Explaining the Growth of China since 1978

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Explaining the Growth of China since 1978

• Lecturer Zhigang Li

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Growth and Development

• Growth The increase in the total amount of goods
  and services available.
• Development A gradual but steady and sustained
  increase in output per capita.

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The Growth Performance of China

• Table 6.1 ()
• GDP Population GDP per capita
• 52-78 6.0 1.9 4.1
• 78-05 9.6 1.1 8.5

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Comparative Perspective

• Sustained growth of per capita GDP above 6 has
  happened in three episodes
• Japan (1955-1973) 8 per year
• Korea, Taiwan, Thailand (1982-1996) around 7
  per year
• China (1978-2005)

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Questions to discuss

• Is the high growth rate of China real?
• Why China has been able to maintain high growth
  rate for 20 years since 1978?

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Outline

• Data and measurement problems
• Driving forces of growth
• Investment
• Labor and migration
• Productivity
• Globalization

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GDP Estimation in China

• Before 1993, National Income but not GDP was
  estimated in China. After 1993, GDP replaced NI.
• National income reflects the activities of
  material production but not nonmaterial services
  (banking and insurance, education, science and
  research, consulting, etc.) industries.
• GDP, in contrast, further includes the service
  industries.

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Three Stages of GDP Reporting (Xianchun Xu)

• Preliminary estimation
• Figures released in February of the following
  year.
• Data from specific fields (rapid reports) by NBS
  departments
• Primary revision
• Figures released in the China Statistical
  Yearbook in the second half of the following year
• Including more reliable and encompassing data
  from NBS, ministries of the State Council, and
  administrative records.
• Final Revision
• Figures released in the China Statistical
  Yearbook in the second year following the
  accounting year.
• Including all of the statistical, accounting, and
  administrative data.

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Two Adjustments

• The first important adjustment to GDP (1978-93)
  was completed in 1994-95, shortly after the first
  census of tertiary industries in China.
• After the second census of tertiary industries,
  the NBS revised GDP upward by 16.

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Remaining Problems with Chinas GDP Estimation

• A regular (annual) survey system for nonmaterial
  services has not been established since the first
  census of tertiary industries.
• The value added of many rapidly developing new
  services are estimated mainly based on the wages
  and taxes.
• Non-observed economy (illegal production,
  underground production, informal sector) is not
  shown fully in GDP estimation.
• Problems in GDP estimation at constant prices due
  to the lack of price indices.
• Interference of local leaders with statistical
  data.

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On Data Quality (text)

• China made a transition to a new data-collection
  system in 1998, shifting to sample survey
  estimates of small-scale industry and services.

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Does NBS Intentionally Falsify Data? (Carsten
Holz, 2003)

• NBS is unlikely to falsify data, and it has been
  making sincere efforts to improve data quality
  over time.
• Industrial energy use, production quantity of
  major products, and freight are insufficient
  proxies for true output.
• Rawskis re-estimation of China GDP using the
  income approach may be misleading due to lack of
  data.
• Internal publication conforms with published data
• World Bank accepts the official estimates.

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Real GDP Growth (Alwyn Young)

• Systematic understatement of inflation accounts
  for 2.5 percent (real) growth per year in the
  non-agricultural economy 1978-98.
• Most countries estimate real GDP by deflating
  nominal GDP using independently constructed price
  indices.
• In China, enterprises are called upon to report
  the value of output in current and constant (base
  year) prices.
• SSB does compile independent price indices, but
  it is not used in their GDP estimates.

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Findings by Alwyn Young

• Official GDP per capita grew 8 percent per year.
• After adopting correct inflation measures, the
  real GDP growth rate of China during the reform
  period is not much different from other rapidly
  growing economies.
• Labor and total factor productivity growth in the
  non-agricultural economy are 2.6 and 1.4 percent
  per year during the reform years (1978-1998).

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Chinas Nominal GDP Estimates A Pessimistic View
(Thomas Rawski)

• Official GDP measures are plausible 1978-97.
• Overestimation Suggested by 1995 industrial
  census
• Underestimation No detailed study of the service
  sector. Overstatement of farm incomes in 1978.
• GDP quality dramatically worsen since 1998.
• A great political responsibility to maintain
  high growth rate (under the impact of Asian
  financial crisis) led to a wind of falsification
  and embellishment.
• NBS publicly rejected provincial estimates of GDP
  growth for 1997/98, and substitute it with a
  lower and black-box estimate (7.8 percent for
  1997/98).
• Rawski believes that real GDP growth is no more
  than 12 between 1997 and 2001, in contrast to
  the official estimate of about 30.

