Lecture 2. Understanding China’s Growth.

Introduction.

• Despite China’s remarkable growth, there is not much literature trying to explain its very high growth rates.

• There is much speculation about the causes of Chinese economic growth and about predictions for the future.

• Many of the data, especially from the past, are problematic and subject to criticism.

• We are at a stage where we get mostly only macroeconomic estimates.

• Yt=AtF(Kt,Lt)

• The big questions turn around

• Kt (capital stock). Problem of valuation of socialist capital.

• At (total factor productivity).

• Lt also raises problems of its own (problems associated to one child policy)

Chow-Li (2002)

• Yt = AetKtLt

• Ln Yt = 0 + 1lnKt + 2 lnLt +3t .6136 .4118 .0263 (.0772) (.1996) (.0025)• Trend only significant after 1978. • Suggests constant returns to scale (1 +2 not

different from 1). • Ln (Yt/Lt) = 0 + 1ln (Kt/Lt) +3t .5577 .03028 (.0468) (.0040)

Chow-Li (2002)

• Suggests a 3% annual growth in TFP from 1978 to 1998.

• Growth of 9.1% can be decomposed in– 5% due to capital (.5577 X 9.1)– 3% due to TFP growth– 1.1% due to labor [(1-.5577)x2.7]

• Growth due mostly to capital accumulation and TFP growth (1/3 of growth explained by TFP growth).

• Projections of 8% annual growth until 2010. Were not proven wrong.

Hu-Khan (1997)

• IMF team report.

• Kt grew by 7% between 1979-94 but capital output ratio has remained more or less constant (no capital deepening).

• Estimate TFP growth of 3.9% in that period (compared to 2% for Asian tigers). Explain by success of reforms.

Young (2003)

Contrarian view critical of official statistics (1978-1998).1. Statistical Bureau reluctant to revise downward

estimates. 2. Problems with reporting nominal and constant output

by enterprises. Leads to underestimation of deflator by 1.7 to 2.5 %.

3. Proposes reconstruction of many data but with not too many differences.

1. Output per capita growth at 6.1% (instead of 7.8), 2. output per worker at 5.2% (instead of 6.9) due to rising

participation rates, 3. non agricultural output per worker at 3.6% (instead of 6.1%)4. non agricultural output per effective worker to 2.6% (instead of

5%), 5. non agricultural TFP per worker at 1.4 (instead of 3).

Perkins-Rawski (2007)

• Try to predict growth over the next two decades.

• Growth accounting:

• TFP growth = gY – KgK -LgL

• gY , gK , gL growth rates of GDP, capital and labor.

• Shares of capital and labor K,L in total factor payments (in total national income).

Perkins-Rawski (2007)

• Use official statistics. Accept possible deflator problems but also underestimation of service sector. Moreover, quality adjustments not applied for price indices.

• Use 2000 prices to avoid inflated industrial prices from socialism.

• Capital stock estimated using annual investment outlays and depreciation rate of 9.6% (perpetual inventory method)

• Labor measured as population 16-65 and decomposing in 5 education categories (no diploma, primary, junior high, high school, college).

Perkins-Rawski (2007)

• Inconsistencies between census and data on graduation. Build data using age-specific mortality rates and graduation rates. Possibly underestimates human capital.

• L = L1 + L2 + L3 + L4 + L5

• H = w1L1 + w2L2 + w3L3 + w4L4 + w5L5

• wi are education-linked wage differentials. • H/L measures educational attainment.

Total Number L RatioYear Age 16-65 No diploma Primary Junior High Senior High Tertiary H/L

1952 313,346,294 73.9 19.6 4.8 1.4 0.4 0.901965 372,783,230 56.8 30.2 9.2 3.0 0.8 0.981978 506,667,822 39.6 33.4 20.6 5.7 0.7 1.071990 722,042,872 27.6 33.5 25.8 12.1 1.0 1.182000 808,414,668 18.5 34.4 30.6 14.7 1.8 1.262005 849,636,604 15.1 32.8 33.6 15.7 2.7 1.31

Mincer weights from 2000 wage data 0.818 1 1.346 2.010 3.277

Source: Appendix. Working age population includes ages 16-65.

