on china’s strategic move for - world · pdf fileon china’s strategic move for a...
TRANSCRIPT
On China’s Strategic Move for
a New Stage of Development –
A Productivity Perspective
Harry X. Wu
IER, Hitotsubashi University
Prepared for the Third World KLEMS Conference
Tokyo, March 19-20, 2014
2
Agenda
1. China at the crossroads: Searching for a new stage
of development
2. Changes over the last three decades: What can we
learn from the restructuring of the economy?
3. Methodology and data
4. Sources of the unbridled growth: How much can be
attributable to productivity?
5. Institutional problems addressed by sector-level
TFP analysis
6. Ready for overcoming the “middle income trap”? –
China in the East Asia perspective
7. Concluding remarks: On key challenges to
“Liconomics”
World KLEMS 3, Tokyo
1. China at Crossroads
After more than three decades of unbridled economic
growth, China and its new leadership now face mounting
problems.
It is a key challenge: cleaning up the dirty air, polluted
water, and tainted food supplies, reducing corruption, and
improving income inequality, which are fueling
widespread discontent among the country’s burgeoning
middle class.
Although these problems are deeply rooted in institutional
deficiencies, they can also be addressed by industry-level
productivity analysis.
After all, the government’s high growth target is pursued
through government-owned or controlled industries,
which has created distorted incentives and misallocation
of resources.
World KLEMS 3, Tokyo3
1….
The largely government engineered growth has ensured
a high speed so far but it is not yet rigorously clear if it
has also improved efficiency and promoted productivity
growth.
We will start our exploration of efficiency problem with
some important observations based on some descriptive
statistics …
using the most recently completed industry level data for
the entire Chinese economy in 1980-2010 (please refer data
problems and construction in CIP papers on data in Wu 2014, Wu and
Ito 2014 and Wu, Yue and Zhang 2014).
The data construction follows the KLEMS methodology
that is theoretically based on Jorgenson and Griliches
(1967).
World KLEMS 3, Tokyo4
1. …industry grouping – why it
can be insightful? Despite a declining share of the state sector, the Chinese
government (at all levels) has maintained strong interventions in
resource allocation to maximize growth.
The intervention is made industry-specific through either
subsidization or administrative control or both depending on a
particular industry’s competitiveness and its distance from the
final demand
Starting from the downstream industries… Local governments
tend to provide subsidies (various cost-reducing measures) to
local manufacturers who directly face the international market
Such manufacturers produce finished and semi-finished
products. The subsidized is to more quickly reap the benefit of
China’s comparative advantage in labor-intensive industries.
Since the subsidies do not come with administrative intervention
in business decision, these industries should be more efficient
5
1. …grouping
There are various costs underpaid by downstream industries
(Huang & Tao, 2010), of which the cost of energy is one of the
most important inputs produced by upstream industries.
They are much further away from the end market and do not
conform to comparative advantage but deemed strategically
important by the central authorities.
These industries not only receive subsidies in the form of public
resources, but are also subject to administrative controls, hence
less efficient.
Now, we see a kind of “cross subsidization” in the production
chain…
The downstream industries are subsidized by cheaper energy and
some primary inputs produced by the upstream industries.
In turn, more revenues collected from “more competitive”
downstream industries are used to subsidize the upstream
industries that are now “proved” more important for the downstream
to generate revenues and create jobs
World KLEMS 3, Tokyo6
The Research Problem…
Upstream industries also include those providing infrastructures
and government services
Most of the energy industries and some of the major primary
input materials industries are state owned or controlled.
An examination of their productivity performance compared with
downstream industries will shed important light on the problem
of structural distortion and misallocation of resources.
The key to sustaining the “cross subsidization” game is both the
growth and the productivity of down-stream “SF&F” industries.
This follows that the inefficient upstream industries can be
tolerated before the down-stream industries are finally
established and become efficient enough without subsidies.
