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- [00:00]
A
Good evening, ladies and gentlemen. I'm going to sit down for this. I'm going to sit down. I want the focus not to be on me. However, it has to be a little bit on me just for a few seconds, or rather on the Confucius Institute for Business London. This is the second of our lectures done in collaboration with the London School of Economics. And we're very, very pleased that Professor Danny Kwah, who's head of the economics department at llc, had agreed to give a talk on one of the most fascinating elements of the new Chinese economy and something that is going to grow and grow. The Confucius Institute for Business London is about China, it's about business. And yes, it's in London. So it really does say the label it has on the tin. We want to really encourage as many of you to get involved in China, particularly learning Chinese, taking parts in our events, and very much seeing how it connects the bigger picture of business and China. I had a quick look at the biog of Dani Kua and I mean, it is humbling reading. Advisor to governments, advisors to companies, advisor to advisers. And I love this sort of the final thing of your specialities, the weightless economy. I love that idea, weightless economy. And it's something that I want to find a lot more about. We're going to start more or less on time. We want to finish on time as well. It's going to be sharp, it's going to be to the point. And of course, we would love to have questions from the floor at the end. So without further ado, can I introduce you perhaps a warm welcome to Danny Hua for his talk tonight.
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B
Thank you very much, Nick. And thank you all for being here. It's a great pleasure indeed to be here and to talk about a combination of different topics that I find have been particularly interesting, not just in my research, but for just the world at large. I want to talk this evening about the knowledge economy, different knowledge economies in China. The Confucius Institute is about, among other things, communication and information. Those of us who have been signed up to take Mandarin, if not already a language that we are fluent in, realize what a steep learning curve that can sometimes present. As you climb that learning curve, it is good to know that that something awaits you at the end of it. Your time will be well spent if you believe that the Chinese economy will continue to grow, its importance and significance in business and commerce and politics will continue to expand. And all the sweat and time you've put into learning the Chinese characters and pinyin and the different four tones will have paid off because you will be fluent in the language of business and of politics and of the world in the future. What I want to talk about is a peek at that world of the future based on what we know now. The basis for economists thinking about the future is economic growth and the basis for economists thinking about economic growth is the development of knowledge and of science and technology. So when apply these thoughts about science and technology, about knowledge, to the problem of economic development in China, there are three points that I would like us to come away from this talk with. Let me be upfront about what these three items are. The first thing I want us to get an appreciation of at the end of this is China's place in a dynamic world, you economy. Now, we are familiar with hyperbola and projections and I want us just to be clear about what is known, what are extrapolations and what has already been the spectacular success that Chinese economic growth over the last 15, 20 years has brought about in the world. So I'd like us to come away with a firm understanding of the facts on that. I then want to qualify what will be an optimistic, rosy picture that I'm going to draw for you out of the first item and describe to you a slight difficulty in what we know about knowledge based economic growth, economic growth based on science and technology, the experiences that we've had assessing we as a profession have had in assessing prospects for future economic growth based on the science and technology configurations that we see around the world. To do that, I want to draw a parallel of things going on with China with a recent history of yet a different East Asian economy. I then want to turn back our attention to the Chinese case, give you a snapshot of the indicators that underlie future growth prospects and I hope reassert the optimistic picture that I want us to come away with at the end of the first part of the talk, tinged by the qualifications that we'll have drawn in the second. So first, the hyperbola. Among the best known of the projections on Chinese on the place of China in the world economy is a study by Goldman Sachs. Down the road from here, the famous BRICS study. Brazil, Russia, India and China, where through a simple, relatively uncontroversial growth accounting extrapolation process, they drew the following scenario. I'm going to tell you what the scenario is. I'm going to tell you what we don't know about the likelihood or uncertainty in that scenario and then turn to what we do know. And the part about what we do know actually confirms The Goldman Sachs BRICS extrapolation so here's the extrapolation, here's the step in the dark. Goldman Sachs calculated that there were six economies in the world in 2003, the so called G6, each of whose gross domestic product national output, national income exceeded the one trillion dollar a year mark measured in US dollars because remember in 2003 the US dollar was actually worth something. So this was a club of rich countries. By contrast, in 2003 the BRIC countries, China, India, Russia, Brazil in total, in total produced gross domestic product that was less than each of the G6 economies. These were poor economies. As recently as 2003, the Goldman Sachs study did a simple growth accounting exercise and they came up with the conclusion that that the four BRIC countries would by some point in the future exceed national income. The current G6 richest economies, the giant among these four BRIC economies will be China. And China, according to these projections, nine years from now will be richer than all countries except the United States. To be clear, again, this is an extrapolation. This is based on an economic model where you run the model forwards. It is not cold hard fact, which is what I'm going to turn to in a minute, but carrying out this projection, looking at different sides to it, there are different ways in which you can see this conclusion. China will have overtaken Germany by next year. It will have taken Japan in 2016 and it will overtake the United States by 2040. India, the only other billion people economy in the world, is on a similar high growth trajectory, although trailing China a little bit in this same extrapolation into the future in this same conjecture based on a model based on running things forwards. While China and India, Brazil and