The Role of Education and Technology in China’s Income Growth
Xingmin Yin, Fudan University
1. Introduction
Traditionally, it is commonly mentioned the belief that the middle class is an important
prerequisite for strong, more sustainable economic growth and development. However,
policymakers are wondering how great a role the middle class can play in terms of country’s
global competitiveness. What is the middle-income trap? How can a country move from the low
income to middle income, and further to high income levels? 1
China has made striking progress since 1978, particularly in the past fifteen years, in reforming its
development policies, and creating the more wealth for sustainable technological development.
For instance, by 2013, China has accumulated to amount of RMB 104 trillion of various savings
and US$3.8 trillion of foreign exchange reserves. Thus, one question may be raised what real
feature of China’s comparative advantage is. It may be argued that the country’s huge pool of
human resources and capital will generally move China along with the path of both comparative
capital and human-capital intensive mode of production and growth. Actually, it is expected that
this process will depend heavily on the productivity growth. In sum, China is well-placed to avoid
the so-called “middle-income trap” and continue to catch up and converge towards the more
advanced economies.2 In order to deepen our understanding on the prospectives of China’s
potential income growth, this paper will not discuss an absolute definition of per capita
consumption of US dollar term per day, but to focusing on the driving force from low-income to
middle-income growth in China.
Generally, this background paper looks at the growth of income in China’s past decade. Then it
discusses how economic growth affects the changes of education and technology to income
growth across labor force. Thirdly, it highlights the machinery sophistication of exports. Fourth, it
looks at the contribution of labor productivity in manufacturing sector to income level. Finally, it
explores these trends imply for the future of high income stance of China.
2. March to High Income Country
There is no standard definition of the middle income country. The term of middle income
originated from the high income countries and was suitable for these countries. Woo calls the
ratio a country’s income level to the US income level between 20% and 55% as middle-income
country.3 Therefore, it is better to compare China’s income stance with that of high income
countries.
1
Wing Thye Woo, “China meets the middle-income trap: the large potholes in the road to catching-up.” Journal
of Chinese Economy and Business Studies, Vol.10, No.4, November 2012, 313-336.
2 Vincent Koen, Richard Herd, Sam Hill, “China’s March to Prosperity ---- Reforms to Avoid the Middle-income
Trap”, OECD Economics Department Working Paper No.1093, 12-Nov-2013.
3 Wing Thye Woo, “China meets the middle-income trap: the large potholes in the road to catching-up.” Journal
of Chinese Economy and Business Studies, Vol.10, No.4, November 2012, p. 314.
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For the sake of comparison, Table 1 presents the basic data of changes of middle-income level
across income groups. The most significant insight from this table has not to do with the current
income, which mirror GDP per capita in sign across country, but also to show the dynamics of
China’s income growth during the period 2001-2020. In 2001, the World Bank defined the
category “lower-middle income” countries to include those countries with per capita incomes in
the range of 430-1860 dollars. With a reported level of per capita income of 1042 dollars in China,
it lies toward the bottom of this range. Ten years late, China per capita rose to 6,000 dollars,
joined the group of upper middle income club.
Table 1 International Comparison of Income Changes (GDP Per capita, US$)
2001
2009
430
509
1,860
3,397
Low middle
1,230
2,321
Upper middle
4,550
7,502
High income
26,510
37,990
China
1,042
6,000 (in 2012)
Low income
Middle income
7,500 (in 2014)
15,000 (by 2020)
Sources: World Bank: World Development Indicators, 2011; China Statistical Yearbook, 2002;
income per capita for China in 2020 is projected by author.
This comparison on income growth illustrated that a significant rising of the income groups
appears to have caused by an improvement of China’s comparative advantage and development
policies. Annual figures on economic growth in dollar terms show that the value of China’s gross
domestic product (GDP) increased more than 10 percent over the past decade (2001-2011). It is
estimated that China’s income will rise to US$7500 per capita in 2014. On the future, this
projection cannot be taken as precise forecasts, to see these effects, we consider a scenario with
nominal 10 percent annual growth and RMB appreciation to US$ in coming seven years, GDP per
capital will rise to around US$15,000 in China by 2020.
Our findings are generally optimistic, suggesting China can continue and even accelerate its
economic growth and reach the gate of high income status by 2020. By using a higher standard
for >$20/day, around 1 billion population in China will grow rapidly to this level year by year.