Appendix for the grouping
World KLEMS 3, Tokyo7
Appendix: Industry grouping (for
structural distortion analysis)
World KLEMS 3, Tokyo8
2 CLM Coal mining Energy 1 AGR Agriculture Agriculture
3 PTM Oil and gas extraction Energy
4 MEM Metal mining C&P 26 CON Construction Market 2
5 NMM Non-metallic minerals mining C&P 27 SAL Wholesale and Retail Trades Market 2
6 F&B Food and kindred products Finished 28 HOT Hotels and Restaurants Market 2
7 TBC Tobacco products ?? 29 T&S Transport and Storage Market 1
8 TEX Textile mill products C&P 30 P&T Post and Telecommunications Market 1
9 WEA Apparel and other textile products Finished 31 FIN Financial Intermediation Market 1
10 LEA Leather and leather products Finished 32 REA Real Estate Activities Market 2
11 W&F Saw mill products, furniture, fixtures ?? 33 BUS Business Services Market 2
12 P&P Paper products, printing & publishing C&P 34 ADM Public Administration and DefenseNon-market
13 PET Petroleum and coal products Energy 35 EDU Education Non-market
14 CHE Chemicals and allied products C&P 36 HEA Health and Social Security Non-market
15 R&P Rubber and plastics products Finished 37 SER Other Services ??
16 BUI Stone, clay, and glass products C&P
17 MET Primary & fabricated metal industries C&P
18 MEP Metal products (excl. rolling products) Semi-finished
19 MCH Industrial machinery and equipment Semi-finished
20 TRS Motor vehicles & other transp. Equip. Semi-finished
21 ELE Electric equipment Semi-finished
22 ICT Electronic and telecomminucation equi. Finished
23 INS Instruments and office equipment Semi-finished
24 OTH Miscellaneous manufacturing industries ??
25 UTL Power, steam, gas and tap water supply Energy
2. Changes in the last three
decades VA (% p.a.) – official
estimates, supper
fast, more than EA at
the same stage (8.5-
8.8%)
Hours (% p.a.) –
adjusted for a
structural break and
informal sector
employment
Net K (% p.a.) –
constructed
The growth is
apparently investment
driven
Only the export-
oriented semi-finished
& finished goods
group is different …World KLEMS 3, Tokyo9
2… structural changes
World KLEMS 3, Tokyo11
Agriculture
declines
significantly,
though still
took one-third
of total
employment
In industry
only SF&F
increased
share in VA
and H, but not
in K – a more
labor intensive
change
All types of
services
gained more
shares
… led to
changes in
Y/L, K/L and
K/Y ratios
2. … more insightful observations:
capital deepening, labor productivity…
World KLEMS 3, Tokyo12
The Y/L growth of
the whole
economy has
been driven by
capital deepening,
pushing up the
K/Y ratio
Energy appears to
be the extreme
case – a very high
K/L and then K/Y,
but a stagnated
Y/L
However, non-
market services
followed energy to
rely on capital
deepening
SF&F is the only
group with a
declining K/Y
World KLEMS 3, Tokyo14
The methodological framework exactly follows the growth
accounting methodology as developed by Dale Jorgenson and his
associates as explained in Jorgenson, Gollop and Fraumeni (1987)
and more recently in Jorgenson, Ho and Stiroh (2005), which is
also used as the general framework in EU/KLEMS (O’Mahony and
Timmer, 2009).
It is based on PPF where the gross output (not value added) of an
industry j is a function of capital, labour, intermediate inputs and
technology, indexed by time T, that is
Under the assumptions of competitive factor markets, full input
utilization, and constant returns to scale, the growth of output can
be expressed as the cost-share weighted growth of all inputs and
technological change:
),,,( TXLKfY jjjjj
Yjtjt
Xjtjt
Ljtjt
Kjtjt AXvLvKvY lnlnlnlnln
3. Methodology & data
World KLEMS 3, Tokyo15
3…
Where
and
The right-hand side of each equation indicates the proportion of output growth accounted for by growth in capital services, labour services, intermediate inputs, and technical change as measured by TFP, respectively.