Russia will be rich economies, the people in there will still be poor, relatively speaking. They're rich economies because they are so large. China and India certainly, but also Brazil and Russia. So even if you take the Goldman Sachs extrapolation, the one that's optimistic among all optimists, you will see that measured in per capita terms, measured in average income terms, China, by the time it's overtaken The United States, 10 years after it's overtaken the United States will have a per capita income that's only about one third that of the US by that time it will still be poorer than the United Kingdom. It will still be poorer than Japan and Germany measured per capita, it is richer in the Goldman Sachs accounting only. Well, maybe only shouldn't be emphasized but for, among other reasons, significantly because these countries have so many people in them, so Much for the hyperbole and extrapolation. What do we actually know today? What I want to turn to now are facts today about the Chinese economy that confirm a lot and in fact in some ways exaggerate the emphasis that been placed in this extrapolative Goldman Sachs study. People like to point out to me that one of the reasons that China or India or other countries show up importantly now in the global economic balance in the global center of gravity, is because we're measuring their incomes in so called purchasing power parity terms. Purchasing power parity corrects for how some countries have lower costs of living. And so when a country has lower cost of living, the people there are better off. When you correct for purchasing power parity, their incomes are observed to rise. Of course, in the world trading system, when a country that has high, low purchasing power parity income actually tries to trade with the world, it finds that it has to trade with the world on official exchange rates based on the renminbi or the rupiah or whatever currency that it happens to be trading. And if the renminbi is undervalued, it does not have that much purchase power in the world. Well, here is an interesting perspective on that. If we look at market exchange rates, official exchange rates, leave aside the criticism of purchasing power parity. Correction. Well, this table tells us a few facts, both good news and bad news. First, the bad news, the news that says that comes down on the side of the detractors who say China and India and other emerging economies are not that important, shows up in this table in the first column. The first column calculates for you the fraction of world national income that is being generated in different parts of the world based on market exchange rates, based on actual trading power in the world economic system. And there, sure enough, you see that the United States, for all the trouble that it is in currently for the last few years, it still generated close to a third of world income. The high income OECD countries altogether generated over three quarters of world income. By this measure, China and India are minnows. They generated less than 5% of world national income, tiny relative to the United States and the high income OECD countries in the world. However, when you turn to a dynamic picture, when you turn to what's happening to the actual changes in the contribution to world national income, actual growth here, the picture balances out a lot more in a very surprising way. The United States in 2006 added to World national income in excess of half a trillion dollars, 533 billion US dollars. China and India, taken together, lo and behold, generated almost exactly the same improvement in world national income from a tiny base. Their contribution to ongoing world prosperity is already massive. And in fact you see this pattern replicated throughout different parts of the world. The high income OECD countries, yes, they at a point in time, in a snapshot way, generated 3/4 of world income. The change that they contributed in the last year was close to $2 trillion. But that's not much more than the low and middle income countries in the world generated in added contribution to world income. If you want to think about it differently, what's actually happened in the world in the last two, three years alone is confirming the Goldman Sachs optimistic extrapolation at market exchange rates, at actual contribution to real purchasing power in the global economic system. It is important to notice this because what we're trying to do now is to get a sense for where China sits in this global economy. It continues to be relatively poor at official exchange rates in its people in per capita income might still be relatively poor even in the most optimistic extrapolations. But as a national economic power, China, India and the low and middle income emerging economies are dollar for dollar matching the contribution to world economic growth that the currently rich countries already provide. Where the excitement and the action is, is coming from these countries, China, India and the emerging economies. That's where most of the interesting economic issues are going to be found in the next 10, 15 years. That's where purchasing power is going to gravitate. That's where all the interesting economic activity is going to move. And this is happening right now, not in a Goldman Sachs optimistic extrapolation. China's contribution to this happens not just at the end of adding to the world's purchasing power, but it is improving the state of the world in all other directions. To turn to these other directions so that we can understand the significance of ongoing Chinese economic growth, I now want to turn away from what, what's happening with the rich high income countries, what's happening to the global economic system, what's happening to the very, very poor people in the world. Okay, this table is going to get us at those facts. I'm going to take us through the first part of this table, relocate why this table is significant in global political discussion, and then come back and look at the role of China. So this table shows the evolution of world income now measured in purchasing power, parity, corrected terms. That's the right way to do it. If you're trying to understand what's happening to human welfare. If you're trying to understand what's happening to the dynamics of the very poor people in the world. This table captures for us snapshots of the last 30 years or so of world economic history. It documents how in 1981, world GDP was in purchasing power parity terms, $24 billion. And how $24 trillion. Sorry. And how by 2004, in inflation corrected purchasing power parity terms, it had more than doubled. That's good news. Per capita income similarly had risen from about $5,500 per person average on Earth to now in excess of $8,000 per average person on Earth. $8,000 a year is about $20 a day. Inflation corrected, correcting for purchasing power parity. While all this growth is going on, the world's poor benefited from this growth. The next row of this table measures the number of billion people in the world. Number of million people in the world living