Therefore, the emergence of China’s middle class is expected to be a dominant force to a positive
sign of global production and consumption.
Figure 1 graphs the trends more vividly, and shows the growth in GDP per capita as well as
average wage of employed persons in urban units over the survey period. GDP per capita
increased from US$949 in 2000 to US$7,500 in 2014, increasing six times. As can be seen in
Figure 1, daily disposable income of more than 50 percent of urban population is in the higher
US$10 level, and will be in the higher US$15 level in 2015. The vast majority of urban households
fall into this group. The population share of the upper-middle class is rising rapidly year by year.
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Indeed, rural areas also saw a very sharp increase in the population earning US$10 per person
per day.
GDP per capital/
Urban Wage
Disposable
Income per day
11000
10000
9000
8000
7000
6000
5000
4000
3000
2000
1000
18.0
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Per Capital
Urban Wage
Disposable Income in Urban Areas
Figure 1 Growth of GDP per capita, Urban Wage and Disposable Income per day (US$)
Economic growth dynamics is tied directly to the household income level. More importantly, the
rapid convergence per capita income levels across China’s regions is giving rise to another
important phenomenon, namely the expansion of the Chinese middle class. We use here the
ownership of major durable consumer goods per 100 urban household as the indicators of life
standards. Compared to any middle-income countries globally, China has much higher rates of TV,
refrigerator, washing machine, laptop, air-condition ownership around 100 percent in urban
areas. Besides, Chinese households rapidly increased in car ownership from less than 1 percent in
2000 to 22 percent in 2012, and will be projected to more than 60 percent by 2020. It is clear that
no matter what definition one uses, there is sizable income rising in China in the past decade.
If we were to treat China as a high-income country for the coming fifteen to twenty years, which
it is for purpose of development policy for middle-income country, the positive and significant
implications would be drawn. No doubt, the prosperity to high income country can only be built
on the foundation of a skilled and productive labor force that generates significant value-added
and higher income. Therefore, it is emphasized the links between schooling and economic
modernization should be analyzed. We turn to this important issue that has not been detailed by
many international observers.
3. More Schooling for Labor Quality and Innovation
Arguably, China has successfully moved along the trajectory from lower-to middle-income
country through accessing the capital, technology, and human capital to support its largest
industrialization in human history.
Education attainment continues to progress rapidly and average education levels across the
population are now comparable to other upper-middle-income countries. This growth will be
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driven by further economic development. Education policies have sought to improve labor
quality to make schooling better serve the needs of the labor market, stimulate the economy,
and promote China’s global competitiveness. No doubt, to accumulate human capital, a key
ingredient in sustained economic development has been encouraged by the Chinese government
since 1978.
China’s education is an exam-based selection system. The education system has been unified so
that, in principle, all students studied the same nine-year curriculum in a 6-3 structure.
Amendment to the compulsory education law, which came into effect September 1, 2006,
commits to provide nine years of free compulsory education for both urban and rural children
through no tuition charges, and now free of charge. The government plans to ensure that all
children receive 12 years of education by 2020. More schooling will gradually improve labor
quality across population.
To place comments about education attainment in the past 20 years, in context, it is important to
highlight what past educational expansions mean for the current population. We turn to
indicators of educational participation during the survey period. The impact of education reform
measures was profound. Table 2 shows gross promotion condition by major levels for 1990-2012.
Gross promotion ratios (GPRs) have been rising dramatically. It is clearly that primary school GPRs
have been above 100 for males and femals since around the start of market reforms, with a
gender gap favoring boys in the 1980s, basically eliminated by the mid-1990s.
The compositional changes are clear as well in gross promotion rates calculated in Table 2 as the
number of people starting a higher level education a percentage of the number graduating from
a lower level of education in the same year. An important trend in China is the rise of education
levels. Increasing demand for education, combined with technological advances, is fuelling a rise
in educational development. First, the primary-junior secondary school promotion rate has been
around 99 percent. Second, after 1990, secondary school GPRs continued to rise. Between 1990
and 2012, gross promoting rate from junior secondary schools to senior secondary schools
increased from 40.6 percent to 88.4 percent. Third, gross promoting rate from senior secondary
schools to higher education increased from 27.3 percent to 87.0 percent.
