Lecture 2. Understanding China’s Growth.

1. Lecture 2. Understanding China’s Growth.

2. Introduction. • Despite China’s remarkable growth, there is not much literature trying to explain its very high growth rates. • There is much speculation about the causes of Chinese economic growth and about predictions for the future. • Many of the data, especially from the past, are problematic and subject to criticism. • We are at a stage where we get mostly only macroeconomic estimates.

3. Yt=AtF(Kt,Lt) • The big questions turn around • Kt (capital stock). Problem of valuation of socialist capital. • At (total factor productivity). • Lt also raises problems of its own (problems associated to one child policy)

4. Chow-Li (2002) • Yt = AetKtLt • Ln Yt = a0 + a1lnKt + a2 lnLt +a3t .6136 .4118 .0263 (.0772) (.1996) (.0025) • Trend only significant after 1978. • Suggests constant returns to scale (a1 +a2 not different from 1). • Ln (Yt/Lt) = a0 + a1ln (Kt/Lt) +a3t .5577 .03028 (.0468) (.0040)

5. Chow-Li (2002) • Suggests a 3% annual growth in TFP from 1978 to 1998. • Growth of 9.1% can be decomposed in • 5% due to capital (.5577 X 9.1) • 3% due to TFP growth • 1.1% due to labor [(1-.5577)x2.7] • Growth due mostly to capital accumulation and TFP growth (1/3 of growth explained by TFP growth). • Projections of 8% annual growth until 2010. Were not proven wrong.

6. Hu-Khan (1997) • IMF team report. • Kt grew by 7% between 1979-94 but capital output ratio has remained more or less constant (no capital deepening). • Estimate TFP growth of 3.9% in that period (compared to 2% for Asian tigers). Explain by success of reforms.

7. Young (2003) Contrarian view critical of official statistics (1978-1998). • Statistical Bureau reluctant to revise downward estimates. • Problems with reporting nominal and constant output by enterprises. Leads to underestimation of deflator by 1.7 to 2.5 %. • Proposes reconstruction of many data but with not too many differences. • Output per capita growth at 6.1% (instead of 7.8), • output per worker at 5.2% (instead of 6.9) due to rising participation rates, • non agricultural output per worker at 3.6% (instead of 6.1%) • non agricultural output per effective worker to 2.6% (instead of 5%), • non agricultural TFP per worker at 1.4 (instead of 3).

8. Perkins-Rawski (2007) • Try to predict growth over the next two decades. • Growth accounting: • TFP growth = gY – aKgK -aLgL • gY , gK , gL growth rates of GDP, capital and labor. • Shares of capital and laboraK,aL in total factor payments (in total national income).

9. Perkins-Rawski (2007) • Use official statistics. Accept possible deflator problems but also underestimation of service sector. Moreover, quality adjustments not applied for price indices. • Use 2000 prices to avoid inflated industrial prices from socialism. • Capital stock estimated using annual investment outlays and depreciation rate of 9.6% (perpetual inventory method) • Labor measured as population 16-65 and decomposing in 5 education categories (no diploma, primary, junior high, high school, college).

10. Perkins-Rawski (2007) • Inconsistencies between census and data on graduation. Build data using age-specific mortality rates and graduation rates. Possibly underestimates human capital. • L = L1 + L2 + L3 + L4 + L5 • H = w1L1 + w2L2 + w3L3 + w4L4 + w5L5 • wiare education-linked wage differentials. • H/L measures educational attainment.

11. Perkins-Rawski (2007)

12. Perkins-Rawski (2007)

15. Japan’s postwar growth based on TFP growth. Half of 9% growth rate between 1950 and 1970 explained by TFP. Later slowdown associated to fall in TFP growth. • Question: Will the growth continue?

16. Low dependency ratio imply robust household savings

17. Projections of Working Age Non-Student Population Ages 16-65: Size and Composition, 2005-2025 Decline of L after 2015 but increasing human capital

19. It would take China 10-15 years at least to reach PPP GDP per capita of $13,000 ($5,300 in 2007).

20. How productive is investment in China? • China has had a very high investment rate (around 40%). This suggests that the marginal product of investment might be low (too much investment and allocative inefficiencies). However, a very high marginal return to capital might explain a high investment rate. • Bai et al. (2006) have addressed this question.

21. How productive is investment in China? • Use revised output estimates after 2004 census (covers 1978-2004). • Assume depreciation rate of 8 % for structure and of 24 % for machinery. Use estimate of initial stock for 1952 plus gross fixed capital formation. • Estimate share of capital income as residual of labor income.

23. How productive is investment in China? • Estimates relatively high even though falling. • Why have returns remained high? • Capital-output ratio has not increased much • Capital share has increased steadily together with increase in the investment rate.

24. How much misallocation of capital in China? • There is a strong perception that despite strong growth, there may be a severe misallocation of capital in China. • General idea: if distortions favor certain firms, they can survive with lower TFP than firms that do not benefit from those distortions. Hsieh and Klenow (2008).

28. Open questions • China’s growth will affect the global economy and there may be feedback effects. • Energy. • Environment.