on less than a dollar a day. So to be clear about the magnitudes, I said that in 2004, the average person on Earth earns about $8 a day. The rich, high income countries that you and I live in now earn at minimum $30 a day. Poor middle income countries earn on average about $10 a day. The very poor people on Earth get by on less than a dollar a day. So in this situation of extreme poverty, the third row of this table describes how in 1981, close to 1 1/2 billion people on Earth, 1/3 of humanity lived on less than a dollar a day. As economic growth proceeded over these last quarter of a century or so, that third row, the figures on that third row happily continues to fall. It fell to 1.2 billion. It fell to just in 1990. It fell to just over a billion at the end of the millennia. And three years ago, it fell below a billion people. This is good news. The number of poor people on Earth has been falling monotonically. We are well on our way to achieving the first of the Millennium Development Goals. You remember the global. The international community in the year 2000 got together and decided that good things should happen in the world between the year 2000 and 2015. Among them, the first. The first of these is to half the rate of $1 a day poverty in the world. And we actually see that happening before our eyes in the third row of this picture. That's all the good news. Now cast your eye on the fourth row of this picture, which documents number of people in China alone living on less than a dollar a day. In 1981, that number was 634 million. In 2004, that number had fallen to 128 million. Calculate the difference between the number of poor people in China in 1981 and that in 2004 you come up with about half a billion, about 500 million people. China reduced the number of poor people living within it by half a billion over the course of these 25 years or so. Oh wait, by coincidence, that happens to be exactly the same number as the poor people in the world had their numbers reduced by in total in the third row, all of the reduction in world poverty over the last 25 years has occurred in a single country in China. If you look at the last of these rows that shows the remainder in the number of poor people in the world after you take out China, that number has remained roughly constant over the last 2530 years. If indeed we are well on our way to meeting the Millennium Development Goal, it is thanks to a country that none of, as far as I know, Borno, the Pope or Angelina Jolie have talked very much about. In Making Poverty History, all of the attention that the Western community has been on reducing or alleviating global poverty has focused on the African continent. Unbeknownst to us, silently, surreptitiously, the reduction in world poverty that has actually occurred has happened in a country that's just gone about its business quietly, not trumpeting the fact that it single handedly is helping us achieve the first of the Millennium Development Goals. That the growth in China has to continue is important not just for the changing global balance of economic power, not just important for confirming the Goldman Sachs optimistic extrapolations, but it's important and significant in a very profound way in improving the state of human welfare in the world. Where China goes with alleviating poverty, so the world goes, at least as we've seen over the last 25 years. This picture demonstrates that fact in what I hope is a vivid and subtle, somewhat more memorable way than looking at just numbers across a table. So this picture I'm going to leave up on the screen for a few minutes, but then take it off because you'll get cross eyed trying to follow the bubbles transiting in this picture. This picture shows on the horizontal axis average income measured in purchasing power, parity terms. On the vertical axis, it measures the millions of people living on less than a dollar a day, the millions of people living in extreme poverty. Each bubble bouncing about in this picture represents a country or a continental grouping. The size of the bubble represents the number of people who are citizens or the number among the population in that country or in that continental grouping. When these bubbles move rightwards in this picture, what that tells us is that economic growth is occurring because the average person in that block of countries or in that country is getting richer, is receiving more and more income. When the bubble sinks towards the floor, it shows that the number of poor people living in that country or in that continental block has fallen. Both of those are good things to happen. What we would like to see in bubbles representing different parts of the world in a picture like this is that over time these bubbles all congregate cluster in the southeast part of this picture. This, this picture shows how the large bubbles begin in the northwest part of the picture. Early in the sample when countries were on average poor and when the number of poor people in those countries were high. The largest bubble that you see in this picture, the light blue bubble, is the East Asian Pacific continent. The blue bubble that's right next to it is China. Both of those bubbles show a dramatic race towards the southeast part of this picture. It shows economic growth occurring in that continental block and then dragging the number of the people who are in the very poor state of that economy out of that state of poverty, lifting hundreds of millions of people out of the state of poverty. The China bubble, this blue one, that is what we had previously referred to as being single handedly responsible for alleviating the poor in the world. Other blocks here are interesting, but more for bad news than for the good news that the China East Asia Pacific bubble shows sub Saharan Africa. This orange looking bubble is a sad illustration. In this picture it has done nothing except percolate upwards. What does that say? Sub Saharan Africa has not grown richer on average, it has shown zero economic growth. The only thing that's happened is that the number of poor people living there has increased. The India South Asia bloc, also similarly large blocks moving southeasterly, not as rapidly as China moves in the right direction, but certainly nothing as dramatic as what's happened in China. So to conclude from this first tour that attempt to situate China in the global economy, we've come away with a depiction. First there was a forecast, and then second, what actually happened that shows the importance of the growth in countries like China and India and the emerging economies, not just for increasing the wealth and purchasing power in the world, but for alleviating poverty in the world, for improving the human condition. Both of those things are happening and happening in exciting magnitudes in China, to some extent, in India, elsewhere among the leading and emerging economies. And from that perspective it is vital not just for the global trading system, not just for the global economic system, not just to pick up when the United States falters. It