Table 2 Promotion Rates of Various Schools and Number of Students in High Education
Senior
Secondary
school
Junior
Secondary
School
Number of
College
Students,
10,000
Number of
Postgraduates
10,000
Number of
Students per
100,000
1990
27.3
40.6
61
3
304
2000
73.2
51.2
221
13
723
2003
83.4
59.6
382
27
1298
2012
87.0
88.4
689
59
2335
Sources: China Statistical Yearbook, various issues.
The impact of 1997/1998 Asian Financial Crisis on China was positive from the point of view of
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the development of higher education. Since then, the number of well-educated worker force has
been rapidly raised and changed the quality composition across labor force. We can summarize a
couple of major progress in China’s education development during the period 2000-2012.
First, as educational provision has expanded, the composition of enrollments has changed.
Proportionally, senior secondary and tertiary school new enrollment have expanded dramatically.
For example, new enrollments in regular institutions of high education increased from 1 million in
1997 to 6.89 million in 2012.
Second, the number of college students per 100,000 populations increased from 482 in 1997 to
2335 in 2012. The number of higher education institutions grew to 2442 in 2012 from 1020 in
1997.
Thirdly, obviously, the new trend of China’s mass higher education program has changed the
supply of human capital that has a long-term impact on the labor productivity. Three years before
the higher education reform (in 1995), there were only 2.91 million students in college; by 2012
the total students in college were 23.91 million.
Fourth, more importantly, around half of college students are registered in science and
engineering. This percentage has remained remarkably stable over the last two decades. Besides,
a significant new development in higher education is the growth of enrollment in economics, law,
and business from 20.65 percent in 2000 to 34.55 percent in 2012.
Fifth, overseas study is another element of higher education that has expanded sharply in the
past twenty years. Overseas study has been regarded as an important step to scientific
modernization, improvement of higher education in China. The number of returned student
abroad increased, from 38,989 in 2000 to 399,600 in 2012.
All evidence we have provided show that the skill-intensive growth of increasing labor production
is a key not only to superior aggregate growth, but also to more extensive growth benefits across
China’s population. More years of schooling are associated with a lower probability of downward
income mobility in both urban and rural areas.4 As the middle class grows it raises investment in
human capital, in turn, drives national economic growth. But the causality can also go the other
way, with human capital accumulation (typically education) pulling more of the poor into the
middle class. Over time, this rising participation in higher education of younger cohorts will
ensure the average education levels amongst Chinese workers will increase.
As a result, China’s population is increasingly well educated and the education system itself is
more outward looking and also more diverse structure. These changes have facilitated China’s
expansion into international markets, and raised the returns to education in ways that are likely
to increase investments in education.
Obviously, as educational credentials rise in importance in the labor market, groups with higher
4
Asian Development Bank. Key Indicators for Asia and the Pacific 2010, August 2010, Pp.33-35.
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quality education today will be tomorrow’s rich. The requirements of more jobs are increasingly
based on human capital attributes; the greater the extent of the labor market, the higher the
returns on human capital. For these reasons, the increasing investment on education should be
regarded as a key step for China’s way towards high-income country.
4.
A Growing Role of R&D Intensity
Can we explain the significantly increasing of China’s income in the past decade? Empirical
research has shown that the accumulation of physical and human capital can only partially
explain different income levels across countries. The residual is commonly attributed to
technological differences between countries, where by technology is defined as the knowledge
required for production.
China is making a great transition from middle-income economy toward an industrialized country
status as it intensifies its innovation effort. According to the report of WTO, the contribution of
China to the “pool” of technological innovation has significantly increased since 1985.5 Chinese
policy is increasingly focused on promoting indigenous innovation capability and lessening the
reliance on foreign technology.
Measuring technological progress is a difficult and imperfect field for study. Widely used
measures of technological progress include total factor productivity, research and development
(R&D) expenditure and patent applications. However, each measure captures a different and
incomplete picture of technological progress. R&D expenditure measures the input into
technological innovation activity. A drawback of this approach is that not all research investments
generate innovations, however, it reflects the innovation investments that may have influence on
the innovation.
Table 3 Comparative Measures of R&D Intensity, 2000-2008
Country
R&D Persons
/Million
R&D/GDP
Ratio
Country
R&D Persons
/Million
R&D/GDP
Ratio
France
3496
2.05
China
1071
1.44/1.98
Germany
3532
2.54
Japan
5573
3.44
Indonesia
205
0.05
UK
4269
1.88
Malaysia
372
0.64
USA
4663
2.82
Philippines
81
0.12
Korea of R.
