The World in 2050-Quantifying the shift in the global economy - HSBC

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EconomicsGlobal4 January 2011abc9. China’s state-owned enterprises are in decline% of total urban employ ment in state-ow ned enterprises10080100806060404020200060 64 68 72 76 80 84 88 92 96 00 04 08Source: CEICThere are a number of examples of how this hasbeen achieved in China (for further details see Insidethe growth engine (Zhang Zhiming, December 8,2010). De-centralising and privatising production tothe regional level and running down the old stateownedindustry model (Chart 9) has led to ‘industryrivalry’ between the regions delivering competitionand incentives for the state governments.Another example in China is the ‘householdresponsibility system’ whereby land was leased torural households with set taxes and rents.Households had every incentive to improveproductivity because they then reaped the rewards.And China has clearly opened itself up to foreigndirect investment and global trade, and in 2001joined the World Trade Organisation. Suchengagement with the developed world allows it tomimic and develop the technologies of the West.There are still challenges to overcome which havethe potential to raise China’s growth rate further.In particular, fuzziness of certain ownershiparrangements, especially in the regional enterprisesector, and a lack of legal infrastructure will allconstrain China’s potential. Moreover, the statecontrolledbanking system is the only officialgame in town for borrowers and savers.Liberalisation of the financial sector will betteralign borrowers and savers and should lead to amore efficient allocation of capital.But it’s worth remembering that during the 1970sJapan was criticised using many of the argumentsthat now face China. The Japanese catch-up effortwas bolstered significantly by government policy.Large corporate groups (keiretsu) and banks hadclose ties, and the Ministry of Trade and industryprovided administered guidance to firms andbanks which influenced what were deemed ‘keyindustries’. Indeed, the criticisms were such ahindrance to Japan’s global economic reputationthat it made a significant donation to the WorldBank for it to complete the ‘Miracle Book’ toexamine the issue.9
EconomicsGlobal4 January 2011abcHuman capitalThe next set of variables in the model focus on theproductivity of the worker – the level of educationbeing the most significant (Chart 10). It’s all verywell having the latest technology, but if aworkforce hasn’t been sufficiently trained it won’tbe able to use it. And once ‘copy and paste’growth is complete, it seems likely the mosteducated workforce will be the one able toinnovate and drive technological progress.Another important determinant of the productivityof the workforce is health, which Barro proxieswith life expectancy. If you expect to live, andtherefore work, for a long time, it will be worthwhile investing years getting yourself educated. Ofcourse, on the other end of the spectrum, apopulation that lives a long time but spends a largeperiod of time in retirement could place a burdenon the working population. But we should capturethis in our model due to the high levels ofgovernment spending required to support an ageingpopulation. Growth will therefore be constrained incountries with a high dependency ratio.Barro also takes into account the level of fertility.A higher fertility rate means investment goods arespread more thinly, and with more productivecapacity devoted to child rearing, it reducesoutput per capita. Of course, when we considertotal growth, high-fertility economies will get aboost for this reason.The role of mortality, fertility and life expectancyis explored in some detail in the chapter entitled‘Running out of workers’ in Stephen King’s bookLosing Control (Yale University Press, 2010).10. The more educated a nation, the more likely an economywill be able to catch up and innovateNorwayUSAustraliaS. KoreaGermanyIrelandJapanSwedenCanadaHong KongNetherlandIsraelGreeceBelgiumFranceSpainSaudiMalay siaDenmarkFinlandIranSw itzerlandPolandChinaRussiaUKAustriaItalyArgentinaMexicoSouthSingaporeColombiaBrazilThailandEgy ptVenezuelaTurkeyIndiaIndonesiaSource: Barro-Lee0 2 4 6 8 10 12 14Average years of male schooling10
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Page 46: Karen WardSenior Global EconomistHS

The World in 2050-Quantifying the shift in the global economy - HSBC

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