Economics 162

The Economy of China

Topic 4 Chinas Modern Growth Experience: A Review of the Evidence

Professor David Roland-Holst
Department of Agricultural and Resource Economics
Tuesday and Thursday, 330-5pm, 10 Evans Hall

China Growth in an Asian Context

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Structure of Growth

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Domestic Financial Resources

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Investment Climate

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Infrastructure

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Human Resources
Both countries have made important progress in education, but they differ in the most growth relevant categories:
Adult Literacy Youth Literacy

1985-19 1995- 1985-19 1995- 95a 2005b 95a 2005b China India 78 48 91 61 94 62 99 76

Source: United Nations

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Financial Capital
These institutional factors have led to divergent levels inbound investment. As of 2007, both the stock and flow of Chinas FDI were over ten times that of India. This source of external capital is essential for three things: 1.To overcome savings/credit constraints 2.Technology transfer 3.Market access through partnership

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Annual FDI Inflows (US$ million)

Rank Host Economy 1 PRC 2 Singapore 3 Hong Kong, C hina 4 Malaysia 5 Indonesia 6 Thailand 7 Taipei,China 8 Philippines 9 Viet Nam 10 Korea, Rep. of 1991-95 Rank Host Economy 22,835 1 PRC 6,373 2 Hong Kong, C hina 5,176 3 Singapore 5,064 4 India 2,342 5 Korea, Rep. of 1,889 6 Malaysia 1,200 7 Kazakhstan 1,124 8 Thailand 1,100 9 Azerbaijan 857 10 Taipei,China 2001-05 57,232 23,402 13,653 5,551 5,145 2,964 2,674 2,377 2,028 1,906

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GDP: Data and Problems I

The Official data
Average annual growth (1979-2009): 9.9% 2005: 11.3% 2006: 12.7% 2007: 14.2% 2008: 9.6% 2009: 9.2%
(After 2009 Revision)

Questions

Alternative method of estimation: proxies

Using electricity consumption growth rate, if elasticity of electricity consumption is constant
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Is the official data reliable? Is the growth rate overstated?

GDP: Data and Problems II

Possible problem (1)
Miscalculation of the GDP deflator Growth rates could be overstated by 1-2% If so, growth is around 8% and growth per capita is around 7% Reporting incentives by local officials Overstating at trough and understating during boom Overstating in poor areas and understating in rich areas Missing data (small-scale, private firms)
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Possible problem (2)

Possible problem (3)

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Growth is Real
Growth is still very impressive even under possible downward revision
Comparable growth to fastest growing economies Population almost three times that of 8 high performing economies: Japan, South Korea, Taiwan, Singapore, Malaysia, Thailand, and Indonesia

Growth measurement in physical terms (not in value)

Production in steel, automobile, housing, highway etc. Consumption per capita

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2004 Economic Census and GDP Revision

GDP revision based on the first economic census in 2004 Announcement on December 20, 2005 Upward revision of 2004 GDP by 16.8% (2.3 trillion yuan or $285 billion) to 16 trillion yuan 2.13 trillion yuan was added to service sector 19 provinces were up, 12 provinces down Main reasons To collect data in a more inclusive way

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2004 Economic Census and GDP Revision

Growth rates adjustment from 1993 to 2004 2000: from 8.0% to 8.4% 2001: from 7.5% to 8.3% 2002: from 8.3% to 9.1% 2003: from 9.5% to 10.0% 2004: from 9.5% to 10.1% As a result adjustment for average growth rate in 1979-2004: from 9.4% to 9.6%

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2009 Economic Census and GDP Revision

Growth rates adjustment from 2005 to 2009 2005: from 9.9% to 11.3% 2006: from 10.7% to 12.7% 2007: from 11.4% to 14.2% 2008: from 9% to 9.6% 2009: from 9.1% to 9.2% As a result adjustment for average growth rate in 1979-2009: from 9.5% to 9.9%

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Economic Census and GDP Revision

Is this revision reliable? Not a surprise to international investment banks Not a surprise to economists Independent evidence Tax revenue (more reliable data) Export (more reliable data) Service sector (data very unreliable)

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Service/GDP: China vs. India (2008)

China India Difference

Total service Retail, restaurants Real estate Transportation Government Financial service Telecomm

41.8 8.7 4.2 5.3 2.9 4.4 2.3

54.6 15.2 7.3 7.1 6.1 7.9 2.1

-12.8 -6.5 -3.1 -1.8 -3.2 -3.5 0.2

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Growth Compounding
GDPt+n = GDPt (1+g)n Rule of 70: number of years to double = 70/growth rate g g g g g = = = = = 9%: 7%: 6%: 5%: 4%: double double double double double every every every every every 8 years 10 years 12 years 15 years 18 years
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First round on the exchange rate: RMB vs Big Mac

