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
Agenda
1.
2.
3.
4.
5.
6.
7.
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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 data
Sources of the unbridled growth: How much can be
attributable to productivity?
Institutional problems addressed by sector-level
TFP analysis
Ready for overcoming the “middle income trap”? –
China in the East Asia perspective
Concluding remarks: On key challenges to
“Liconomics”
World KLEMS 3, Tokyo
1. China at Crossroads
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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, Tokyo
1….
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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).
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4
The data construction follows the KLEMS methodology
that is theoretically based on Jorgenson and Griliches
(1967).
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1. …industry grouping – why it
can be insightful?
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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
1. …grouping
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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…
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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…
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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
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Appendix: Industry grouping (for
structural distortion analysis)
2 CLM
3 PTM
4 MEM
5 NMM
6 F&B
7 TBC
8 TEX
9 WEA
10 LEA
11 W&F
12 P&P
13 PET
14 CHE
15 R&P
16 BUI
17 MET
18 MEP
19 MCH
20 TRS
21 ELE
22 ICT
23 INS
24 OTH
25 UTL
Coal mining
Oil and gas extraction
Metal mining
Non-metallic minerals mining
Food and kindred products
Tobacco products
Textile mill products
Apparel and other textile products
Leather and leather products
Saw mill products, furniture, fixtures
Paper products, printing & publishing
Petroleum and coal products
Chemicals and allied products
Rubber and plastics products
Stone, clay, and glass products
Primary & fabricated metal industries
Metal products (excl. rolling products)
Industrial machinery and equipment
Motor vehicles & other transp. Equip.
Electric equipment
Electronic and telecomminucation equi.
Instruments and office equipment
Miscellaneous manufacturing industries
Power, steam, gas and tap water supply
8
Energy
1 AGR
Energy
C&P
26 CON
C&P
27 SAL
Finished
28 HOT
??
29 T&S
C&P
30 P&T
Finished
31 FIN
Finished
32 REA
??
33 BUS
C&P
34 ADM
Energy
35 EDU
C&P
36 HEA
Finished
37 SER
C&P
C&P
Semi-finished
Semi-finished
Semi-finished
Semi-finished
Finished
Semi-finished
??
Energy
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Agriculture
Agriculture
Construction
Market 2
Wholesale and Retail Trades
Market 2
Hotels and Restaurants
Market 2
Transport and Storage
Market 1
Post and Telecommunications Market 1
Financial Intermediation
Market 1
Real Estate Activities
Market 2
Business Services
Market 2
Public Administration and Defense
Non-market
Education
Non-market
Health and Social Security
Non-market
Other Services
??
2. Changes in the last three
decades
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VA (% p.a.) – official
estimates, supper
fast, more than EA at
the same stage (8.58.8%)
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 exportoriented semi-finished
& finished goods
group is different …
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 ratios
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/L
However, nonmarket services
followed energy to
rely on capital
deepening
SF&F is the only
group with a
declining K/Y
2….
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3. Methodology & data
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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
Y j  f j (K j , L j , X j ,T )
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:
 ln Y jt  v jt  ln K
K
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 v jt  ln L jt  v jt  ln X
L
jt
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X
  ln A jt
Y
jt
3…
K
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Where
v
K
jt

P jt K
L
jt
Y
P jt Y jt
v
L
jt

P jt L jt
Y
P jt Y jt
X
v jt 
X
P jt X
jt
Y
P jt Y jt
v jt  v jt  v jt  1
K
L
X
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and
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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)
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3…Domar aggregation
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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):
d ln A
dt
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
d ln FD
dt

Pz Z
PFD FD

d ln Z
dt
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
PMM M M
PFD FD

d ln M M
dt
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:
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d ln A
dt


j
 d ln Q

P  FD  dt
j
P Q

j
j

P
j
j
zZ
j
P Q
j

d ln Z
dt
j

P
j
j
MD
MD
j
j
P Q
Finally, Domar’s aggregation formula:
j

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P

d ln A

j
j
MM
j
dt
dt

d ln M D
MM
P Q

j
j
P Q
j
P  FD

j
j
d ln M M 



dt

d ln A
j
dt
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.
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4. Sources of Chinese growth
(All inputs are cost-weighted with costs are
controlled by national accounts)
Total Economy
GO
L input
K input
M input
TFP TFP (Domar)
1980-1991
1991-2001
2001-2007
2007-2010
8.5
11.0
15.9
12.7
0.6
0.1
0.5
0.7
2.1
2.3
2.9
3.4
5.2
7.3
11.5
8.8
0.5
1.2
1.0
-0.2
1.1
2.2
1.1
-1.9
1980-2010
11.2
0.4
2.5
7.5
0.8
1.1
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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 2001-07
The most inefficient period followed the global financial crisis with the
unprecedented fiscal injection, which worsened the structural problem
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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 business
Now China is still in
the difficult aftermath
of the global crisis …
5. Sector level TFP growth and
institutional problems
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5…
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Remarks
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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..
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6. China in East Asia Perspective
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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
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A comparison of TFP growth
PERFORMANCE OF TOTAL FACTOR PRODUCTIVITY: CHINA VIS-À-VIS EAST ASIAN ECONOMIES
TFP growth
(% p.a.)
0.8
0.9
China
(Percent per annum)
Period
Coverage of
the Economy
1992-2010
Industry
1992-2010
Total economy
Japan
5.1
4.4
5.0
1950-1973
1950-1973
1960-1970
Total economy
Total economy
Total economy
South Korea
1.8
1.7
3.0
1.6
1970-1990
1966-1990
1966-1990
1970-1992
Total economy
Total economy
Manufacturing
Total economy
Taiwan
4.5
2.6
1.7
1970-1990
1966-1990
1970-1992
Total economy
Total economy
Total economy
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Source of
the Study
This study1
This study1
Maddison (1995)
Wolff (1996)2
Bosworth, Collins and
Chen (1995)
Kawai (1994)2
Young (1995)
Young (1995)
Bosworth, Collins and
Chen (1995)2
Kawai (1994)2
Young (1995)
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
China has to grow
faster than the rate of
Japan after PPP$8000
pc due to lower labor
productivity.
ChinaPPP/GDP
$2000-$8000
Japan
PPP/GDP
$2000-$16000
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”
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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, Tokyo
Main References
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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, Tokyo