4627
3.21
Thailand
311
0.25
Singapore
6088
2.52
India
137
0.80
Source: World Bank, World Development Indicators, 2011, pp. 314-316.
The data in Table 3 show that China’s R&D intensity both in R&D persons to million populations
and R&D spending to GDP sharply accelerated during 2000-2008 and continued to rise into the
higher level. By 2013, its R&D intensity remarkably rose to 2.03 percent, approaching to 2.29
percent of high-income countries in 2000-2008.
5
WTO, 2013 World Trade Report: factors shaping the Future of the World Trade, p.153.
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Firstly, according to World Development Indicators, China had 1071 R&D persons per million
populations. This ratio is notably less than those of high income countries such as Japan (5573),
Korea (4627), Singapore (6088) and the US (4663). At 1071, however, Asian middle-income
countries lagged behind China in this measure. For instance, Thailand (311) and India (137) show
a small number of R&D persons for innovation in 2000-2008. As noted above, education
attainment continues to rise sharply, including at the tertiary level, thereby enhancing innovation
capacity. Looking forward, because of its large population, the sheer number of scientists and
engineers will continue to rise under the support of mass higher education program. In 2012,
China graduated 250,000 scientists and engineers with degrees at the master’s level and above.
This figure shows the continued increasing of R&D persons who engaged in innovation activity.
Thus, China is home to one of the largest R&D workforces.
Secondly, it is widely agreed that the long-term growth of living standards depends on the
capacity of an economy to sustain technological progress, whether by adopting the technologies
from abroad, through its own technological innovations or, most likely, through a combination of
adoption and innovation. The success of technology transfers has not been taken place without
the investment in innovation spending. Thus, today’s innovation and technology transfers are
more localized than the past, which imply the actual role of country’s R&D spending. While
starting from low levels, China’s rate of advance in R&D spending in relation to its gross domestic
product (GDP) indicates strikingly rapid progress, from 1.00 percent in 2000, to 1.44 percent in
2008 and 1.98 percent in 2012, respectively. Measured in absolute, PPP, terms Chinese R&D
expenditures are second only to the United States, having overtaken Japan in 2009.6 India’s level
of R&D intensity remained relatively stable during 2000-2008, hovering in the range of 0.8
percent. Thus, China’s R&D intensity has outpaced the performance of middle-income countries,
even surpassed that of some industrialized countries such as Italy (1.18%), Netherlands (1.63%),
and the United Kingdom (1.88%). But China still lags behind leading industrialized countries such
as the United States (2.82%) and Japan (3.44%) in the proportion of R&D spending. However, as a
middle-income country, its R&D spending to GDP already passed its East Asian counterparts such
as Malaysia (0.04%) and Thailand (0.25%), their R&D spending has been below 1 percent to the
GDP. One issue that we have to mention that China’s government has set 2020 as the date for the
country to achieve around 2.5 percent of R&D spending to GDP in supporting its long-term
sustainable growth. At 2.5 percent, China’s R&D intensity is approaching that of Germany (2.54%)
and substantially greater than what should be expected given the country’s level of per capita
income.
Thirdly, noteworthy, China’s share of international publications rose more rapidly during the
recent decade, from fifth in 2004 to second (after the US) in 2007. In 2007, China accounted for
7.49 percent, whereas the US accounted for 27.66 percent.7 The number of China’s patent
application increased to 308,318 in 2010, reached the top three after Japan and the US.8 Clearly,
the growing importance of China in innovation is not driven by multinational firms alone. For
6
Vincent Koen, Richard Herd, Sam Hill, “China’s March to Prosperity ---- Reforms to Avoid the Middle-income
Trap”, OECD Economics Department Working Paper No.1093, 12-Nov-2013, p.19
7 World Bank: World Development Indicators, 2011, Washington DC.,pp.314-316.
8 WTO: World Trade Report: Factors shaping the Future of World Trade, 2013, p.155.
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example, the great majority of patens and the bulk of R&D activity in China are generated by
Chinese organizations. R&D conducted by foreign subsidiaries still represents a relatively small
share.