Next, we have to consider the aggregation problem
That is why we introduce the Domar weights that take into account the productivity effect of the upper-stream on the down-stream industries (an accumulative effect)
jtYjt
jtKjtK
jtYP
KPv
jtYjt
jtLjtL
jtYP
LPv
jtYjt
jtXjtX
jtYP
XPv
1 Xjt
Ljt
Kjt vvv
3…Domar aggregation
Domar aggregation considers the link between aggregate and
industry-level measures, explored by Domar (1961) and further
elaborated by Hulten (1978).
For an industry-wide equivalent, we postulate the existence of
an industry-wide PPF that relates available primary factor inputs
to deliveries to the final demand.
Aggregate productivity change is defined as a shift of the
aggregate PPF over time, or the rate of change of A (i.e. TFP),
which can be measured as the difference between the rate of
change in total final demand (FD) and the rate of change in
primary factor inputs (Z=L*K) and imported intermediate inputs
(M):
World KLEMS 3, Tokyo16
dt
Md
FDP
MP
dt
Zd
FDP
ZP
dt
FDd
dt
Ad M
FD
MMM
FD
z lnlnlnln
3. The Domar aggregation…
Now recall our industry-level equation to measure the rate of change in
TFP
Following the aggregate productivity change as discussed above, the
industry-level productivity change can be aggregated as:
Finally, Domar’s aggregation formula:
A direct consequence of this integration is that weights do not sum to unity,
implying that productivity growth amounts to more/less than a weighted
average of industry-level productivity growth.
This reflects the fact that productivity gains in M do not only have an “own”
effect but in addition they lead to reduced or increased prices in the
downstream industries, and the effects cumulated.
World KLEMS 3, Tokyo17
dt
Md
QP
MP
dt
Md
QP
MP
dt
Zd
QP
ZP
dt
Qd
FDP
QP
dt
Ad jM
jj
jMMM
jjD
jj
jDMD
jj
jj
jz
jj
j
jj lnlnlnlnln
dt
Ad
FDP
QP
dt
Ad j
j
jj lnln
4. Sources of Chinese growth(All inputs are cost-weighted with costs are
controlled by national accounts)
World KLEMS 3, Tokyo18
Overall, TFP growth is 0.8% p.a. or 1.1% with Domar
The best period appears to be 1991-2001, followed by WTO entry 2001-07
The most inefficient period followed the global financial crisis with the
unprecedented fiscal injection, which worsened the structural problem
Total Economy
GO L input K input M input TFP TFP (Domar)
1980-1991 8.5 0.6 2.1 5.2 0.5 1.1
1991-2001 11.0 0.1 2.3 7.3 1.2 2.2
2001-2007 15.9 0.5 2.9 11.5 1.0 1.1
2007-2010 12.7 0.7 3.4 8.8 -0.2 -1.9
1980-2010 11.2 0.4 2.5 7.5 0.8 1.1
4. TFP index for the total economy
World KLEMS 3, Tokyo19
The economy entered
a stage of steady
efficiency improvement
after mid 1990s
following the reform of
the state sectors
But TFP slowed down
following China’s WTO
entry while
consolidated large
SOEs resurged and
growth motivated local
government get more
involved in business
Now China is still in
the difficult aftermath
of the global crisis …
Remarks
The TFP growth of energy, C&P, infrastructure (services 1). As
well as agriculture are important. Their improvement in 1991-01
played a key role in the rise of Domar weighted TFP growth for
the entire industry…
…and their deterioration in 2001-07 and 2007-10 was behind the
drop of the Domar weighted TFP growth.
Most of energy and some of C&P industries , government
monopolized services cannot survive in a market situation
without the subsidies
Our conjectured “cross subsidization” is evident. No matter how
inefficient the (especially state-owned) upper-stream industries
is, they maintained a strong growth to ensure that the
downstream industries are “competitive”.
This is certainly unsustainable when the market situation is bad..