is vital for human welfare that growth in these countries continues. It is vital for you to be able to justify the Chinese lessons that you are taking from the Confucius Institute that the growth and economic commerce in those countries continue to grow as rapidly as they have been. So now, stepping aside, stepping back from what's actually happened, let's look at the structure of economic growth in China or elsewhere. In particular, the structure of economic growth that might be driven by science and technology and by the development of knowledge economies by science and technology as expressed by computers, the Internet, mobile telephony, research and development, and other indicators that are natural to think of. Well, when we turn to those, we have a slight difficulty. We have a slight problem. And this difficulty should give us pause in otherwise unbridled optimism for Chinese economic development. I actually have an equation up on this slide. I realize this is a public lecture, but I will be disowned by my profession if I don't put up at least one equation in every lecture. Here's the slight difficulty. Economists, or it's just a fact, we have to think about economic growth in terms of a so called production function. Production function tells us how output or income evolves in a way that depends on the inputs that we put into the national production process. If capital is K, physical capital is K. I want us to think of the machines that we build, the bridges and the buildings, and the fiscal infrastructure that we put in place. If the people, the labor, the workforce that we are applying to these factories we call N, then the labor input is yet another cause for rising national incomes. Both of these are so called factor inputs into the production process. The third of these, by tradition denoted A, is so called total factor product productivity. In economists view on this, total factor productivity is identified with improvements in technology. Improvements in technology make physical capital more productive, makes people more productive. And it too is an input. But not in the sense that we can build buildings or factories, not in the sense that we have people. But it's something else that represents the state of technology in an economy. In principle, growth can come from improvements in the buildings, the infrastructure, the bridges, the highways. It can come from having more of a workforce, or it can come from this so called total factor productivity. Economist studies over the last few 50 years have convinced almost all economists that in the long run growth can continue, can be sustained only through improvements in total factor productivity, only in improvements through a that while we can Put up fancy buildings and infrastructure while we can put more people into the work process. Those are short term gains that run into diminishing returns rapidly. For sustained growth, you've got to have improvements in total factor productivity. As Paul Krugman put it once memorably, total factor productivity isn't everything in economic life, but in the long run it is the only thing in economic life. If Chinese economic growth is going to continue to have the positive impact that we have just seen, then we have to be convinced that total factor productivity in China is going to continue to improve. And the way, the only way we know how to improve total factor productivity is through improvements in the state of technology, through improvements in engineering, the state of science and technology. Sometimes people refer to growth that occurs from just capital stock and just the labor input as being growth that comes through mere factor inputs, unsustainable short run bursts of economic growth that will not continue. Where the action is for long run growth is total factor productivity. A so when you and I now sit here and try and project forwards Chinese economic growth, when trying to ask ourselves if the Goldman Sachs projections are reasonable, what you and I are really asking is what is the state of science and technology in China? What is it that's going to drive total factor productivity in China over the next 5, 15, 25, 50 years? Now the economics of what drives A is complicated and subtle. It involves trying to think through what happens with intellectual property rights, involves trying to think about the economics of creativity versus the economics of dissemination. All of those are interesting and important issues. The goal that you and I have this evening is just to come up with a snapshot of the state of technology A in China. We want either a number or a picture that gives us some confidence that growth in China is not just growth through mere factor inputs. So the question that we now turn to is how high tech must a society be before we can count it as having high total factor productivity. Now you and I can go to Beijing or Shanghai and you walk down the streets in Wangfujing or any other shopping area. You look around you and you see high tech everywhere. People are carrying cell phones. They're wired up through Internet cafes. Internet and broadband penetration is high. And we think of coming away from that as the state of science and technology is strong and robust in China. So let's look at that picture. Let's look at that picture by drawing a comparison with a different economy. So I'm going to take us through the case of Columbia Korea, which for a while was the similar golden poster Child of economic growth in the Far East. So let's remind ourselves of some facts about Korea. I want to go from there and then turn back to China. Korea too had this spectacular economic history. When its race for growth began in the mid-1960s, it was a poor country. It was an agricultural country, open. Over 50% of its workforce was employed tilling fields. My goodness, it was poorer in per capita terms than Zimbabwe and Cameroon and Senegal. It was a very poor country. In the space of 25, 30 years, it turned that completely around. By 1996, it was a member of the OECD, the Group of rich countries in the world. It had per capita income that was more than half that of the United States, beginning from less than 10%. By the mid-1980s, the strength of its chaebol, its technology driven corporations, was such that it was challenging intel for leadership in producing semiconductors and EEPROM chips. By the turn of the millennium, there were more mobile phones normalizing by income, There were more mobile phones than the United States. States people were using the Internet in a broadband way, more than three times the rate at which the United States was. This must be the very model of a country that has gone from being very poor to a high tech advanced economy. Many economists look at Korea now not with the same rose tinted glasses that they used in the mid-1980s when they thought of it and Japan as challenging the supremacy, economic supremacy in the West. Why? One thing happened. In 1997, the East Asian currency crisis occurred. It swept through almost all of Southeast Asia and East Asia. But