The Sources & Sustainability of China's Economic Growth*

1. Based on Jefferson, G.H, Hu, Albert G.Z. & Su, J. 2006 (Brookings Papers on Economic Activities) The Sources & Sustainability of China's Economic Growth* (Part 1) Prepared by Lee Pei San

2. Introduction • 1978, China – 10th largest eco., with a GDP of $150 billions • 2005, C – 4th largest eco., with GDP of $2.2 trillion • Instead, measured in PPP, C – 2nd largest eco with $9 trillions in output ( about 3 quarters that of US) • * at this growth rate, C’s GDP in terms of PPP could > US as early as 2010!! • - This rapid eco. Transformation in C has brought in unequal advances in terms of techno. Change and productivity, of diff regions and sectors across this country

3. There are the presences of two gap: • ~ international and internal gap • * adv : provide channel through which catch-up process can takes place • * disadv : - threatens social stability • - burdens of catching up will fall on coastal industry (most technologically advances sector) • MR & LR eco growth prospect • ~ takes into consideration of the country’s capacity for institution adaptation –formulate strategies & rules to sustain inv. in techno. dev. and to facilitate the flow of resources

4. Basic model: Two Productivity Gap • Denison ~ sources to catch up: • * resource reallocation, scale economies, movement towards the int techno frontier • Denison’s result suggests that: • (a) labor productivity in initially poorer countries grew faster than it did in the richer countries ~ necessary to catch up • (b) Some labor productivity growth originated from capital accumulation but for the poor countries the most important source to catch up is the growth in TFP. • (c) Among the sources of TFP growth, the creation of scale eco & resource allocation ~ catch up process

5. International productivity gap: • ~ distance between the int techno frontier and the C’s tech frontier • ~ defined as productivity of Chinese industry @ productivity of industry of C’s leading coastal services • Internal productivity gap: • ~ disparity between C’s coastal industrial sector and the country’s lagging agri & services sector & between coastal industry and the industrial sectors of C’s other regions • - Catch up of C is mainly driven by technological advance, which in turn driven by the integration of C’s industrial eco with the world eco.

6. Measuring Productivity Gap • International gap: • ~ labor productivity differential for 27 manufacturing industry in 4 regions (coastal, northeastern, central and western) • ~ result: food, beverage & tobacco industry are substantially faster than other C’s industry • *reason: high profits in the tobacco industry

7. (II) Internal Gap ~ described along two dimensions: (a) Agricultural-industrial gap results: gap is large; 2005, the average industrial worker produced more than 7 times as much as his/her agricultural counterpart (b) Regional & sectoral gap results: 2004, tendency for the gap to shrink, particularly between the coastal & northeastern industrial sectors * In short, although some convergence of labor productivity has occurred within industry, the productivity gap between industry and the agri and services sector generally increased during 1995-2004

8. Summary: • Industrial labor productivity across China’s regions is converging but that coastal industry remains some distance ahead of the other regions • Industry data including mining and power generation suggests a more rapid catch up than other industries, and follows a pattern in which the capital productivity in non-coastal region falling behind that of the coastal; slowing but not reversing the TFP

9. Chinese Productivity & International Frontier • Industries & regions that are further behind the int productivity frontier can catch up by imitating or by importing technology or capital • rate of labor productivity growth in catch-up industries slows as these countries move toward the int productivity frontier • coastal firms generally enjoy higher rates of productivity growth than firms in non-coastal area • there’s a potential for manufacturing, the northeastern, central and western regions to enjoy rapid productivity growth but will not catch up with the coast, at least not in the MR

10. Why there is a persistent disparity between the coastal & non-coastal?? • Concentration of FDI and R&D spending in coastal region • better development of institutional arrangement, including the legal sys and human cap dev in the coastal region • All these factors enable coastal industry to take greater adv of int techno than industry in other regions can

11. Sources of Internal Productivity Growth • Contribution of Labor reallocation • - reallocation of labor from the low- to high-productivity sectors ---increase output and productivity level • - however, this labor reallocation is subject to diminishing marginal returns (diminishing contribution to GDP growth from reallocation). WHY?? • (i) with respect to agriculture – there is a diminishing no. of surplus workers as a share of total workforce. • (ii) widening gap signals for greater productivity gains for each migrating worker, this also implies for smaller contributions to GDP

12. (b) Efficient Reallocation among industrial firms • Changes in the employment of labor and capital across industrial firms were positively related to the firm’s initial levels of labor and capital productivity • except in the coastal region, growth of labor was more responsive in the later period of 1995-2000 • responsiveness of capital formation is similar to that of labor growth; however, in all regions capital was more responsive in the earlier period. • higher rates of growth of inputs of labor and capital are associated with slower TFP growth; firms with initial low TFP exhibit faster growth of TFP

13. (c) The contribution of Exit and Entry • However, there is a shortcoming of the analysis of resource allocation and productivity convergence – limited to the firms that survived over the period 1995-2004 • the results for labor productivity show a distinct pattern in which the existing firms exhibit low productivity where as the entrants exhibit high productivity • found that firms with high capital productivity tend to capture new inv and that the exit-entry phenomenon contributes substantially to improvements in capital productivity • assumption that some observed entry and exit is due to enterprise structuring & subject to diminishing returns & overtime, it will contributes less to GDP

14. Summary • Two major sources of catching up are the increased allocative efficiency based on the reallocation of capital and labor to more productive firms and diffusion of technology to backwards firms; as well as exit and entry that associated with enterprise restructuring • However, all these factors contribute to the increase in GDP at a diminishing rate!