Master programme in Economic Growth,
Innovation and Spatial Dynamics
On the Railways of Growth:
China’s Railway, Technology and Economic Growth
Tatiana Pyshkina
EKHR21
Master thesis (15 credits ECTS)
June 2010
Supervisor: Prof. Jonas Ljungberg
Abstract:
Railway expansion is usually associated with containing and supporting economic growth. This particular research approaches railways from the angle of technological potential. It explores whether railways can drive China towards technology-led growth, and if so, the way in which this process occurs. The study uses a theoretical framework of complementarities adjusting it to the qualitative analysis of railway expansion. It helps to uncover major technology-led areas of growth in China’s railway industry and their broader potential impact on economic development. Significant conclusion of the research is that railway expansion induces the development of a new major technology-led growth area in China – High Speed Railway. HSR results into the increased demand for technology commercializing the railway industry, and attracts new partnerships, through which massive amount of technology transfer with the biggest local railway equipmentsupplier occurs. As an outcome, China’s domestic suppliers become more independent and competitive. The research makes a contribution to technology-led, efficiency-oriented view on China’s economy.
Key words:China Railways expansion, High Speed Railways, technology, economic growth.
Table of Contents
List of Tables and Abbreviations...... 4
1.Introduction...... 6
1.1.Aims and Research Question...... 7
1.2.Methodology...... 8
1.4.Disposition...... 10
2.On the Railways of Growth – Defining the Terms...... 11
2.1.Literature Review...... 11
2.2.Infrastructure and Economic Growth Review...... 13
3.TheMany Facets of China - Theory...... 17
3.1.Theoretical Approach to Railways...... 17
3.1.1.Beyong the ‘social savings’...... 17
3.1.2.Towards Complementarities, Technology and Structural Change...... 19
3.2.Theoretical Approach to Economic Growth and Technology...... 22
3.2.1.Understanding China’s Reform...... 23
3.2.2.Understanding China’s Technological Development...... 26
4.Empirical Analysis and Discussion...... 29
4.1.Step One – What is Driving China’s Railways: Drivers and Major Growth Area...30
4.1.1.Drivers...... 31
4.1.2.Major growth area HSR...... 35
4.2.Step two – HSR and Technology Transfer...... 40
4.3.Putting Pieces Together – Railways and Economic Growth...... 45
5.Conclusion...... 48
Bibliography...... 50
List of Tables
Table 1: Four Stages of Long-Term Infrastructure Life-Cycle
Table 2: DGP and Employment by sector (%)
Table 3: China’s Top Urban Networks
Table 4: Number of Chinese cities by size, Polulation’000.000
Table 5: China Railway Transport Average Annual Growth Rates for Freight/Passenger Traffic (%)
Table 6: Transportation of Passengers and Freight (%)
Table 7: China’s Growth Indicators 1978-2006
Table 8: China’s Railway Network Expansion
Table 9: China’s Railway Expansion 2009- 2010‘000km
Table 10: Global Stimulus Packages
Table 11: Break-down of the Government Stimulus Package
Table 12: Biggest China’s companies and ownership structure
Table 13: Planned routes and global share of China’s HSR (%)
Table 14: CHR Technology and local partner
Table 15: Joint Ventures between Major and Chinese companies
Table 16: CNR and CSR orders to foreign partners
Table 17: Train Orders and Technology Transfer
Table 18: China’s Railway Expansion and Development of Technology
Abbreviations
CNR – China North Locomotive and Rolling Stock Industry, or CNR Group
CSR – China South Locomotive & Rolling Stock Corporation Limited
MoR – Ministry of Railways (China)
HSR – High Speed Railway
v-HSR – very High Speed Railway
CCG – China’s Central Government
FYP – Five Year Plan
UIC – International Union of Railway
CHR – China Railways High-speed trains
- INTRODUCTION
Infrastructure typically refers to physical and electronic systems that enable production, movement of goods, services, labor and information. Transportation infrastructure is a key physical condition that secures access to markets. Well-established transportation networks make it easier for people to move around and for resources to be relocated at a decreased amount of time. They optimize the efficiency of an economy and create new markets and opportunities. Historically, railways have played a crucial role in the development of today’s biggest economies.