among the more dramatic things that happened was in Korea. The Korean currency fell by 35% in the space of six months. The IMF had to put together a rescue package in loans to the Korean economy that was the largest it had ever engineered. Korean citizens at the Thai citizens were generously volunteering their gold jewelry to bolster up the Korean treasury so that it could meet its foreign exchange commitments. Daewoo Group, one of the three largest Korean chaebols, disappeared altogether in the aftermath of the 1997 crisis. Now Korean economic growth is still respectable. It is now 4.5%. But that is less than 2/3 of the rate of economic growth it had before. Many economists point to Korea and they say, here is the culprit. Look. When we measure total factor productivity in Korea, it was a dismal 57% of that in the United States. It was lower than that in the United States, and it had not grown dramatically. Korea had through the 60s and 70s and the 80s grown only through Mere factor inputs and a slight disruption in the economic environment completely put that economy out of joint. So, so the story goes, but here's the problem. Here's why I personally don't believe this story that I've just told you. Total factor productivity A is about measuring the state of science and technology. It's about measuring the state of knowledge in an economy. Okay, we've seen that the Korean economy was not all gung ho, firing on all cylinders, but on the other hand, it was firing many of the right cylinders. So this graph, which is not a depiction that's typically drawn up in these debates, shows the results from an OECD survey of the problem solving skills in teenagers in different countries. What the OECD did was they went out and sampled 275,000 59 year old school children. You might have been among them. For all I know when they did the survey that they did, some of you, others of you might have had children who were among those among those subjects surveyed. They ran a survey over a quarter of a million school children across 41 countries and then through these standardized tests attempted to assess the state of science and technology knowledge in the different countries. Problem solving skills you would think must be high in the list of what drives total factor productivity. If an economy is just stock full of problem solving creative individuals, Google, engineers, every single one of them, then that economy must be pushing on the boundaries of total factor productivity. Which country led the world in problem solving skills in 2003? The horizontal axis here shows the mean score of the country. The vertical axis shows a measure of dispersion. When you look across the 275,000 school children, some of them do better than others. The lead country was Korea. Korea led the world in problem solving skills, closely followed by Japan, Finland and Hong Kong. The United States shows up well in the middle of the pack in terms of these direct measures of creativity. This first piece of evidence says that, well, maybe the way economists have traditionally measured total factor productivity or, or have viewed total productive productivity is not right. You can look at how a country can have knowledge, can have science and technology high measures in all of these dimensions, but somehow still evade the high total factor productivity description. Either these direct measurements of creativity and knowledge and science and technology are wrong, or the economist's view of total factor productivity is wrong. Now I've shown here a graph of problem solving skills among 15 year olds. When you do the same experiment for science skills, for mathematics skills, for reading skills, my goodness, for all I know, for knitting skills in all of these Measures, Korea shows up well to the left of the picture, well to the right of this picture, my left, well high among the creative, knowledgeable, science and technology intensive economies. Something is wrong with the way economists are measuring total factor productivity. There is a problem in the way we identify science and technology directly assessed in the world with total factor productivity. And it might be that our assessments of the dismal state of Korean science actually show a problem in our measurement more than it does a dismal state of science and technology in Korea. Because by almost every measure Korea shows up well in research and development expenditure as a fraction of gdp. Korea is well in the pack of the leading countries. It is far and away above the United Kingdom in patent applications. The most direct measures we have of knowledge creation and the application of knowledge in society. Korea, the blue line in this picture, is simply jumping ahead by leaps and bounds over the United States, over the United Kingdom, over all of the high income OECD countries. By every direct measure that we know, the Korean economy is a knowledge intensive, science and technology capable economy. Yet economists have measured Korea's total factor productivity to be only 57% that of the US we have used that as a way to try and understand that the Korean economy might not be as robust as we once thought it was. Something is wrong with our picture of the world. Let me summarize that by saying, by describing the problem this way, total factor productivity might well be the engine of growth, but its identification with science and technology, with high tech, with knowledge, is not as direct as we once thought it was. These direct indicators of science and technology I personally find much more reliable than indirect measures of total factor productivity that as economists we have come up with. So what's the bad news here? Well, China's measure of total factor productivity is even worse than that of Korea's. In 2000, China's total factor productivity was only one third that of the United States and not improved dramatically. Now there are two parts not improved dramatically over the last 20 years preceding that. Despite the spectacular growth that we have seen in the Chinese economy, despite the spectacular improvements in the state of welfare in China, there are two paths that we can take from this point. We can say I'm going to go with how economists have measured total financial factor productivity and write off China. Because China has not been able to improve its total factor productivity, it too, on the next East Asian currency crisis, will suffer a fate worse than Korea's. That's one path we can take. The other path we can take is to say that total factor Productivity is not, as we once thought it was the right way to assess growth prospects for an economy. It's not the right way to look at science and technology indicators going forwards in the world. It is this second path that I want to take us down. And there I want to reinstate the position of optimism for the Chinese economy. When we look at snapshots of China, when we look at snapshots of its science and technology and its human capital development, the snapshots that we come up with show a country that's trying to do the best