6.6. The Chinese domestic firms are catching The Chinese domestic firms are catching up rather slowly with respect to foreign up rather slowly with respect to foreign multinationals with plants in Chinamultinationals with plants in China

Source: Artus

(2009), Flash, n°

243, 26 mai.

Figure 19 - Exports from foreign firms, nationalized and private Chinese firms (%

of world exports)

7.7. A clear regional concentration of innovations, high tech industries and exports…A clear regional concentration of innovations, high tech industries and exports…

More a series of More a series of local local clusters…clusters…

……Frequently with Frequently with international international connections…connections…

……Than a really Than a really national national systemsystem

The existence of two innovation styles and The existence of two innovation styles and growth regimesgrowth regimes• Chinese firms specialize in specific sectors Chinese firms specialize in specific sectors

(metal product, machinery, transport (metal product, machinery, transport equipment) linked to domestic demandequipment) linked to domestic demand

Gaulier, Lemoine, Ünam-Kesenci (2005), Table 9, p. 33

……Foreign firms specialize in Foreign firms specialize in importing electronic importing electronic

components and exporting the final components and exporting the final productsproducts

High-tech flows in % of total trade by firm type in the branch

For the time being, the For the time being, the domestic effort in RD does not domestic effort in RD does not seem to show out in the seem to show out in the performance of Chinese performance of Chinese firms…firms…

……An conversely, the spillover An conversely, the spillover from FDI is still modestfrom FDI is still modest

Provisional conclusions : Provisional conclusions : An original far sighted strategy for promoting long term growth…butAn original far sighted strategy for promoting long term growth…but

A growing importance of the innovations made and captured by foreign A growing importance of the innovations made and captured by foreign multinationalsmultinationals

The quite problematic success of an endogenous and indigenous innovation The quite problematic success of an endogenous and indigenous innovation process in the present decade process in the present decade

CONCLUSIONCONCLUSIONC1 – China displays a rather C1 – China displays a rather unique unique

institutional configurationinstitutional configuration: a series of : a series of local meso-corporatisms in local meso-corporatisms in competition under the tentative competition under the tentative control by the central state.control by the central state.

C2 – The speed and resilience of Chinese C2 – The speed and resilience of Chinese economic growth is largely the economic growth is largely the outcome of a outcome of a competition led competition led accumulation regime. accumulation regime.

o Among provinces, localities, large citiesAmong provinces, localities, large citieso Among various types of firmsAmong various types of firmso On the world marketOn the world market

C3 – A large fraction of Chinese trade C3 – A large fraction of Chinese trade surplus and international frictions surplus and international frictions originates in such an originates in such an unbalanced unbalanced domestic growthdomestic growthoPermanent trend towards overcapacityPermanent trend towards overcapacityoUnbalanced income distribution at the Unbalanced income distribution at the

detriment of wage-earners and welfaredetriment of wage-earners and welfareoDifficult management of credit and Difficult management of credit and

moneymoney

C4 – The impressive productivity C4 – The impressive productivity performance of domestic Chinese performance of domestic Chinese firms still comes from the firms still comes from the rapid rapid adoptionadoption of frontier technologiesof frontier technologies but not yet from the emerging of an but not yet from the emerging of an endogenous national system of endogenous national system of innovationinnovation

C5 – The quick and seemingly C5 – The quick and seemingly successful response to the successful response to the world crisis by the Chinese world crisis by the Chinese authorities is actually authorities is actually deepening the previous deepening the previous growth modelgrowth modeloSignificant autonomy of Significant autonomy of fiscal policyfiscal policy

oControl of exchange rateControl of exchange rateoMassive stimulation of Massive stimulation of infrastructures and infrastructures and productive investment at the productive investment at the local levellocal level

Table 8 – The public spending program 2008-2010 by sectors

Source: Artus (2009), Flash n° 536, p. 13, 4 décembre.

C6 – Paradoxically, these quite C6 – Paradoxically, these quite remarkable remarkable short term short term achievementsachievements of economic of economic policy might be quite policy might be quite detrimental to the long run detrimental to the long run viabilityviability of the present growth of the present growth regimeregimeoUnprecedented overcapacityUnprecedented overcapacityoA creeping protectionism from A creeping protectionism from the rest of the worldthe rest of the world

oRecurring speculative bubblesRecurring speculative bubblesoPermanent recreation of bad Permanent recreation of bad loans.loans.

Figure 21 – The widening gap between consumption and investment (% of GDP)

Source: Artus (2009), Flash n° 536, p. 3, 4 décembre.

C7 – A C7 – A domestic demand led domestic demand led regimeregime will take at least will take at least one decade to be one decade to be implemented, and the implemented, and the emergence of a strong emergence of a strong and and autonomous autonomous innovation systeminnovation system will will still take another still take another decade.decade.

Thank you for your Thank you for your attentionattentionRobert BOYER

CEPREMAP (Paris), GREDEG (Sophia-Antipolis).

140, Rue du Chevaleret 75013 PARIS, France

Invited Professor at CBP, Copenhagen Business School

e-mail : robert.boyer@ens.fr

web site : http://www.jourdan.ens.fr/~boyer/