Topic 4 Growth

7/29/2019 Topic 4 Growth

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Economics 162The Economy of China

Topic 4 Chinas Modern Growth

Experience: A Review of the EvidenceProfessor David Roland-Holst

Department of Agricultural and Resource Economics

Tuesday and Thursday, 330-5pm, 10 Evans Hall


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Roland-Holst 2Economics162

China Growth in an Asian Context

14 April 2011


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Structure of Growth

14 April 2011


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Domestic Financial Resources

14 April 2011


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Investment Climate

14 April 2011


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Infrastructure

14 April 2011


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Human Resources

Both countries have made important progress in education,but they differ in the most growth relevant categories:

14 April 2011

AdultLiteracy YouthLiteracy1985-19

95a1995-

2005b1985-19

95a1995-

2005bChina 78 91 94 99India 48 61 62 76

Source: United Nations


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Financial Capital

These institutional factors have led to divergentlevels 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 constraints2.Technology transfer3.Market access through partnership

14 April 2011


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Roland-Holst 9

Annual FDI Inflows (US$ million)

Rank HostEconomy 1991-95 Rank HostEconomy 2001-05

1 PRC 22,835 1 PRC 57,232

2 Singapore 6,373 2 HongKong,China 23,402

3 HongKong,China 5,176 3 Singapore 13,653

4 Malaysia 5,064 4 India 5,551

5 Indonesia 2,342 5 Korea,Rep.of 5,145

6 Thailand 1,889 6 Malaysia 2,964

7 Taipei,China 1,200 7 Kazakhstan 2,674

8 Philippines 1,124 8 Thailand 2,3779 VietNam 1,100 9 Azerbaijan 2,028

10 Korea,Rep.of 857 10 Taipei,China 1,906


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GDP: Data and Problems I

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

Questions Is the official data reliable? Is the growth rate overstated?

Alternative method of estimation: proxies Using electricity consumption growth rate, if elasticity

of electricity consumption is constant


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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 capitais around 7%

Possible problem (2) Reporting incentives by local officials Overstating at trough and understating during

boom Overstating in poor areas and understating in rich

areas

Possible problem (3) Missing data (small-scale, private firms)


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Growth is Real

Growth is still very impressive even underpossible downward revision

Comparable growth to fastest growing economies Population almost three times that of 8 highperforming economies: Japan, South Korea, Taiwan,

Singapore, Malaysia, Thailand, and Indonesia

Growth measurement in physical terms (not invalue) Production in steel, automobile, housing, highway etc. Consumption per capita


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2004 Economic Census andGDP Revision

GDP revision based on the first economic censusin 2004

Announcement on December 20, 2005Upward revision of 2004 GDP by 16.8% (2.3trillion yuan or $285 billion) to 16 trillion yuan

2.13 trillion yuan was added to service sector19 provinces were up, 12 provinces down

Main reasonsTo collect data in a more inclusive way


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Growth rates adjustment from 1993 to 20042000: 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 in1979-2004: from 9.4% to 9.6%


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Growth rates adjustment from 2005 to 20092005: 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 in1979-2009: from 9.5% to 9.9%


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Economic Census andGDP Revision

Is this revision reliable?Not a surprise to international investment banksNot a surprise to economists

Independent evidenceTax revenue (more reliable data)Export (more reliable data)Service sector (data very unreliable)


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Roland-Holst 17

Service/GDP: China vs. India (2008)

China India Difference

Total service 41.8 54.6 -12.8

Retail, restaurants 8.7 15.2 -6.5

Real estate 4.2 7.3 -3.1

Transportation 5.3 7.1 -1.8

Government 2.9 6.1 -3.2Financial service 4.4 7.9 -3.5

Telecomm 2.3 2.1 0.2


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Growth Compounding

GDPt+n = GDPt (1+g)n

Rule of 70: number of years to double = 70/growthrate

g = 9%: double every 8 years g = 7%: double every 10 years g = 6%: double every 12 years g = 5%: double every 15 years g = 4%: double every 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 ofBigMac Index:

US$1 = 3.9 Yuan

(Big Mac prices: US$ 2.54 in US and 9.9 yuan inChina)

purchasing power parity (PPP) in World Bankstudies: US$1 = 2 Yuan


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GDP sizes of China and US in 2000 underalternative 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 = $35,000China per capita GDP: $3,500

At purchasing power parity (US$1 = 2 Yuan):China GDP = $4.5 trillion, nearly half the size ofthe US(Chinas population is about 4.5 times of US)