that it can. Nothing spectacular, nothing that shakes us from this view, that total factor productivity in China is only a third that of the United States. When we look at gross enrollment across different countries in the world, yes, China has many students enrolled in primary education. Now, the ratio here routinely exceeds 100 because this counts the number of people who actually enrolled in primary schools, normalized by the number of children in the relevant age group. So to the extent that there are people who stay on in school and who are of a different age than everybody else there, this ratio routinely exceeds 100%. China is about in the middle of the pack for primary enrollment. It's about in the middle of the pack for secondary enrollment, and it's low towards the bottom for tertiary enrollment. But maybe that's because all the Chinese students are here at the lse. When we look at how that human capital is used, again, the snapshot of China is that it's roughly in the middle of the pack. Research and development expenditure as a percentage of GDP is slightly below that of Russia, it's above that of India, but it is only about a third that in the United States. The number of researchers involved in research development as a fraction of the population, it's a respectable number for 539 more than in India, which is a technological powerhouse, more than in Brazil, about one fifth that of the uk, Much, much lower than the United States. So the snapshot of science and technology indicators show roughly what we might have assessed from total factor productivity when we look at research. Now I'm going to turn to changes over time. Well, the changes over time picture, turn around that conclusion. So I'm now going to run through some graphs that show on the horizontal axis, evolution in time and on the vertical axis, different indicators of science and technology. This graph shows research and development expenditure as a fraction of gdp. China, this light blue line in the bottom pack, in the bottom cluster is nothing dramatic, nothing out of the ordinary, sitting at roughly a third that of the United States. Consistent with our measures of tfp. But what it begins to point out is what we begin to notice, staring at this picture a little more, is the slope of that line, how rapidly it is increasing. China might now still have low R and D expenditures, a fraction of GDP. But even relative to a GDP that's growing at about 10% a year, that research and development expenditure is growing even faster. Science and technology publications an indicator for the knowledge that's being produced in the economy. Again, this is a time series plot. The horizontal axis shows what's happened since the mid-1980s. It shows that the United States, sorry, the United Kingdom produces well above the average science and technology publications as a fraction of its population. The United States just dominates in this picture. So I've taken that out. There's a cluster of poor and emerging economies that produce useful science and technology articles contributing to the knowledge in the world. The striking feature here in China, the brown line here, is that it's emerging from the pack and it's on a rapid upwards trajectory. When we look at the number of patent applications that are being taken out in the world now, the popular view is that China is an intellectual property rights wasteland. You do not want to take intellectual assets to China because there's serious disrespect for it there. Well, actually, if you look at patent applications, patent applications indicated by the brown line there show China's numbers as a fraction of the world total that has just skyrocketed. It has overtaken patent applications everywhere else in the world. Basic from a very low base, China seems to be on a trajectory where it's extremely serious about improving its knowledge base, improving the state of science and technology, being innovative and creative in all the right ways for continued economic growth there. In terms of the uses of technology, whether you look at Internet users or other indicators, all of these again show the rapid upwards trajectory that China is now embarked on. The blue line there indicates Internet users in the world, Internet users in a particular country in China here as a fraction of the world total, everybody is trundling along. The whole world is increasing. Number of users on the Internet, number of users of high technology. All countries are keeping roughly parity, except for China, again simply skyrocketing through exploding through users everywhere else. You might say, well, sure, that's just because there are so many people in China. Well, that's true. But there are also a lot of people in India. And as a fraction of the world, the population size in China now is not dramatically different. As a fraction of the world of the Population size in China 10, 15, 20 years ago. This, this dramatic upwards trajectory indicates something real and profound happening in the state of science and technology in China. When you look at mobile phone penetration or you look at PC usage in the world on all indicators of science and technology, China has begun from a low base and has begun to break through the ceiling compared to everywhere else in the world. To conclude, China's prospects are rosy. They are optimistic now from our survey of science and technology and knowledge in China, just as they were optimistic from Goldman Sachs type extrapolations that did not look further into the nature of total factor productivity. The nature of science and technology in an economy. What I've done in this lecture is I've taken you through a snapshot picture of China's place in the dynamic world economy today. I've told you about its importance in contributing to world economic growth not just in purchasing power parity terms, but in terms of real hard currency being traded in the world. I've told you how that's important not just for ongoing continued world economic growth growth, but it's important for improving the state of human welfare across the globe. China occupies a central role in both of those dimensions. I've told you about a slight doubt or difficulty that outside observers might have and come away thinking that prospects for China by comparison with that of what happened in Korea, we might need to be more careful about. I've told you why I find that kind of reasoning tenuous at best, not as credible as it might be. I've told you why I've decided not to take the path that follows measuring total factor productivity, but instead looked at direct measures of state of science and technology knowledge economies in China. And I've told you how, although those began from a very low base, the rate of growth has been so rapid they have overtaken almost every other nation in the world. So my conclusion is an optimistic one and it's an optimistic one that's necessary if we're going to continue world economic growth and we're going to continue alleviating improving human welfare and alleviating poverty in the world. Thank you.
