Finance, Development and the Chinese Entrepreneurial State

A Schumpeter-Keynes-Minsky Approach

Leonardo Burlamaqui

University of the State of Rio de JaneiroThe Levy Economics Institute -New York

FIID Conference Kyoto – Japan

July, 2015

“ I conceive, therefore, that a somewhat comprehensive socialization of investment will prove the only means of securing an approximation to full employment…though this need not exclude all manner of compromises and of devices by which public authority will co-operate with private initiative”

(Keynes, 1936: p 377-8 ).

“What I really suggest is that the State should assume the role of Entrepreneur –in-Chief, directing the flow of productive resources to the employments in which can best serve human

needs”

(H. Henderson, exchange with Keynes, 1943).

“ By socialist society we shall designate an institutional pattern in which the control over means of production and over production itself is vested with a central authority—or, as we may say, in which, as a matter of principle, the economic affairs of society belong to the public and not to the private sphere”

(Schumpeter,1942 p. 168).

Key Propositions:

• From a theoretical point of view, China’s achievements reaffirms key elements of works of, Schumpeter, Hilferding, Keynes, Minsky and the “Developmental State’s” approach to economic analysis and public policy.

• China’s speed and ability to leapfrog its peer-nations in the last three decades stems, largely, from the fact that it is a fully developed Entrepreneurial State (ES).

Key Propositions:

• ES should be regarded as a concept: A core bridging concept in a Schumpeter-Keynes-Minsky analytical synthesis.

• The concept of Entrepreneurial State should combine three core elements: Finance Innovation Socialization of Investment

• The State – Entrepreneurial or not- should be a central feature of any empirically relevant theory of development.

The Theory Behind the Concept :

FINANCE A “Sch.-Minsky’s

type of banking system

Uncertainty reduction, Stable Funding and hight speed-growth.Linking sciense, tech. and innovation to investment.

State guided investment &Creative-destruction management.

MANAGEDSTRUCTURAL

CHANGE INNOVATION

An extention to the State of

Schumpeter’s Entrepreneurial

function.

SOCIALIZ OF INVESTMENT

Merging Keynes and Schumpeter’s instit. approaches

The “core elements” and China”

FINANCE A financial system working ,essentialy, to fund development

and innov.

Policy Banks, Development Banks,Public SIV’s. Strategic Tech, Innov. & Industrial policies.

CHINA’S ENTREP.STATE

INNOVATIONGovernment’s

Entrep. skills and direct

involvment with innov.

SOCIALIZ OF INV. “Forging the future” as a Public Policy

matter. Regulation,PPP’s &

Mkt shaping

Big Bank &Long –term funding+ a. spirits

originating mostly in the

commanding heights State-

sponsored Shumpeterian

agendas: China’s 12th five-year plan

(2011- 2015) + China 2030 .

Pilot agencies, Robust fin regulationInstitutional cooperation,

.

.

Big Gov.CCP’s Standing

Committee,The State Council

MunicipalitiesCorporations

The State is the key player in all layers of the process and operates within a global strategy.

There is a well-designed public financial system backing its industrial, innovation and technology policies.

The “Big 4”and, especially, China’s Development Bank (a U$S 1.3 Trillion institution) are the modern incarnation of Hilferding/Sch. Finance Capitalism ON STEROIDS + public ownership & robust financial regulation .

From a mainstream perspective , this institutional architecture should deliver disastrous results.

Nonetheless, when looking at the data, far from disastrous, the process has worked extremely well in terms of growth, industrial expansion, technological upgrading and “leapfrogging” its peers.

That, in itself, raises a host of theory and policy questions.

