On Tuesday, April 17th Sandra Polaski, Director of the Carnegie Endowment’s Trade, Equity and Development Project, and Li Shantong, Senior Research Fellow at the Development Research Center of the State Council of the People’s Republic of China presented results from their recently released study “China’s Economic Prospects 2006 – 2020.” Albert Keidel of the Carnegie Endowment moderated the event.
The report uses two computable general equilibrium models to examine (1) the impact on China’s economy, sectors and households of its accession to the WTO and (2) to project how different international and domestic policy environments would affect China’s evolution in the future.

Sandra Polaski began her presentation with an overview of the major economic characteristics of China’s growth since 1980 and the structural changes over that period.  These included the singularly important role capital accumulation has played in driving growth, the gradual shift out of agriculture and to higher value added manufacturing, and the lifting of millions of Chinese out of the most severe levels of poverty, while most Chinese still live under the $2 a day poverty line.

Ms. Polaski then presented the findings from the first model, which addresses the impact of WTO accession on China’s economy.  The model allows the authors to isolate the causal relationships between trade liberalization and changes in output and employment of different sectors.  See the attached Powerpoint presentation for key findings, which include the following:

--Gains from accession favored urban households, exaggerating already significant inequality between urban and rural areas.
--WTO accession generated an estimated net creation of 13 million jobs.  In the context of China’s 770 million person labor force, this number implies that trade and exports alone cannot solve China’s unemployment and underemployment problems.  Achieving full employment will require much greater growth of domestic demand.

Ms. Li presented the findings from the second model, which simulates China’s growth pattern to 2020 under various scenarios.  These scenarios were designed to capture a plausible range of international and domestic developments that could arise from factors such as trade, current account and capital account imbalances, which might lead to increasing protectionism in the world economy; possible future shortages in strategic resources; the pace of urbanization; and changes in the savings patterns of an aging Chinese population.  The scenarios include an optimistic forecast, a business-as-usual projection, and a more pessimistic scenario.   See the attached Powerpoint presentation for key findings, which includes the following:

--China’s poor, rural households have the most at stake in ensuring that an optimistic scenario materializes.  Not only do they stand to gain the most in an optimistic scenario, but they would also fall furthest from their baseline trajectory were a risk scenario to come to pass.

From these key findings Sandra Polaski derived a number of policy recommendations.  First, given the vulnerability of China’s rural households, greater emphasis should be placed on creating jobs to pull farmers out of low-productivity agriculture.  Second, focusing on labor-intensive service industries such as health care or education could maximize job creation.  To this end, the government should stimulate demand for these services by investing in social infrastructure such as schools and hospitals and by providing or organizing financing in the form of health-care insurance options, tuition relief and social safety nets.

Following the authors’ presentations, Keidel opened the floor to questions from the audience.  In response to questions about the treatment of variables such as inflation and exchange rates in the models, the authors argued that both are short term variables that play a relatively unimportant role in determining long-term, structural changes in an economy.  In response to questions about China’s dependency on trade as a growth engine Polaski stressed that China’s increasing wealth is stimulating a counter-balancing domestic demand but that more needs to be done to distribute the wealth.  Shantong also pointed out that the size of the re-export sector in China inflates the country’s trade dependency ratio.+

This summary was prepared by Will Talbott, Junior Fellow in the Trade, Equity and Development Project.