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Chinas Economy and the Exchange Rate

Which exchange rate should be used?
current exchange rate: US$1 = RMB6.232692 yuan purchasing power parity (PPP) in terms of Big Mac Index: US$1 = 3.9 Yuan (Big Mac prices: US$ 2.54 in US and 9.9 yuan in China) purchasing power parity (PPP) in World Bank studies: US$1 = 2 Yuan

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Chinas Economy and the Exchange Rate

GDP sizes of China and US in 2000 under alternative exchange rates
At current exchange rate: China GDP = $1 trillion; US = $10 trillion At World Bank (PPP) (US$1 = 2 Yuan): US per capita GDP = $35,000 China per capita GDP: $3,500 At purchasing power parity (US$1 = 2 Yuan): China GDP = $4.5 trillion, nearly half the size of the US (Chinas population is about 4.5 times of US)
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Chinas Economy and the Exchange Rate

Per capita GDP (World Bank, 1998-99)

@ER @PPP
Malaysia Mexico Thailand Brazil Philippines China Indonesia Egypt India Pakistan Bangladesh
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4,680 3,680 2,800 4,720 1,220 860 1,110 1,180 390 490 270

10,920 8,120 6,590 6,240 3,670 3,570 3,450 2,940 1,650 1,590 1,050
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Chinas Economy and the Exchange Rate

Assuming Chinas economy in 2000 is 0.5 of US
If the growth rate difference between China and US is 5% (China 8% and US 3%), then China will overtake US in total GDP in 2015 If the growth rate difference between China and US is 4% (China 7% and US 3%), then China will overtake US in total GDP in 2018

Assuming Chinas economy in 2000 is 0.4 of US

If the growth rate difference between China and US is 5% (China 8% and US 3%), then China will overtake US in total GDP in 2020 If the growth rate difference between China and US is 4% (China 7% and US 3%), then China will overtake US in total GDP in 2024
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Structural Change: Labor I

Three sectors
Primary sector: agriculture Secondary sector: manufacturing, mining, utilities, construction Tertiary (service) sector: restaurants, transportation, communication, trade, education, health care, etc.

Labor force
Those in population: 16-59 for male, 16-54 for female High labor force participation: > 80% Mainly because of high female labor force participation

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Structural Change: Labor II

Patterns of structural change
Labor moving from the agricultural sector to the non-agricultural sector (development story) Correcting the initial distortion by expanding the service sector (distortion correction story) Labor moving from the domestically oriented sector to the export oriented manufacturing sector (globalization and the worlds factory story)

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Structural Change: Labor III

80%

70%

Primary
60%

50%

40%

30%

Secondary

20%

10%

Tertiary
78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00

0%

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Structural Change: GDP Components I

Distortions in measuring structure change (relative importance of agriculture and industry) using distorted prices Low agricultural prices underestimate the share of primary sector High industrial prices overestimate the share of secondary sector

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Structural Change: GDP Components II

1978 GDP components at 1978 prices
Primary sector: 28% Secondary sector: 48% Tertiary sector: 24%

1978 GDP components at 1993 prices

Primary sector: 37% Secondary sector: 37% Tertiary sector: 26%

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Percentage of Total GDP by Sectors 10 20 30 40 50 60 0

Structural Change: GDP Components III

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Structure of GDP

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Tertiary

Primary

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Secondary

Structural Challenges in China I

2008 data
Service/GDP Capital formation/GDP Savings/GDP Export/GDP Energy consumption/GDP (ton of standard coal/10k yuan) Before revision 42.60% 42.98% 52.05% 36.05% 1.21 After revision 43.47% 44.43% 54.01% 36.56% 1.10
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Structural Challenges in China II

Is Chinas service sector too small (or is Chinas industrial sector too large)? Is Chinas investment rate too high (or is Chinas investment inefficient)? Is Chinas saving rate too high (or is Chinas consumption too low)? Does China rely too much on exports (or does China rely too little on domestic consumption)? Does China consume too much energy?