Furthermore, one issue has not been analyzed, that the transfer from R&D into production can
be complex and require significant coordination between those who design a good and those
who manufacture it.9 Similarly, designing a product may be difficult if the designer does not
understand how production works. Thus, as manufacturing shifts to China, it is likely that so too
will know-how, research and eventually innovation. One important question may be raised, is it
possible or sustainable for any country to maintain its world frontier technology without the
strong production of manufacturing base?
One possible explanation for the growing importance of China in innovation is the relocation of
significant manufacturing capacity to China. By 2012, the value-added output of China’s
manufacturing products accounted for 20 percent of the global, surpassing that of the United
States, which kept its top producer for one century. Two production patterns should be
distinguished. First, for China, investment in domestic technology has increased significantly in
the past years, which will provide the capacity for a further rapid rise in domestic production;
second, for other middle-income countries, less commitment on the R&D spending is building a
barrier to block the road to high income stance. Under the support of increasingly investing in
technology and innovation, it seems to be that China is completing from net importer to be a net
exporter of technological products.
Against the backdrop of the R&D spending of the middle income countries, we illustrate that
China has begun to move to the gate of the high income countries. From above discussion, these
educational and technological developments are likely to affect trade patterns and industrial
productivity because of their impact on comparative advantage.
5. Exports as A Reflection of Improved Comparative Advantage
China has grown to be the biggest contributor to world trade, accounting for over 11.5 percent of
total word trade, second only to the EU. Trades from China to the rest of the world have been
strong for most of the past decade, registering an unprecedented increase of more than 20
percent annually. The dollar volume of China’s merchandise exports increased from US$266.1
billion in 2001 to US$1430.69 billion in 2008, contracting to US$1220.46 billion in 2009 due to
global financial crisis, and rebound to US$1577.75 billion in 2010. Growth in imports has broadly
kept pace with growth in exports. China’s merchandise imports also grew from US$243.55 billion
in 2001, to US$1132.57 billion in 2008, contracting to US$1005.92 billion in 2009, and also
rebound to US$1396.24 billion in 2010. Furthermore, China’s merchandise exports rose 7.9
percent in 2013 to US$2.2 trillion, while imports increased by 7.3 percent to US$2.0 trillion.
The composition of China’s manufactured exports, has shifted from textiles, garments, toys, and
9
Pisano, G. and W.C.Shih 2012. Producing Prosperity; Why America Needs a Manufacturing Renaissance.
Cambridge MA. Harvard Business Press Books.
8 / 15
other labor intensive products to a more sophisticated goods led by various types of machinery,
electronics and transportation equipment. According to the Heckscher-Ohlin model, countries
have a comparative advantage in sectors that make more intense use of their relatively
abundance factors. It has been argued that the endowment of human capital is an important
determinant of comparative advantage and trade patterns. When workers are more educated,
they spend a smaller fraction of their time learning and are able to suitable for more complex
sectors.10 As mentioned in Introduction, the huge amount of savings and foreign exchange
reserves has been accumulated through faster economic growth rates in the past decade. These
factors have changed China’s comparative advantage.
On one hand, in fact, rapid growth of China’s exports was driven by the trade liberalization
through the reduction of tariffs prior to WTO accession. For instance, by 2005, China’s average
tariff on industrial products was 8.9 percent. For Argentina, Brazil, India and Indonesia, the
respective percent figures are 30.9, 27.0, 32.4, and 36.9.11 On the other, the labor productivity of
China’s manufacturing production has been dramatically enhanced and turned to be a major
factor to increase its exports.
Some economists already observed that over time Chinese exports exhibit rising sophistication
relative to countries with similar aggregate endowments and that it exports more products in
common with capital and skill abundant members of the OECD than its peers.12As author’s
empirical study shows that China is increasingly exporting more medium-and high-technology
products in terms of its process technology. At the aggregate level, the China effect is clearly
visible in technology-intensive exports, particularly in the electric and electronic sector. China’s
world market share of telecommunications recorded a four-fold increase from 6.8 percent to 26.1
percent, while the market share of its integrated circuits and electronic components has
dramatically increased from 1.7 percent to 8.5 percent between 2000 and 2007.13 This generates
the increased overlap in the structure and in the skill content of exports from China.
