Explaining the Growth of China since 1978

Lecturer: Zhigang Li

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.

The Growth Performance of China

Table 6.1 (%)

GDP Population GDP per capita

52-78 78-05

6.0 9.6

1.9 1.1

4.1 8.5

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)

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?

Outline

Data and measurement problems Driving forces of growth

Investment Labor and migration Productivity Globalization

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.

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 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. Figures released in the China Statistical Yearbook in the second year following the accounting year. Including all of the statistical, accounting, and administrative data.

Primary revision

Final Revision

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%.

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.

On Data Quality (text)

China made a transition to a new datacollection system in 1998, shifting to sample survey estimates of smallscale industry and services.

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.

Real GDP Growth (Alwyn Young)

Systematic understatement of inflation accounts for 2.5 percent (real) growth per year in the non-agricultural economy 197898.

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.

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).

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. 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%.

GDP quality dramatically worsen since 1998.

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 nontax) revenues. Imports rose by 70 percent 1997-2001. The problem is the existence of smuggling. 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.

Agreeing

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

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%.

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.

The Solow Model: Setup

Transitional growth rates depend on technology advance rates and capital accumulation rates (affected by saving and capital depreciation rates). Capital Capital Per Worker Depreciation Output Technology Rate Per Worker 1 Production: y A k (0<<1)

Capital Accumulation : K sY dK
Saving Rate Output Capital Stock

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.

s /(1 ) y A( ) n g d

Productivity

Productivity may have grown rapidly in China and contributed significantly to its economic growth.

Li, Wei (1997): SOE 1979-1989 data

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 198089 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

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.

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.

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.

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.

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.

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

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.

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.