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Per capita GDP (World Bank, 1998-99)

@ER @PPPMalaysia 4,680 10,920

Mexico 3,680 8,120

Thailand 2,800 6,590Brazil 4,720 6,240

Philippines 1,220 3,670

China 860 3,570

Indonesia 1,110 3,450

Egypt 1,180 2,940India 390 1,650

Pakistan 490 1,590

Bangladesh 270 1,050



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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 totalGDP in 2015

If the growth rate difference between China and US is 4%(China 7% and US 3%), then China will overtake US in totalGDP 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 totalGDP in 2020

If the growth rate difference between China and US is 4%(China 7% and US 3%), then China will overtake US in totalGDP 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 theservice sector (distortion correction story)

Labor moving from the domestically orientedsector to the export oriented manufacturing sector

(globalization and the world

s factory story)


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Structural Change: Labor III

0%

10%

20%

30%

40%

50%

60%

70%

80%

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

Primary

Secondary

Tertiary


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Structural Change: GDPComponents I

Distortions in measuring structure change(relative importance of agriculture and industry)using distorted prices

Low agricultural prices underestimate theshare of primary sector

High industrial prices overestimate the shareof secondary sector


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Structural Change: GDPComponents 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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Structural Change: GDP Components III

0

10

20

30

40

50

60

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

PercentageofTotalGDP

bySe

ctors

Structure of GDP

Primary

Secondary

Tertiary


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Roland-Holst 30

Structural Challenges in China I

2008 data Beforerevision

After

revision

Service/GDP 42.60% 43.47%

Capital formation/GDP 42.98% 44.43%

Savings/GDP 52.05% 54.01%

Export/GDP 36.05% 36.56%

Energy consumption/GDP

(ton of standard coal/10k yuan)

1.21 1.10


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Structural Challenges in China II

Is Chinas service sector too small (or is Chinasindustrial sector too large)?

Is Chinas investment rate too high (or is Chinasinvestment inefficient)?

Is Chinas saving rate too high (or is Chinasconsumption too low)?

Does China rely too much on exports (or does Chinarely 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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Roland-Holst 33

Return to Capital: Base Line


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Roland-Holst 34

Return to Capita: After Taxes


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Roland-Holst 35

Return to Capital: Excluding ResidentialHousing, Taxes, Including Inventories


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Roland-Holst 36

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 laborproductivity Labor productivity in both secondary and tertiary

sectors is about 4 times as high as that inagriculture 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 = Ae

tKtLt

ExplanationsY: output K: capital L: labor t: time : elasticity of capital : elasticity of labor If + = 1, constant return to scale (Cobb-

Douglas production function)


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Sources of Growth II

Why are economists interested in estimating thisequation?

Ln Yt = LnA + t + Ln Kt + Ln Lt

Ln Yt+1 = LnA + (t+1) + Ln Kt+1 + Ln Lt+1Ln 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


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


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Sources of Growth IV

Estimation equationsLn Yt = LnA + t + Ln Kt + Ln Lt + t

Yt/Yt = + (Kt/Kt) + (Lt/Lt) + ut Difficulties

Measurement of capital stock KtKt = (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


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 ChinasEconomy I


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 ChinasEconomy II


What do we learn Capital accumulation has been the most important

factor for growth, contributing about 62% ofgrowth

Labor reallocation from agriculture to industrycontributes to about 10% of growth TFP growth contributes to about 28% of growth


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Growth Accounting of ChinasEconomy III


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 toincrease (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 startconsuming more.

The export-led modelhas outlived itsuse.

-Taro Aso, Japan

s PM


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Globalization Bites Back


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The government is starting to believe itsown propaganda. GS Banker

We can see the economic figures are already stabilising and recovering,which shows the [governments stimulus] policies have started to takeeffect, 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, thecountrys powerful economic planning agency.

They have been very effective in stopping the slowdown in economicgrowth, in overcoming the difficulties of enterprises and in expandingconsumption, echoed Xie Xuren, the finance minister.

Li Deshui, the former statistics bureau chief who moved markets aroundthe world on Wednesday with comments about an imminent new Chinesestimulus 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, whichcountry in the world has economic growth as high as China? I can saywith confidence that 8 per cent growth will be realised.


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Managing Expectations


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How long can China defygravity?


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R l d H l t 56E i 162

Vehicle Sales in China

Source: IEA

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Topic 4 Growth