Our own estimates of the R&D and capital intensity of China’s industry also point to the same
direction of exports. There is no doubt that the structure of China’s exports has changed
dramatically over the past decade. China has emerged as a major producer and exporter of
electronic and machinery products. For example, 45 percent of China’s exports to the United
States are machinery and electrical equipment, which amounted to US$169 billion in 2013.14
Figure 2 shows estimated year-on-year in dollar value of China’s exports for major categories of
manufactured goods. It illustrates the fact that exports of machinery and electronic products
increased much faster than that of the traditional manufactured goods such as textile products
10
Costinot, A. 2009. “On the Origins of Comparative Advantage”, Journal of International Economics, 77(2):
255-264.
11 Lee Branstetter and Nicholas Lardy, “China’s Embrace of Globalization,” in Chinas Great Transition, pp.656-657.
12 Schott, Peter K. 2006. “The Relative Sophistication of Chinese Exports.” NBER Working Paper 12173,
Cambridge, MA: National Bureau of Economic Research. Rodrick, D. (2006) “What’s so special about China’s
Exports?” China and world Economy 14(%):1-19.
13 Xingmin Yin, “China’s Export of Sophisticated Products to MRBC: The Case of Machinery and Electronic
Appliances”, in Mitsuhiro Kagami ed. Economic Relations of China, Japan and Korea with the Mekong River Basin
Countries, Bangkok Research Center, IDE-JETRO, Bangkok, Thailand, 2010, pp.71-74.
14 Standard Chartered Global Research, Special Report on Global Trade Unbundled, 9 April 2014, p.29.
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and miscellaneous products. Machinery appears to be in a higher growth wave. It has registered
the largest category of all export since 2004, more than that of the combination of light textile
and miscellaneous products.
A country’s technological level is determined not only by domestic innovation but also by the
diffusion of technology from abroad. One point of view could be pointed out that the openness
of developing country has a positive impact on its technology progress to economic development.
To some extent, therefore, technology differences between developing countries are an
important determinant of income levels. The performance of China’s trade in machinery products
provides a good evidence to support the point that we just discussed. Figure 2 captures the
major difference of export sophistication.
1200
1000
800
600
400
200
0
2001
2002
2003
2004
Light Textile
2005
2006
2007
Machinery
2008
2009
2010
2011
2012
Miscellaneous
Figure 2 Exports of Manufactured Goods, 2001-2012
China exported US$ 964.36 billion in machinery products in 2012, while its imports of these
products were US$ 652.94 billion. However, at 2001, its export volume of machinery products
was US$ 94.90 billion, slightly lower than that of imports: US$ 107.02 billion. In short, China’s
balance of machinery trade in 2001 was a deficit of US$ 12.1 billion, and significantly turned to
be a large surplus of US$ 311.42 billion in 2012. Furthermore, its ratio of machinery exports to
total manufactured goods rose from 39.58 percent to 49.50 percent over this period. Looking for
the future, around half of China’s exports from machinery and electronic products will be further
strengthened. Clearly, there has been a pronounced shift in China’s exports, first to more
capital-intensive industry such as steel products and then to those coming from more
technology-intensive industry during the past decade, which is in consistent with the growing
role of higher labor quality and R&D intensity to GDP ratio.
This is a big progress of technology development in manufactured goods. Therefore, it is
important to keep our confidence that China’s exports demonstrated the changes of comparative
advantage from labor-intensive to capital and knowledge-intensive products. No doubt, exports
of skill-intensive goods to rich countries can be a source of growth for middle-income countries.
Integrating a large number of skilled workers in their labor force will improve the productivity of
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country’s labor. China is moving up the value-chain, increasing its share of medium-to
high-technology exports. However, trade remains a key to sustaining economic growth for middle
income countries. This is particularly true of countries such as China where the export volume
per head is still relatively low in 2011, US$ 2,500 for China, compared to US$ 10,000 for the EU
and US$ 13,000 for the US.
After reviewing the changes of China’s comparative advantage in its trade performance, the
objective of this paper is to emphasize the productivity’s role in industry.
6. Higher Productivity by Industry Restructuring
What is the rapid progress of China’s industrialization? China’s economic boom has stimulated
rapid expansion of many industries, typically in response to a surge in domestic demand arising
from increased household income. Consumer spending in China has shown surprising resilience
in the past decade. It increased to an estimated US$3.84 trillion in annual expenditures of total
retail sales of consumer goods in 2013, from only US$0.49 trillion in 2002, by increasing 6.8 times
within a short span of eleven years. Assuming consumptions continue to grow at roughly the
same rate as in the past five years, they are likely to approach US$10 trillion by 2020, placing
China at the fore front of worldwide consumption.
