On China’s Strategic Move for a New Stage of Development – A Productivity Perspective

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 ConferenceTokyo, March 19-20, 2014

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Agenda1. China at the crossroads: Searching for a new stage

of development2. Changes over the last three decades: What can we

learn from the restructuring of the economy?3. Methodology and data4. Sources of the unbridled growth: How much can be

attributable to productivity? 5. Institutional problems addressed by sector-level

TFP analysis6. Ready for overcoming the “middle income trap”? –

China in the East Asia perspective7. 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).


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

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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


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


Appendix: Industry grouping (for structural distortion analysis)


2 CLM Coal mining Energy 1 AGR Agriculture Agriculture3 PTM Oil and gas extraction Energy4 MEM Metal mining C&P 26 CON Construction Market 25 NMM Non-metallic minerals mining C&P 27 SAL Wholesale and Retail Trades Market 26 F&B Food and kindred products Finished 28 HOT Hotels and Restaurants Market 27 TBC Tobacco products ?? 29 T&S Transport and Storage Market 18 TEX Textile mill products C&P 30 P&T Post and Telecommunications Market 19 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 211 W&F Saw mill products, furniture, fixtures ?? 33 BUS Business Services Market 212 P&P Paper products, printing & publishing C&P 34 ADM Public Administration and DefenseNon-market13 PET Petroleum and coal products Energy 35 EDU Education Non-market14 CHE Chemicals and allied products C&P 36 HEA Health and Social Security Non-market15 R&P Rubber and plastics products Finished 37 SER Other Services ??16 BUI Stone, clay, and glass products C&P17 MET Primary & fabricated metal industries C&P18 MEP Metal products (excl. rolling products) Semi-finished19 MCH Industrial machinery and equipment Semi-finished20 TRS Motor vehicles & other transp. Equip. Semi-finished21 ELE Electric equipment Semi-finished22 ICT Electronic and telecomminucation equi. Finished23 INS Instruments and offi ce equipment Semi-finished24 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 …


2… by industry group


2… structural changes


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…


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

2….



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


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

jt YPKP

v jt

Yjt

jtLjtL

jt YPLP

v jt

Yjt

jtXjtX

jt YPXP

v

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):


dtMd

FDPMP

dtZd

FDPZP

dtFDd

dtAd 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.


dt

MdQPMP

dtMd

QPMP

dtZd

QPZP

dtQd

FDPQP

dtAd j

Mjj

jMMM

jjD

jj

jDMD

jj

jj

jzjj

j

jj lnlnlnlnln

dtAd

FDPQP

dtAd j

j

jj lnln

4. Sources of Chinese growth(All inputs are cost-weighted with costs are controlled by national accounts)


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 EconomyGO L input K input M input TFP TFP (Domar)

1980-1991 8.5 0.6 2.1 5.2 0.5 1.11991-2001 11.0 0.1 2.3 7.3 1.2 2.22001-2007 15.9 0.5 2.9 11.5 1.0 1.12007-2010 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


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 …

5. Sector level TFP growth and institutional problems


5…


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..


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


A comparison of TFP growth


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.

However, poor areas may have strong growth potentials

Level of per capital PPP-GDP: The richest five versus the poorest five

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.


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


On China’s Strategic Move for a New Stage of Development – A Productivity Perspective

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