- [53:39]
A
I mean an immediate thank you to Danny for an absolutely fascinating lecture and some of. Actually I found, actually I was taking serious notes rather than just listening, which is quite frightening. And I'm so glad that you ended on a tone of optimism as well because the alternative would be quite disastrous. I don't want to waste time by talking. I'd like you to ask questions, any questions. First of all, gentleman there with a beard, then the Gentleman, glasses. And then gentlemen at the back first. 3.
- [54:42]
B
Okay. The. Okay. It is true that the absolute numbers of $2 a day poverty have increased slightly over this period that I've studied. But remember also that the world population has increased by over 2 billion in the space of this time. It would be quite, it would be a spectacular success story if we could improve absolute numbers everywhere. As a fraction of the world population, the number of people living on less than $2 a day has fallen. That is clear. My own interpretation is that it is simply a transition process that we're going through. And eventually soon the absolute numbers of $2 a day poverty will also fall just through the process of economic growth. And the reason I say that is because when you break down the different. What's happening to $2 a day poverty in the different parts of the world China has done has taken similar positive strides in that direction. And as we've seen, China together with India will account for most of what's happening in that dimension.
- [56:00]
A
Thank.
- [56:08]
B
You. That's the reason why I think I'm.
- [56:12]
A
Very obvious when you say there must be something wrong always in the world.
- [56:18]
B
Throughout your presentation, I'm wondering, are you.
- [56:22]
A
Trying to argue that we need a new definition of the.
- [56:31]
B
No, I wouldn't. I mean, this, you know, this could be a fairly technical discussion to get into, and I don't want to do that. I wanted to suggest that when we hear about economists talking about total factor productivity as a way to assess future growth prospects, I simply want to suggest that we need to have a proper amount of skepticism in the way we interpret total factor productivity. That's all.
- [56:59]
A
Thank you, gentleman. There. And then I'll take number three.
- [57:25]
B
But. Yeah, Yeah. I have no, you know, I have no objections to wanting to move economics in that direction. I mean, you know, I've, in my own economic work, I've tried to emphasize that it's not just looking at measures of income directly, but looking at measures of human welfare or utility that are much more important. But, you know, the fact of the matter is when you move 500 million people from living on less than a dollar a day to being wealthier, however you measure it, whatever ethical basis you put on that, that's got to be a good thing. This is no two ways about it. It's got to be a good thing.
- [58:38]
A
Thank you, gentleman. Blue sweat at the back, gentleman here. And then just so, gentlemen, not one. One question, please.
- [58:46]
B
I know.
- [58:48]
A
Straight to the top, then we go back. How's this for, you know, balancing?
- [58:51]
B
Okay, I'm Here to represent the women as well. I'm curious, Two major factors that could possibly derail the rape of growth in China. Short of something that points to the 1997 East Asian financial crisis, what would those. Yeah, I wouldn't even point to a 1997 type crisis to derail China. I would look instead at US and Western Europe. Protectionism. I think that's the single most important danger, single largest danger in the world right now. I think that's large enough. That's large enough to. Number two. I don't know if we all stop buying jeans. No, I'm being slightly facetious, but I think that the number one danger is more than enough to take up slots two through five.
- [59:54]
A
Similarly, the latest words of jeans we're hoping to have next term. Interesting. Three way between Central St. Martin's College of Art and Design, the Institut Francaise de la Mode, connected with Tsinghua University. Looking actually at the whole question of textiles and fashion and development as a big roof area. So come back in. So back to the format. Gentleman in the blue. Gentleman in the blue again. And then. Was there another gentleman in blue?
- [60:21]
B
Yes.
- [60:21]
A
Okay. Blue, 1, 2, 3. Yeah.
- [60:35]
B
Okay, I'm not hearing really clearly.
- [60:37]
A
So one needs to speak up.