Results show that China outpaced any large economies. It is astonishing to observe that China’s
industrial growth was 12.9 percent in 1990-2000 and 11.4 percent in 2000-2009 at annual rate,
while 2.4 percent and 2.8 percent for the world average. China’s industrial output increased from
US$0.57 trillion in 2002 to US$3.16 trillion in 2012, by increasing 4.55 times. All industrial
production that China has done contains more technological contents that are originated from
more innovation activity. R&D spending is highly concentrated. Nearly 85 percent of R&D
investment takes place in the manufacturing sector. According to a study, the key statistical
relationships are surprisingly robust, including the contribution of R&D expenditure to new
product innovation, productivity, and profitability. New product innovation accounts for
approximately 12 percent of the total returns to R&D. Returns to industrial R&D in China appear
to be at least three to four times the returns to fixed production assets.15
Over the past three decades, China’s high economic growth was mostly due to the massive
industrialization across regions at various levels. Chinese industry is a vast subject that no single
paper can encompass. By 2012, based on Chinese statistics, the value-added output in China’s
industry was US$3.16 trillion, accounting for 20 percent of the global output. This ensures that a
permanent shift of industry power to China, rather than a temporary wave. In emphasizing the
contribution to income growth, we focus on two issues. How far has China advanced toward
creating a technologically advanced manufacturing base? What is the improvement of labor
productivity in manufacturing industry?
To large extent, the industrial restructuring achievement has been pushed by the local
15
Jefferson, Gary H., Huamao Bai, Xiaojing Guan, and Xiaoyun Yu, 2006. “R and D Performance in Chinese
Industry,” Economic Innovation and New Technology, 15(4-5), pp.345-366.
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industrialization effort rather than the central government policy. Increasing labor productivity is
a weapon not only to superior aggregate growth, but also to more extensive growth benefits
across population, because it is tied directly to the income of urban households. The data shows
that China’s industrial labor productivity increased from US$3,437 in 2000 to US$10,439 in 2008
and US$16,029 in 2011, respectively.
Table 4 provides the changes of employment and output to total manufacturing industry. As
living standards rise, for example, automobiles substitute for bicycles, that the composition of
goods and services shifts from products with low technology content to goods and services that
are more technology intensive. China emerged at the turn of the century as the world’s largest
steel producer, with rolled steel production of 128.5 million tons in 2000. The following years saw
a further steep increase, with rolled steel output to 955.8 million tons, or around 50 percent of
global production in 2012. The efficiency in steel industry has substantial changed. International
comparison involving productivity show leading Chinese firms approaching norms for
steelmaking in advanced market economies.16
Table 4 Changes of China’s Manufacturing Structure (%)
Employment
2003
2011
Gross Output of Industry Value
2003
2011
Textiles
10.22
7.35
6.07
4.45
Apparel
5.92
4.77
2.69
1.84
16.14
12.12
8.76
6.29
Chemicals
6.38
5.68
7.26
8.29
Steel
5.24
4.24
7.86
8.73
10.01
10.21
7.49
9.15
Transportation equipment
6.38
7.23
8.81
8.62
Electric machinery
5.43
7.48
6.22
7.01
Electronic industry
5.60
10.23
12.44
8.69
39.04
45.07
50.08
50.49
Sub-total
Five Capital-intensive sectors
Machinery
Sub-total
Source: China Statistical Yearbook, 2004-2012.
As the outset of reform, textiles and apparel ranked away China’s largest industrial sectors,
representing a sixth of the gross value of industrial output. This sector was also an important
source of export earnings. However, the share of this sector both in manufacturing employment
and output has been declining. As Table 4 shows that the employment of this sector decreased
from 16.14 percent to 12.12 percent, while its output share decreased from 8.76 percent to 6.29
percent between 2003 and 2011. Compared to this sector, the employment combination of six
capital and technology intensive industries increased from 39.04 percent to 45.07 percent of the
manufacturing industry. Most of the technological industry increased its output share except for
that of electronics, which decreased around four percentage points within this survey period.
16
Loren Brandt and Thomas G. Rawski, China’s Great Economic Transition, Cambridge University Press, 2008, ,
pp.593-594.