Percentage of Workers in Each Education Category

Table 1Non-student Working Age Population, 1952-2005

Headcount, Educational Attainment, Education-enhanced Total

Perkins-Rawski (2007)

Period GDP AverageFixed Raw Education TFP Fixed Education

Capital Labor Enhanced Growth Capital Enhanced TFPK L H K Labor H

1952-2005 7.0 7.7 1.9 2.6 2.1 47.7 21.4 30.91952-1978 4.4 5.8 1.9 2.5 0.5 56.3 32.7 11.01952-1957 6.5 1.9 1.2 1.7 4.7 12.7 14.9 72.41957-1978 3.9 6.7 2.0 2.7 -0.5 73.7 39.7 -13.41957-1965 2.4 5.2 1.5 2.1 -1.0 93.1 49.5 -42.61965-1978 4.9 7.7 2.4 3.1 -0.2 67.7 36.7 -4.41978-2005 9.5 9.6 1.9 2.7 3.8 43.7 16.2 40.11978-1985 9.7 9.2 3.4 4.5 3.2 40.6 26.6 32.81985-1990 7.7 6.9 2.5 2.9 3.1 38.8 21.5 39.71990-1995 11.7 9.1 1.4 1.9 6.7 33.3 9.5 57.31995-2000 8.6 10.5 0.9 1.6 3.2 52.7 10.5 36.82000-2005 9.5 12.6 1.0 1.8 3.1 57.1 10.6 32.3

Source: Appendix.

Note: Calculations assume that 1952 capital stock is two times that year's GDP; assumed depreciation rate is 9.6 percent.

Labor Input Growth Attributable to

Table 2Average Annual Growth of GDP, Fixed Capital, Labor, and TFP,

With Contributions to TFP Growth, 1952-2005 (percent)

Average Growth of Inputs Percentage Shares of GDP

Perkins-Rawski (2007)

Figure 1Sources of Annual GDP Growth, 1952-2005

Annual Change in Fixed Capital, Education-enhanced Labor, and TFP

-25

-20

-15

-10

-5

0

5

10

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20

1952

/53

An

nua

l cha

nge

(per

cen

t)

Fixed Capital

Education-enhanced Labor ForceTotal Factor Productivity

Figure 2China: Fixed Capital Formation Proportions, 1952-2005

0

10

20

30

40

50

60

1952

1954

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

Per

cent 2000 prices

Current prices

• Japan’s postwar growth based on TFP growth. Half of 9% growth rate between 1950 and 1970 explained by TFP. Later slowdown associated to fall in TFP growth.

• Question: Will the growth continue?

Population and Dependency Ratio, 1990-2025

Year Population Percentage Share

(Millions) Working Age 16-65 Dependents

Include Exclude Include Exclude Working Age Students Working Age Students

1990 1,130 65.4 64.1 34.6 35.9 2000 1,263 66.7 64.5 33.3 35.5 2005 1,308 68.8 65.3 31.2 34.7 2015 1,390 70.6 66.4 29.4 33.6 2025 1,457 67.9 63.4 32.1 36.6 2035 1,489 64.1 35.9 2045 1,497 61.4 38.6

Source: Data for 1990 from official census results for that year. Dependents are defined as persons aged under 16 and over 65. High school and college students: appendix to this paper

Low dependency ratio imply robust household savings

Labor Force and Graduates

(Millions) Educational Composition of Non-student

Workforce

Year Working Age Annual

Graduates (Percent)

Non-students Senior Tertiary No Primary Junior Senior Tertiary Ratio L High Diploma High High H/L