Summing up

THE ENTREPRENEURIAL STATE IN ACTION:

SOCIALIZATION OF INVESTMENT AND GROWTH

-6

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Alemanha Estados Unidos Japão China

▲ GDP ( %)

China, Germany, Japan and

the U.S:

1990

Fmr Fed. Rep. of Germany 17,8% Japan 17,9% Fmr Fed. Rep. of Germany16,4% USA 13,3% USA 14,4% Germany 11,8% ChinaUSA 16,1% Fmr Fed. Rep. of Germany 15,4% USA 13,6% Japan 12,8% Japan 10,4% China 11,5% Germany

Japan 14,5% USA 14,8% Japan 13,5% Germany 12,6% Germany 10,2% USA 10,2% USA

France 8,8% France 6,9% France 7,3% France 6,3% France 5,2% Japan 7,5% Japan

United Kingdom 8,4% Italy 6,7% Italy 7,0% Italy 6,0% China 5,0% France 4,7% France

Italy 7,4% United Kingdom 6,3% United Kingdom 6,5% United Kingdom 5,4% Italy 4,7% Italy 4,4% Italy

Netherlands 3,7% Canada 4,7% China, Hong Kong SAR 3,7% China, Hong Kong SAR 4,9% United Kingdom 4,6% United Kingdom 4,1% Rep. of Korea

Canada 2,9% Netherlands 3,1% Netherlands 3,4% China 3,7% China, Hong Kong SAR 4,5% China, Hong Kong SAR 4,0% China, Hong Kong SAR

Switzerland 2,7% Rep. of Korea 2,9% Canada 3,1% Rep. of Korea 3,5% Canada 3,7% Rep. of Korea 3,7% Belgium

Sweden 2,5% China, Hong Kong SAR 2,9% Rep. of Korea 3,0% Canada 3,2% Rep. of Korea 3,6% Belgium 3,2% United Kingdom

China, Hong Kong SAR 2,1% Switzerland 2,2% Switzerland 2,5% Netherlands 3,1% Mexico 3,3% Netherlands 2,9% Singapore

Rep. of Korea 1,8% Sweden 2,2% China 2,1% Singapore 3,0% Belgium 2,8% Singapore 2,7% Mexico

Austria 1,6% Spain 1,6% Sweden 2,0% Switzerland 2,0% Singapore 2,7% Canada 2,5% Canada

Spain 1,5% Austria 1,4% Spain 1,9% Spain 2,0% Netherlands 2,7% Mexico 2,5% Switzerland

Poland 1,2% Singapore 1,2% Singapore 1,8% Mexico 1,9% Spain 1,9% Spain 1,9% Malaysia

Denmark 1,0% Brazil 1,1% Austria 1,6% Malaysia 1,7% Malaysia 1,8% Switzerland 1,6% Thailand

Singapore 1,0% Denmark 0,9% Denmark 1,0% Sweden 1,6% Sweden 1,5% Malaysia 1,5% Austria

Finland 0,8% Finland 0,7% Malaysia 0,8% Austria 1,3% Switzerland 1,5% Sweden 1,4% India

Norway 0,6% Poland 0,6% Brazil 0,7% Thailand 1,2% Thailand 1,2% Austria 1,3% Czech Rep.

Ireland 0,5% Ireland 0,6% Finland 0,7% Denmark 0,8% Ireland 1,1% Thailand 1,2% Sweden

India 0,4% Norway 0,5% Ireland 0,7% Ireland 0,8% Austria 1,1% Czech Rep. 1,0% Turkey

Australia 0,4% Turkey 0,5% Thailand 0,7% Finland 0,7% Philippines 0,8% Poland 1,0% Ireland

Portugal 0,3% Malaysia 0,4% Portugal 0,6% Brazil 0,7% Denmark 0,7% Turkey 0,9% Denmark

Malaysia 0,3% Portugal 0,4% Mexico 0,5% Portugal 0,5% Indonesia 0,7% Ireland 0,9% Brazil

Greece 0,2% India 0,4% India 0,5% Indonesia 0,5% Finland 0,7% India 0,8% Russian Federation