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In fact, high returns from investing in relatively capital-intensive technologies, with the support of
R&D, China has retained an enormous achievement in its quest for economic efficiency and
unusually rising income level. Total factor productivity (TFP) measures an economy’s efficiency in
transforming inputs into outputs. Empirically, total factor productivity is defined as the output
per unit of combined inputs and is calculated as a difference between a country’s GDP and the
contribution of capital and labor. The residential output that is not explained by capital and labor
inputs is considered “technology”.
Table 5 illustrates that industry productivity and cost trends demonstrate impressive gains in
China’s manufacturing sector. Despite massive increases in output, sector wide employment grew
by only 64 percent between 2003 and 2011. As a result, output per worker rose more than four
fold over this period.
Table 5 Measures of Labor Productivity in Manufacturing Industry
2003
2011
Growth Rate, %
Textile
4.99
5.89
18.04
Apparel
2.89
3.82
32.18
Steel Industry
2.56
3.40
32.81
Transportation Equipment Industry
3.12
5.80
85.90
Electric Power
2.38
2.53
6.30
Manufacturing Industry
48.84
80.14
64.09
Industry Labor, Million persons
Industrial Products
Growth Times
Yan, 10,000 tons
983.58
2870.17
1.92
Cloth, billion meters
35.35
81.41
1.30
Rolled Steel, million tons
241.08
886.20
2.68
Motor Vehicles, million units
4.44
18.42
3.15
Electricity, trillion kwh
1.91
4.71
1.47
Gross Industrial Output Value, RMB trillion
12.74
73.40
4.76
In US$ trillion
1.54
11.63
6.55
Source: China Statistical Yearbook, various issues.
For the detailed discussion, Table 5, which feature rising productivity in five sectors, show that,
between 2003 and 2011, the growth rates of labor force were 18.04 percent for textiles and
32.28 percent for apparel industry, respectively. Taking some products as indicators of efficiency
improvement, the output growth of Yan and Cloth increased 1.92 times and 1.30 times
respectively. Specifically, the labor in steel and transportation equipment sectors increased 32.81
percent and 85.90 percent respectively, however, its output of rolled steel and motor vehicles
experienced unusually growth rates with 2.68 and 3.15 times respectively. In 2010, China became
the world largest automobile producer with sales of 18.27 million units. More interestingly
observed, the electric power industry only increased 6.30 percent of its labor, while increased
1.47 times of electricity supply. This is evidence of labor productivity enhancement.
The capital-intensive industrialization involved the establishment of an extensive set of
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capital-intensive industries, including steel, chemicals, heavy machinery, electric and electronics,
automobile and civil aircraft industries. This policy preference has been criticized by many
international economists. For example, as Jefferson analyzed that the pursuit of capital-intensive
growth that was fundamentally inconsistent with China’s underlying comparative advantage in
labor, not capital, created further inefficiencies in the allocation of China’s scarce supply of
capital.17 However, our evidence shows that growing efficiency in capital-intensive technology is
critical to sustaining the growth of China’s R&D investments and its technological advance. The
fact is that a necessary step to capitalize on China’s comparative advantage has moved China’s
economy up the technology ladder and the high income level.
It is important to remember that the sheer size of China’s capital-intensive industry will mean
that even 8 percent for value-added growth, faster than the growth in developed countries,
would make China the single biggest producer to world capital-intensive products in absolute
terms in one decade.
7. Concluding Remarks
We believe that concerns about China’s middle-income trap focus too much on traditional
indicators. As already revealed, among the middle-income countries, China has been the only
country whose level of R&D intensity has risen beyond 2 percent, and whose gross promotion
rate of higher education for children has increased to 30 percent. That is to say, more
investments on education and innovation have turned China into knowledge-intensive
endowments instead of low-quality labor force. China’s growth dynamics in education, research
and innovation, trade liberalization and sophisticated exports and new wave of capital-intensive
industrialization, has made it the largest industrial producer in the global economy.
It is reasonably expected that the focus on more supply of human capital and higher R&D
intensity on innovation will, over time, enhance the efficiency of resource allocation and
eventually realize its labor productivity as high as that of the leading industrialized countries.
The research we review shows that as China moves to high-income economy with an emphasis
on capital-intensive industry, the rapid rising of labor productivity will lay a solid foundation for
sustainable growth.
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17
Albert G.Z. Hu and Gary H.Jefferson , “Science and Technology in China” in Loren Brandt and Thomas G. Rawski,
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