- [60:40]
B
Perhaps you could stand up and then. Oh, I see. If we remove the students who have been kept behind, how does the picture look? I don't know the answer to that question. You know, UNESCO and the OECD who put these numbers together don't give me enough. Don't give me enough tools to disentangle that. I don't know, is the quick answer to your question. How do you think it would. I mean, assuming we knew the answer to that question, how do you think that would change. Change our views? Okay, good. All right, that's what I needed to know. Next question. Yeah, yeah, I'm open to trying to explore those kinds of ideas. I mean, many of the most interesting ideas that have to do with science and technology developments in the developed countries come from studying clusters of excellence. How clusters, universities and Silicon Valley and elsewhere are the actual drivers for national knowledge performance? Perhaps. Perhaps.
- [62:34]
A
Right. I'm like a barman. I'm working the room across. So it's dark blue, light blue. And I want questions from that corner there. Right, okay, gentlemen. There.
- [63:14]
B
Yeah, perhaps. Yeah, I mean, the, you know, we're talking about deep issues here. I mean, the. What is the creativity of the human spirit when all society around you might be miserable and hobbled by all kinds of constraints? You know, wonderful art was produced in Europe in Miserable conditions under monarchies and people weren't exactly free there, but they found cultural, artistic and scientific expression nonetheless. So I don't take a strong view on how we must liberalize all political discussion and freedom in China or any other country before scientific knowledge can fully flower. I don't take a dogmatic view on that. It might or might not be. I just don't know. On the issue of whether patents are a good indicator of the knowledge economy, I'm totally with you. I mean, not only is it the case that one pattern might be much more valuable than another, so that, you know, looking at just crude patent counts is not necessarily a very informative indicator. That's certainly possible. It's more than possible. It's likely when we get the data that allows us to be able to look at those kinds of issues. I hope to be one of the first to analyze those data, but right now we don't have such indications. But a second layer of complexity in your question is that actually an overly patented economy is not necessarily an economy where knowledge is used most productively. An economy given a fixed set of ideas. If more of those ideas are patented, then less of those ideas can be freely used and developed on. And so having more patents is actually in some ways having more restrict restrictions on the use of knowledge. And I fully agree with you on that as well. Right now the first, I think that the first order importance here is just trying to see crude patent counts rising or falling. After that then we need to be able to think through some of these more complicated issues. I completely agree with you.
- [65:34]
A
Like we said, I can. Grace, Please.
- [65:57]
B
I would surmise a great deal of that state of enterprises have actually been negative and the private economy in China is now beginning to add something. Wouldn't the real threat then to the knowledge economy of China be returned away from investment in China with foreign direction? The real threat is that for some reason that foreign investment or its. No, I wholeheartedly agree with you. I mean that's the flip side of the US and Western Europe closing in on themselves and being protectionists. Is that the same thing happens on the other side of the world that the flow of foreign direct investment into places like China also shrivels away. I think that the technology that foreign companies bring in is a necessary but not sufficient condition for ongoing scientific improvement in China. We do need to have that come in to initiate and spark further development. But that by itself will not be enough. And you know, people have different views on this. I don't think that it has is Clear one way or the other. There are some people who argue that places like China and India have better things to do with their time than try and be creative. There's so much science and technology out there in the world already. Let's just use that fully rather than try and be creative on some stem cell biotech innovation. I think the jury is out on that. But what we definitely have to see is more activity in science and technology rather than less of any kind.
- [67:49]
A
Thank you.
- [68:04]
B
The relative. Oh, my seat. I don't have a clear view on this. I don't know how to pronounce on this. I mean, countries like Singapore, admittedly much, much smaller, you know, are often criticized or noted for not going through with the same kind of liberal political reform that the rest of the world would like to see. But it's science and technology base is solid. There's no question about that. Now, of course, China is a tiny country. I mean, sorry, Singapore is a tiny country. After a while, all these countries blend together. China has over 1.3 billion people. Singapore has 56. No, I'm kidding. It has millions of people, but it's much, much smaller. And it's a tiny island. China is as large as the United States. Geographically, there are many things different about those two countries, but there are other ways in which they are surprisingly similar. China trades in exports and imports as a fraction of GDP, about 70%, which is not a million miles away from what Singapore does. And then there are cultural influences that connect those two ecosystems, economies. So it's hard to say. I can stand up here and speculate, and I'm happy to do so, drinking coffee, whatever, but there's no scientific basis, I think, for deciding one way or the other.
- [69:41]
A
You've really worked the audience well. It's 22 8. How much energy strength? What inclination do you have for any of the questions?
- [69:49]
B
Well, I'm happy to continue this conversation, but. But maybe not necessarily at this forum now because it's late and I think we're all tired.
- [69:58]
A
I totally agree. I think it's been a fascinating evening and it really is something that I think we need to reapproach and reapproach again because it's changing all the time. Thank you very much, Danny Clark.