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Agreeing and Disagreeing Evidence for the
Pessimistic View

• Disagreeing
• Tax revenue increased by 90 percent 1997-2001
  (Lardy 2002). The problem is (1) the tax revenue
  may be exaggerated, (2) the presence of
  non-budgetary (or non-tax) revenues.
• Imports rose by 70 percent 1997-2001. The problem
  is the existence of smuggling.
• Agreeing
• Falling energy consumption. The problem is the
  worsening quality of energy statistics.
• Civil air traffic increases slowly despite lower
  prices
• Declining commodity prices, near-zero employment
  growth, sluggish consumer demand, slow growth of
  private investment, widespread excess supply of
  both commodity and production capacity.

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Accuracy and Reliability of Energy Statistics (J.
Sinton, 2001)

• Energy statistics may be relatively good in the
  early 1990s, but the quality has declined since
  the mid-1990s.
• Strong incentive to underreport coal use due to a
  widely publicized campaign to close down small
  mines.
• Changes in definitions and coverage

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Accuracy of Transport Statistics(Ralph
Huenemann, 2001)

• Published transport statistics underestimate road
  traffic in the 1990s, and the problem get worse
  over time.
• Growth rate of petroleum consumption in
  transportation in the 1980s (around 5) is low
  compared to the growth of traffic (around 10).
• 1995-98, petroleum consumption grew by 14 while
  traffic grew by around 4.

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Accuracy of Unemployment Rate(Giles, Park, and
Zhang, 2005)

• Unemployment rate of urban permanent residents in
  China increased from 6 to 11, and that of all
  urban residents increased from 4 to 7.
  (official unemployment rate increased from 2.9
  to 4 during the period)
• Internationally comparable definition
• Survey in Fuzhou, Shanghai, Shenyang, Wuhan, and
  Xian.

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The Solow Model Setup

• Transitional growth rates depend on technology
  advance rates and capital accumulation rates
  (affected by saving and capital depreciation
  rates).

Capital Depreciation Rate
Capital Per Worker
Output Per Worker
Technology
(0ltalt1)
Output
Saving Rate
Capital Stock
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The Solow Model Equilibrium

• Long-term growth rates depend on technology
  advancing rates only.
• Long-term growth levels depend on technology
  level, saving rate, population growth rate, and
  capital depreciation rate.

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Productivity

• Productivity may have grown rapidly in China and
  contributed significantly to its economic growth.
• Li, Wei (1997) SOE 1979-1989 data

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Efficiency of State-Owned Enterprises (W. Li 1997)

• Data Survey data on about 800 SOEs
• Findings
• Total real output grew by 6.37 per year 1980-89
• TFP (total factor productivity, or the A) grew
  by 4.68 per year 1980-89
• Increases in factor inputs accounted for the
  remaining 27 of output growth

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Determinants of Efficiency Improvements (W. Li,
1997)

• More efficient allocation Shifts in resources
  from less productive enterprises to more
  productive ones accounted for 38 of the TFP
  growth.
• Goods allocation improved This is possibly a
  benefit of the dual-track system, which created
  a market for materials on the margin.
• Labor allocation improved The improved labor
  allocation might be due to larger incentive for
  local government to improve economy and to
  increased labor mobility.
• Capital allocation changed little
• Incentives Growth in bonus per worker and
  increases in product market competition accounted
  for 49 of TFP growth.

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Explaining the Increase in Chinas Agricultural
1980-84 (Mead, 2000)

• Before 1980, Chinese households tend to allocate
  a disproportionate share of non-land inputs to
  individual private plots.
• As much as 53 percent of increased farm output
  1980-84 may be explained by eliminating
  inefficient input allocations before 1980.

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Investment

• Ironically, Chinas investment rate (over GDP)
  actually continued to increase after the Big Push
  strategy is abandoned
• Temporary decreased after 1978
• Temporary decreased following 1989
• Reaching 40 by 2004
• The most immediate explanation for Chinas rapid
  growth may be its high investment rates.

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Why Investment Rates have Increased since 1978?

• Reduced wasted investment by government
• Reflected on the continuously reduced inventory
  accumulation rates
• Increased return to investments that increase
  private saving and investment.

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Labor

• Although the size of population grew much slower
  than the growth of industrial sector, the
  migration of workers from rural to urban provide
  sufficient labor input to satisfy the rapidly
  increased demand for labor, without increasing
  labor cost much.
• The large-scale rural-urban migration is possible
  only if the agricultural productivity increased
  significantly.

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Labor

• Chinas labor force was 740 million by 2000
  census.
• A very high, and increasing, share of the
  population is of working age.
• The share of the labor force in agriculture has
  declined since 1978, especially in three periods
• 1983-87
• 1991-96
• 2003-present

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Globalization

• Chinas high manufacturing share is also closely
  related to its emergence as the worlds
  factory.
• China clearly can continue to expand its
  manufacturing sector for a longer period than if
  it were not so integrated into world industry.

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The Future

• Chinas rapid growth is expected to continue for
  another decade and then begin to moderate as
  labor force growth slows and rural-to-urban
  shifts wind down.