Argentina 0,2% China 0,4% Norway 0,5% India 0,5% Brazil 0,7% Brazil 0,8% Indonesia

Thailand 0,2% Israel 0,4% Turkey 0,4% Czech Rep. 0,5% India 0,6% Hungary 0,8% Finland

Philippines 0,1% Australia 0,3% Poland 0,3% Turkey 0,5% Hungary 0,6% Denmark 0,7% Philippines

New Zealand 0,1% Thailand 0,3% Australia 0,3% Poland 0,5% Czech Rep. 0,6% Finland 0,7% Israel

Hungary 0,1% Greece 0,2% Israel 0,3% Australia 0,4% Poland 0,5% Russian Federation 0,5% United Arab Emirates

Saudi Arabia 0,1% Pakistan 0,2% Indonesia 0,3% Israel 0,3% Russian Federation 0,5% Philippines 0,5% Romania

Tunisia 0,1% Argentina 0,2% Pakistan 0,2% Norway 0,3% Turkey 0,5% Indonesia 0,5% Portugal

China, Macao SAR 0,1% Venezuela 0,1% Romania 0,2% Hungary 0,2% Israel 0,4% Slovakia 0,4% Norway

Colombia 0,1% Philippines 0,1% Greece 0,2% Philippines 0,2% Portugal 0,4% Portugal 0,4% South Africa

Bangladesh 0,1% Saudi Arabia 0,1% Argentina 0,2% Pakistan 0,2% Australia 0,3% Ukraine 0,3% Australia

Peru 0,1% Indonesia 0,1% Philippines 0,1% Slovenia 0,2% South Africa 0,3% Romania 0,3% Slovenia

Indonesia 0,0% New Zealand 0,1% Saudi Arabia 0,1% Argentina 0,2% Norway 0,2% South Africa 0,3% Argentina

Morocco 0,0% China, Macao SAR 0,1% United Arab Emirates 0,1% Slovakia 0,2% Slovakia 0,2% Israel 0,3% Saudi Arabia

Cyprus 0,0% United Arab Emirates 0,1% Tunisia 0,1% Romania 0,2% Ukraine 0,2% United Arab Emirates 0,3% Pakistan

New Caledonia 0,0% Hungary 0,1% Morocco 0,1% Greece 0,2% Pakistan 0,2% Australia 0,3% Tunisia

Kenya 0,0% Bangladesh 0,1% New Zealand 0,1% Saudi Arabia 0,1% Argentina 0,2% Viet Nam 0,3% Luxembourg

Sri Lanka 0,0% Tunisia 0,1% China, Macao SAR 0,1% Tunisia 0,1% Romania 0,2% Norway 0,2% Belarus

Syria 0,0% Morocco 0,1% Venezuela 0,1% Croatia 0,1% Slovenia 0,2% Saudi Arabia 0,2% Lithuania

Mauritius 0,0% Colombia 0,0% Syria 0,1% New Zealand 0,1% United Arab Emirates 0,1% Slovenia 0,2% Bulgaria

Barbados 0,0% Sri Lanka 0,0% Colombia 0,1% Bangladesh 0,1% Viet Nam 0,1% Pakistan 0,2% Morocco

Trinidad and Tobago 0,0% Uruguay 0,0% Bangladesh 0,1% Colombia 0,1% Luxembourg 0,1% Argentina 0,2% Colombia

Iceland 0,0% Mauritius 0,0% Egypt 0,1% Venezuela 0,1% Bangladesh 0,1% Bangladesh 0,1% Croatia

Jamaica 0,0% Jordan 0,0% Malta 0,0% Dominican Rep. 0,1% Greece 0,1% Greece 0,1% Kazakhstan

Senegal 0,0% Peru 0,0% Sri Lanka 0,0% China, Macao SAR 0,1% Belarus 0,1% Luxembourg 0,1% Estonia

Ecuador 0,0% Zimbabwe 0,0% Mauritius 0,0% Morocco 0,1% Morocco 0,1% Belarus 0,1% New Zealand