This research speaks about railways in terms of speed, technology, innovation and economic progress. It focuses on the qualitative analysis of the Chinese railway industry inquiring what kind of effect railways may have on China’s economic growth in terms of technology. It departs from a theoretical assumption that not only do the expanding railways have an ability to contain economic growth, they also can have a potential to complement other aspects of economic growth, such as accumulation of technology stock.
Infrastructure investment today is onemajor trend in the development of emerging economies. It is usedto balance and stimulate economic growth. In China infrastructure investment has been a policy matter for the last couple of decades. Infrastructure expansion, railways in particular, has been studiedfrom different perspectives mainly with regard to meeting naturally growing demand of accelerating and unevenly developing economy.
The complementary impact of railways on economic growth in terms of technology transfer that happens in the industry with the latest developments such as the High Speed Railways in China, however, is less tightly overseen. This research looks closer into this process and suggests that through its remarkable railway industry, particularly High Speed Railways, China has been exposed to massive technology transfer that allows it to gradually increase own technology stock, potentially upgrading the qualityof China’s economic growth.
China is a booming economy that comprises 6% of global economic output with a geographical stretch of 9.6 million square kilometers with over 1.3Bn citizens, which is approximately 20% of the global population. Measured in gross domestic product (GDP) China has been growing by around 9% annually since the 1978 economic liberalization reforms. Even the recession-hit year of 2009 demonstrated an average of 8.7% GDP growth, stabilizing China on the path to supersede Japan as the second largest economy after only the United States by the end of 2010.[1]
Despitethe economic recession in the developed world, China demonstrated remarkable growth backed by the 2008/9 stimulus package and increased bank lending.[2] Notably, the governmentallocated $317Bn of the total $585Bn economic rescue plan to the development of infrastructure.[3]The statehas steadily supported rail expansion for the last few decades, especially so since the 10th Five Year Plan of 2001.[4] Yet, China has the most over-utilized railway network transporting over 20% of the global traffic on 6% of global network lines.[5]Through 2009 China invested approximately $87.8Bn in railways following the goal to increase its network to 120.000km by 2020led by the two largest domestic suppliersCSR Group and China North Locomotive and Rolling Stock Industry.[6]
The breadth and depth of the Chinese approach to infrastructure development is unprecedented – what took the US a hundred years to accomplish China is aiming to squeeze into a couple of decades. China’s most remarkable ambitionis to build the world’s largest High Speed Railway network that by the end of 2012 would comprise 13.000km of high speed rail in comparison to today’s figures of 3.300km in operation, subsequently growing to 18.000km in 2020.[7]Today, China has the world’s fastest operating bullet trains built with most sophisticated technologies, which run with a maximum speed of 350km/h.
As a saying goes in Guangzhou, the third biggest city after Beijing and Shanghai and the largest transportation hub located in the southern China by the Pearl River: over a day, one could board a train to have lunch at historic Mount Yuelu in Changsha, dinner at the famous Yellow Crane Tower in Wuhan and return home to Guangzhou by bedtime.[8] For Europeans, this is roughly equitable to boarding a train in Paris for dinner in Milano with a lunch stop-over in Genève and back to own bed in Paris.
1.1.Aims and Research Question
The study is based on the analysis of China’s railway industry, which is firmly led by the government. It concentrates on the complementary effect the railways may have on China’s economic growth in terms of technology. It looks for the qualitative evidence oftechnological value-added to China’s economic growth through the expansion of railways. It departs from the assumption that not only do the expanding railways have an ability to contain economic growth, they also can have a potential to contribute to other aspects of economic growth, such asthe increase in the share of technologically-driven sectors.