World KLEMS 3, Tokyo23
6. China in East Asia Perspective
We use per capita PPP GDP in 1990 prices to define the
same stage of development for East Asia economies
$2000-$8000
Like its EA neighbors, China spent almost the same time
to accomplish this stage
However, in terms of labor productivity China is still much
lower than EA (Chart)
This means that China has to be more productive
Where will the productivity come from? More investment
or structural reform to address the inefficiency problem?
EA experience has also showed that after this stage, the
growth will slowdown, see the case of Japan and South
Korea, which make the challenge to China even bigger
World KLEMS 3, Tokyo24
A comparison of TFP growth
World KLEMS 3, Tokyo25
PERFORMANCE OF TOTAL FACTOR PRODUCTIVITY: CHINA VIS-À-VIS EAST ASIAN ECONOMIES (Percent per annum)
TFP growth
(% p.a.)
Period Coverage of
the Economy
Source of
the Study
China 0.8 1992-2010 Industry This study1
0.9 1992-2010 Total economy This study1
Japan 5.1 1950-1973 Total economy Maddison (1995)
4.4 1950-1973 Total economy Wolff (1996)2
5.0 1960-1970 Total economy Bosworth, Collins and
Chen (1995)
South Korea 1.8 1970-1990 Total economy Kawai (1994)2
1.7 1966-1990 Total economy Young (1995)
3.0 1966-1990 Manufacturing Young (1995)
1.6 1970-1992 Total economy Bosworth, Collins and
Chen (1995)2
Taiwan 4.5 1970-1990 Total economy Kawai (1994)2
2.6 1966-1990 Total economy Young (1995)
1.7 1970-1992 Total economy Bosworth, Collins and
Chen (1995)2
China has to work much harder to achieve the
same level of per capita GDP (1990PPP) as its
east Asian counterparts
Annual growth rate of per Capita GDP:
China v Japan
ChinaPPP/GDP$2000-$8000
Japan PPP/GDP
$2000-$16000
China has to grow
faster than the rate of
Japan after PPP$8000
pc due to lower labor
productivity.
7. Concluding remarks –
implications for “Liconomics” Our results well justify one of the three pillars, the most
important one, structural reforms
The other two pillars are “no stimulus” and “deleverage”
However, there are signs that the government has gone
back to its old trick of boosting the economy.
Major banks (in services 1 group) have been required to
provide more landing to sustain the growth
China observers have been saying that there is no way
for Li to become the first premier to abandon the growth
target
The most politically correct argument is that China needs
growth, and a faster growth to avoid falling into the
“middle income trap”, at whatever the cost. This won’t
work. World KLEMS 3, Tokyo30
Main References Domar, Evsey (1961), “On the Measurement of Technological Change”, Economic
Journal 71
Hulten, Charles (1978), “Growth Accounting with Intermediate Inputs”, Review of
Economic Studies 45
Ito, Keiko and Harry X Wu (2013) “Construction of China’s Input-Output Table
Time Series for 1981-2010: A Supply-Use Table Approach”, presented at the 2nd
Asia KLEMS Conference, Bank of Korea, Seoul, August 22-23, 2013
Jorgenson, Dale W., Frank Gollop and Barbara Fraumeni (1987), Productivity and
U.S. Economic Growth, Harvard University Press, Cambridge, MA
Jorgenson, D.W., Ho, M.S. and Stiroh, K.J. (2005). Information Technology and
the American Growth Resurgence, Cambridge, MA: MIT Press
O’Mahony, Mary and Marcel P. Timmer (2009), Output, Input and Productivity
Measures at the Industry Level: The EU KLEMS Database, The Economic
Journal, 119 (June), F374–F403.
Wu, Harry X. (2008), Measuring capital input in Chinese industry and implications
for china’s industrial productivity performance, 1949-2005, presented at the World
Congress on National Accounts and Economic Performance Measures for
Nations, Washington D.C.
Wu, Harry X. and Ximing Yue (2012), Accounting for Labor Input in Chinese
Industry, 1949-2009, RIETI (Japan) Discussion Paper Series, 12-E-065
World KLEMS 3, Tokyo31