Taking Away the Ladder? China Becomes Most Competitive Manufacturing Exporter

2009

(percent of World Manufacturing Exports)

1980 1985 1995 2000 2006

Leapfrogging its Peers

Reserves 1980-2013:Hedging Against External

Vulnerability

0

500

1.000

1.500

2.000

2.500

3.000

3.500

4.00019

8019

8519

9019

9119

9219

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0020

0120

0220

0320

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0720

0820

0920

1020

1120

1220

1320

14 m

ar

U$ Trillion

SWFs : Foreign Public Investment Capacity

(2013- US$ ~800 Billion)

THE ENTREPRENEURIAL STATE IN ACTION:

THE SCHUMPETERIAN STATE

Long Term Vision:

“magic seven” industries: (1) energy saving and environmental protection, (2) next-generation information technology, (3)

biotechnology, (4) high-end manufacturing, (5) new energy, (6) new materials and (7) clean-energy vehicles.

(1) Energy saving and environmental protection,

(2) Next-generation information technology,

(3) Biotechnology, (4) High-end manufacturing, (5) New energy, (6) New materials and (7) Clean-energy vehicles.

7 Strategic Industries:

R&D Spending (1)

0

20

40

60

80

100

120

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Bill

ion

US

Do

llars

Expenditure on Domestic R&D and Technology Import

Technology Import Expenditures

Domestic R&D Expenditure

Building Future Innovation

Capabilities ( 1)

0

200

400

600

800

1,000

1,200

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Thou

sand

Science and Engineering Graduates(4-Year Colleges)

China

U.S.

Building Future Innovation Capabilities

(2)

Strategic Emerging Industries: Share of GDP

2010 2015 2020

New IT Industry 2.5%

High-end Machinery 0.5%

Biotech 0.3%

Conservation and EP 0.3%

New EnergyNew Materials 0.4%

Electric+ Vehicles

Total 4.0% 8.0% 15.0%

The strategic emerging industries are expected to account for about 20% of industrial value-added in 2015, and 40% in

2020.

Forging the Future

Long – Term Finance & Global Strategy

THE ENTREPRENEURIAL STATE IN ACTION:

The Big Four :

(Main activity: Development Banks)

• Industrial and Comercial Bank of China-

(#3).

• China Construction Bank - ~(#6).

• Agricultural Bank of China - (#8)

• Bank of China - (#9)

...and The most strategic :

China Development Bank-

“CDB maintained a steady course in 2013, performing strongly in both its business and social mandates as a development finance institution”.

Assets: RMB 8.19 trillion (U$ 1,3 Trillion).

NPL ratio: 0.48% (less than 1% for the thirty-fifth consecutive quarter).

Year-end profit : RMB 79.9 billion (~U$ 13 Billion).

Capital adequacy: 11.28%. ( Source: CDB website)

CDB 2013

Some “Prominent Clients”

• Huawei

• Lenovo

• Haier

• ZTE (Telecom)

• Yingli (Solar panels)

• Sky Solar

• National Development Zones for High and New Technology Industries ( part of China 2030 strategy)

CDB & Tech: A Competitiveness Strategy

CDB & Energy : A Global Strategy

Global Infrastructure: The new Silk Road

Minsky and the “Task Ahead”

“The task confronting economics today may be characterized as a need to integrate Schumpeter's vision of a resilient intertemporal capitalist process with Keynes' hard insights into the fragility introduced into the capitalist accumulation process by some inescapable properties of capitalist financial structures" (Minsky: 1986 , p.121)

The Chinese Entrepreneurial

State

seems to have gotten that

…...

…..But

as Minsky also affirms :

growth creates

fragile financial structures.

Super growth certainly

compounds that.

My take is that the current

“bubble”

should be seen trough those

lenses ( and not as a big

mistake) .

THANK YOU