To that end, the main aim is defined as: to explorewhether there is evidence that railways lead China towards technology-led growth, if so, how does this process occur.
Significant conclusion of the study is that the railways do have a relative complementary effect on China’s economy in terms of technology-led growth. Railway expansion facilitated the development ofChina’s major technology-led growth area – High Speed Railway. HSR yieldsan increased demand for technology whilst commercializing the railway industry. It attracts new partnerships, through which massive amount of technology transfer with the biggest local railway equipment supplier occurs.
As an outcome, China’s domestic supplierbecomesmore independent and capable of innovation, which has already been used to manufacture new trains ahead of the international partners. To that end, by investing into railway infrastructure, China is profiting not only in terms of meeting natural geographical and socio-economic needs but also is, to a certain extent, moving towards the next phase of the resource-efficient economic growth.
This studycontributes to a vast landscape of research on the role of technological development in China’s future. It is premature to claim at this stage that a clear-cut explanation to this process could be found, yet it is necessary to look for empirical evidence and to expand our stock of knowledge of where China seems to be moving. Broader view demonstrates that recent development of China’s railway industry bares enormous potential to influence not only China’s own competitiveness and economic sustainability, but also global industry as a whole.
1.2.Methodology
Railway expansion is a moving target, the analysis of which with regard to China’s economic growth is subject for exciting research, the longer the temporal perspective the better.To that end, qualitative empirical analysis of China’s railway expansion policiesand their outcomewas chosen as ideally serving the purpose of particular research to analyze current trends in the railway industry.
The analysis is explorative and benefits from an open, non-linearinductive perspective[9]designed to highlight new elements and detect causalities[10] in the relationship of railways to China’s economic growth. It relies on one mere assumption that railways may have a complementary effect on China’s economy in terms of technology and proceeds to explore whether, and in what way, this process may or may not occur.
While quantitative evidence is generally characterized with more accuracy and credibility, qualitative analyses essentially seek for probabilistic arguments to explain the data with the help of theoretical observations.[11]Departing from Schön’s framework for economic complementarities, the study essentially looks for movement of technological progress along the axis of railway expansion. The analysis is necessarily illustrative and interpretative, and is not intended to make definitive judgments but rather to contribute to existing theories with innovative perspective.
The research question is multidisciplinary in nature. Therefore, the data for the empirical analysis is necessarily derived from amassing a variety of qualitative sources and quantitative aggregates on railway expansion. It is, therefore, a secondary analysis,[12]which relies on descriptive statistics.[13]Putting together aggregates of quantitative and qualitative data, in Schumpeter’s words, leaves the author in danger of entrapment of aggregate figures that “conceal more than they reveal”.[14] Yet, aggregates have to be valued for their best services – revealing occurrence of movements as a matter of fact, on the basis of which their possible direction could be assumed.
The researcher also takes into account that using secondary analysis and working with aggregates is challenging due to the fact that even misinterpreted statistics can sometimes be taken for granted, thus, the study reasons, observes and avoids sources potentially more inclined to dubious or misinterpreted statistics.[15]
Qualitative data and statistics for the analysis is provided by China’s Ministry of Railways, China’s Statistical Yearbook, China Railway Construction Corporation Limited (Mid-to-Long Term Railway Network Scheme), Bernstein Research 2010, International Union of Railways (UIC), Asian Development Bank, as well as on-line newspapers China Daily, The Financial Times, Spiegel. Where the information was incomplete or not available, the data was looked up in the corporate reports and financial statements on the websites of related companies.
Due to the language barrier, thus the challenge to access important data from the Chinese websites, some of the information may have been left out. The available data was assessed against reliability and trustworthiness criteria to increase general reliability of the study.[16]
In projecting the study of railways onto China’s economic growth, the limitations of the analysis imposed by the interest to study merely the railway expansion policies and their outcome, are necessarily being taken into account. Thus, the analysis serves best for what it is intended - to demonstrate the qualitative evidence oftechnologicalvalue-added in China’s economy- increasing general validity of this particular study[17].
