On China’s Strategic Move for a New Stage of Development - PowerPoint Presentation

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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, 2014Slide2

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Agenda

China at the crossroads: Searching for a new stage of development

Changes over the last three decades: What can we learn from the restructuring of the economy?

Methodology and dataSources of the unbridled growth: How much can be attributable to productivity? Institutional problems addressed by sector-level TFP analysisReady for overcoming the “middle income trap”? – China in the East Asia perspectiveConcluding remarks: On key challenges to “Liconomics”

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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, Tokyo3Slide4

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, Tokyo4Slide5

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 demandStarting from the downstream industries… Local governments tend to provide subsidies (various cost-reducing measures) to local manufacturers who directly face the international marketSuch 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

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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 groupingWorld KLEMS 3, Tokyo7Slide8

Appendix: Industry grouping (for structural distortion analysis)

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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 drivenOnly the export-oriented semi-finished & finished goods group is different …World KLEMS 3, Tokyo9Slide10

2… by industry group

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2… structural changes

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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 ratiosSlide12

2. … more insightful observations: capital deepening, labor productivity…

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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/LHowever, non-market services followed energy to rely on capital deepening

SF&F is the only group with a

declining

K/YSlide13

2….

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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:

3. Methodology & dataSlide15

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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)Slide16

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, Tokyo16Slide17

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, Tokyo17Slide18

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

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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 2001-07The most inefficient period followed the global financial crisis with the unprecedented fiscal injection, which worsened the structural problemSlide19

4. TFP index for the total economy

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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 businessNow China is still in the difficult aftermath of the global crisis …Slide20

5. Sector level TFP growth and institutional problems

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5…

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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, Tokyo23Slide24

6. China in East Asia Perspective

We use

p

er 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 stageHowever, in terms of labor productivity China is still much lower than EA (Chart)This means that China has to be more productiveWhere 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 biggerWorld KLEMS 3, Tokyo24Slide25

A comparison of TFP growth

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China has to work much harder to achieve the same level of per capita GDP (1990PPP) as its east Asian counterparts Slide27

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. Slide28

However, poor areas may have strong growth potentialsSlide29

Level of per capital PPP-GDP: The richest five versus the poorest fiveSlide30

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 growthChina 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, Tokyo30Slide31

Main References

Domar,

Evsey

(1961), “On the Measurement of Technological Change”,

Economic Journal 71Hulten, Charles (1978), “Growth Accounting with Intermediate Inputs”, Review of Economic Studies 45Ito, 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, 2013Jorgenson, Dale W., Frank Gollop and Barbara Fraumeni (1987), Productivity and U.S. Economic Growth, Harvard University Press, Cambridge, MAJorgenson, D.W., Ho, M.S. and Stiroh, K.J. (2005). Information Technology and the American Growth Resurgence, Cambridge, MA: MIT PressO’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

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