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The Return to Capital in China

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Return to Capital: Base Line

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Return to Capita: After Taxes

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Return to Capital: Excluding Residential Housing, Taxes, Including Inventories

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Return to Capital: By Sector

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Productivity
Labor productivity
Rough measure: Output per worker (Y/L) Precise measure: Output per working hour (Y/H)

Labor productivity depends on many factors

Physical capital Human capital (skills) Technology Labor participation rate Number of working hours

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Productivity
Different sectors have different labor productivity
Labor productivity in both secondary and tertiary sectors is about 4 times as high as that in agriculture sector in 1978 (at 1993 prices)

Sector reallocation
Movement of labor from low labor productivity sector to high labor productivity sector The process of industrialization

Total factor productivity: see below

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Sources of Growth I
The neoclassical growth model (Solow model) Yt = AetKtLt Explanations
Y: output K: capital L: labor t: time : elasticity of capital : elasticity of labor If + = 1, constant return to scale (CobbDouglas production function)
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Sources of Growth II
Why are economists interested in estimating this equation? Ln Yt = LnA + t + Ln Kt + Ln Lt Ln Yt+1 = LnA + (t+1) + Ln Kt+1 + Ln Lt+1 Ln Yt+1 - Ln Yt = + (Ln Kt+1 Ln Kt) + (Ln Lt+1 Ln Lt) Ln (Yt+1/Yt) = + (Ln (Kt+1/Kt)) + (Ln (Lt+1/Lt)) Ln (1+Yt/Yt) = + (Ln (1+ Kt/Kt)) + (Ln (1+ Lt/Lt)) Yt/Yt = + (Kt/Kt) + (Lt/Lt)
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Sources of Growth III

Yt/Yt = + (Kt/Kt) + (Lt/Lt) Explanations
Yt/Yt: GDP growth rate Kt/Kt: capital growth rate Lt/Lt: labor growth rate : Solow Residuals or technical progress or Total Factor Productivity (TFP)

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Sources of Growth IV
Estimation equations Ln Yt = LnA + t + Ln Kt + Ln Lt + t Yt/Yt = + (Kt/Kt) + (Lt/Lt) + ut Difficulties
Measurement of capital stock Kt
Kt = (1-d)Kt-1 + It

Measurement of labor Lt Deflators used for Yt and Kt

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Growth Accounting of the U.S. Economy

Yt/Yt = + (Kt/Kt) + (Lt/Lt) 1990-95: 2.5% = 0.6% + (1/3)(3.7%) + (2/3)(1%) = 0.6% + 1.2% + 0.7% 1995-98: 3.5% = 1.4% + (1/3)(4.3%) + (2/3)(1%) = 1.4% + 1.4% + 0.7%

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Growth Accounting of Chinas Economy I

Yt/Yt = + (Kt/Kt) + (Lt/Lt) Before reform (1952-78) 5.5% = 0% + (3/4)(6.1%) + (1/4)(3.6%) = 0% + 4.6% + 0.9% After reform (1978-98) 9.3% = 2.7% + (3/4)(7.6%) + (1/4)(3.6%) = 2.7% + 5.7% + 0.9%
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Growth Accounting of Chinas Economy II

Yt/Yt = + (Kt/Kt) + (Lt/Lt) What do we learn
Capital accumulation has been the most important factor for growth, contributing about 62% of growth Labor reallocation from agriculture to industry contributes to about 10% of growth TFP growth contributes to about 28% of growth
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Growth Accounting of Chinas Economy III

Yt/Yt = + (Kt/Kt) + (Lt/Lt) Prospective Sources of Growth
Capital accumulation will still be very high Labor reallocation from rural to urban areas will continue for some time, but not forever TFP growth rate may still be moderate Capital elasticity (very high now) may start to decline (not yet) Labor elasticity (very low now) may start to increase (not yet)
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Impressive Growth Continues, but Leveling Off

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Re-structuring Continues
Non-agricultural growth rates look dangerously high.

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External Imbalances Persist

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Decoupling? Unlikely.

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Asia and the Crisis

Asia has to start consuming more. The export-led model has outlived its use. -Taro Aso, Japans PM

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Globalization Bites Back

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The government is starting to believe its own propaganda. GS Banker

We can see the economic figures are already stabilising and recovering, which shows the [governments stimulus] policies have started to take effect, Zhou Xiaochuan, Chinas central bank governor. The measures taken have been positive and efficient, said Zhang Ping, chairman of the National Development and Reform Commission, the countrys powerful economic planning agency. They have been very effective in stopping the slowdown in economic growth, in overcoming the difficulties of enterprises and in expanding consumption, echoed Xie Xuren, the finance minister. Li Deshui, the former statistics bureau chief who moved markets around the world on Wednesday with comments about an imminent new Chinese stimulus package, told reporters yesterday he had been misquoted and there was no need for big new stimulus measures. The Chinese economy is not in recession and will not enter recession, Mr Li said at a press conference. Open your eyes and take a look, which country in the world has economic growth as high as China? I can say with confidence that 8 per cent growth will be realised.
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Managing Expectations

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How long can China defy gravity?

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Vehicle Sales in China

Source: IEA
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