1.3.Disposition
The next section proceeds with creating the context of the study. It clarifiesthe concept and provides a brief overview of China’s transportation infrastructure. Second step introduces the theoretical framework. It puts togetherthe potential impact of railways on economic growth anda broader framework of China’s economic development with the role of technology in this process. Complementarities were chosen as serving ideally the goal of this particular research.Finally, section four closes with the presentation of empirical findings and concludes with the discussion of the results.
- On the Railways of Growth – Defining the Terms
This studyputs together two analytical elements: China’s expansion of railways and China’s economic growth.The subject of inquiry is whether there is a link between railway expansion and economic growth in terms of technology, and if so, how does this mergeroccur. The first step is to createthe context of the study. The following section will start with a brief overview of China’s transportation infrastructure.
2.1.Literature and Approach Review
Infrastructure typically refers to physical and electronic systems that enable production, movement of goods, services, labor and information, thus infrastructure is the main engine for sustaining economic development.[18]Back in 1987 the U.S. National Research Council provided a definition for public infrastructure that includes:
“both specific functional modes - highways, streets, roads, and bridges; mass transit; airports and airways; water supply and water resources; wastewater management; solid-waste treatment and disposal; electric power generation and transmission; telecommunications; and hazardous waste management - and the combined system these modal elements comprise. A comprehension of infrastructure spans not only these public works facilities, but also the operating procedures, management practices, and development policies that interact together with societal demand and the physical world to facilitate the transport of people and goods, provision of water for drinking and a variety of other uses, safe disposal of society's waste products, provision of energy where it is needed, and transmission of information within and between communities”.[19]
Infrastructure growth impliesthe developments across urban landscape withutilization of complex systems of support, such as equipment and building, therefore, it strongly depends on the government policies and macroeconomic demands associated with accumulation of wealth and urbanization, and with technological possibilities to support infrastructure.[20]
An economy benefits from infrastructure investment when infrastructure responds directly to its needs. For instance, the demand for infrastructure can be associated with unmet geographical needs that create bottlenecks to economic growth, or with income growth and urbanization.Public infrastructure investments can induce changes to regional and industrial distribution, orsupportemployment by creating “new factory jobs with people needing electricity, water and transportation”.[21]
Transportation infrastructure is one sector of infrastructure industry that includes roads, streets, highways, bridges, ports, airports and railways, and is a key physical condition that secures access to markets. Railways in particular are responsible for providing low-cost long-distance and energy-efficient transportation services for persons and goods, particularly efficient in the economies with high infrastructure occupation rates, such as China.[22]
The research landscape on transportation infrastructure consists mostly of studies on physical conditions it provides to support growth of an economy, as well as on the opportunities it naturally creates for the labor market. Well-established transportation networks optimize physical accessibility at a decreased amount of time as they generally make it easier to produce and move around. Thus, infrastructure promotes factor mobility that fosters urbanization and income growth. It allows relocating resources, which is necessary toexploit comparative advantage and toincrease efficiencyof an economy whilst reducing price volatility.
A number of studies examined infrastructure as a production growth factor. Similar approach was taken by Aschauer (1989), Baffes and Shali (1993) and Easterly and Rebello (1993), as well as Antle who back in 1983 found a strong Cobb Douglas correlation between infrastructure and aggregate productivity growth. Later studies were concerned with reversed casualty relating roads and productivity; for instance, Fernald (1999) suggested that decline in investment into roads indeed affected productivity loss in the US in the 1970s.[23]
Bowden and Huang (2009) analyzed physical infrastructure that developed in the first instance to enhance and diversify manufactured exports. They linked it to the supply push into export of human capital services related to infrastructure construction and tourism. Gannon and Zhi (1997) found the relationship between transportation and access to health and education services, while Fan et al. (2000, 2002) made an impressive contribution by estimating high importance of roads for poverty reduction.[24]