2005 849.6 8.3 3.1 15.1 32.8 33.6 15.7 2.7 1.31 2010 885.3 9.9 5.0 11.6 29.3 36.6 17.8 4.7 1.39 2015 913.4 12.8 5.0 9.5 25.3 37.8 20.2 7.2 1.48 2020 903.6 11.5 6.9 7.4 21.9 38.2 21.7 10.8 1.58 2025 885.6 12.8 6.6 5.7 19.4 37.0 23.2 14.7 1.69

Projections of Working Age Non-Student Population Ages 16-65: Size and Composition, 2005-2025

Decline of L after 2015 but increasing human capital

Productivity Consequences of Input Projections and 6 or 9 Percent Growth to 2025

Period Annual Average Growth of Inputs % Annual Growth of GDP (%)

GDP Labor Input Average Attributable to TFP Share

Growth Fixed Raw Education TFP Fixed Education TFP of GDP

% Capital Labor Enhanced Growth Capital Enhanced Growth Growth

Labor Labor percent

K L H % K H

Version 1 2005-2015 9.0 9.8 0.7 2.0 3.6 4.2 1.1 3.6 40.4 2015-2025 9.0 8.2 -0.3 1.0 4.9 3.5 0.6 4.9 54.4 Version 2 2005-2015 9.0 9.0 0.7 2.0 4.0 3.9 1.1 4.0 44.5 2015-2025 9.0 6.6 -0.3 1.0 5.6 2.8 0.6 5.6 62.4 Version 3 2005-2015 6.0 8.1 0.7 2.0 1.4 3.5 1.1 1.4 23.1 2015-2025 6.0 5.6 -0.3 1.0 3.0 2.4 0.6 3.0 50.7 Version 4 2005-2015 6.0 7.3 0.7 2.0 1.7 3.1 1.1 1.7 28.7 2015-2025 6.0 4.0 -0.3 1.0 3.7 1.7 0.6 3.7 61.7

Memo item: average TFP growth 1978-2005: 3.8 percent (Table 2)

Versions 1 and 2 assume 9% GDP growth; Versions 3 and 4 assume 6% growth

Ratio of fixed capital formation to GDP declines linearly from the 2005 figure of 42.3 % to a terminal 2005 level of 35 percent (Versions 1 and 3) or 25 percent (Versions 2 and 4).

Country Year start Period Growth Period Growth

PPP GDP

Exch Rate

of slowing before Rate after Rate

per cap at GDP at

slowdown Before slowdown After slowdown slowdown (2005 prices)

Japan 1971 1948-1970 10.72 1971-78 2.605 13800 16500

Taiwan 1990 1980-89 8.56 1990-99 6.304 13370 10880

Korea 1992 1982-91 9.05 1992-2005 5.28 13370 8810

It would take China 10-15 years at least to reach PPP GDP per capita of $13,000 ($5,300 in 2007).

How productive is investment in China?

• China has had a very high investment rate (around 40%). This suggests that the marginal product of investment might be low (too much investment and allocative inefficiencies). However, a very high marginal return to capital might explain a high investment rate.

• Bai et al. (2006) have addressed this question.

How productive is investment in China?

• Use revised output estimates after 2004 census (covers 1978-2004).

• Assume depreciation rate of 8 % for structure and of 24 % for machinery. Use estimate of initial stock for 1952 plus gross fixed capital formation.

• Estimate share of capital income as residual of labor income.

How productive is investment in China?

• Estimates relatively high even though falling.

• Why have returns remained high?– Capital-output ratio has not increased much– Capital share has increased steadily together

with increase in the investment rate.

How much misallocation of capital in China?

• There is a strong perception that despite strong growth, there may be a severe misallocation of capital in China.

• General idea: if distortions favor certain firms, they can survive with lower TFP than firms that do not benefit from those distortions. Hsieh and Klenow (2008).

Open questions

• China’s growth will affect the global economy and there may be feedback effects.

• Energy.

• Environment.