Sectoral Productivity Growth in China

Baiding Hu and Michael McAleer

Department of EconomicsUniversity of Western Australia

Abstract: Rapid economic growth in the 1990s in China raised the question of whether the high growthwas achieved by augmenting economic scales and increasing investment, through productivity lifting andefficiency improvement, or both. This paper analyses and evaluates total factor productivity growth andtechnical efficiency in five sectors that encompass the full spectrum of the economy. Assuming a constantrate of technological progress, a random effects panel data model is estimated to quantify total factorproductivity growth over the period 1991 to 1997, which covers the prominent eighth five-year period. Thepanel consists of data from 30 Chinese provinces on output, capital and labour for (i) Agriculture, (ii)Industry, (iii) Construction, (iv) Transportation, Post and Telecommunications, and (v) Services. Strongtotal factor productivity growth was recorded in Agriculture and Transportation , Post andTelecommunications over the sample period. In the other three sectors, total factor productivity growthslowed down and even declined.

Keywords: sector, total factor productivity, technical efficiency, panel data model, regions, provinces.

1. INTRODUCTION

Rapid economic growth in the 1990s in Chinaattracted world-wide attention, with the real GDPgrowth rate from 1991 to 1997 averaging over 10per cent per annum (China Statistical Year Book,1998). It is important to investigate whether thehigh growth was achieved by augmentingeconomic scales and increasing investment,through productivity lifting and efficiencyimprovement, or both. Previous productivitystudies on China’s economy have been concernedlargely with productivity differentials betweendifferent ownerships, or with productivity in asingle sector or a section of the economy (see, forexample, Jefferson et al. (1992, 2000), Hu (2001),Zhang et al. (2001), Xu and Wang (1999), Zhenget al. (1998), Zhang and Zhang (2001), Liu andZhuang (2000), Wu (1995, 2000), Xu (1999), Chen(1996), and Liu and Yoon (2000)).

The paper analyses and evaluates total factorproductivity growth and technical efficiency in fivesectors, namely, Agriculture (agr), Industry (ind),Construction (con), Transportation, Post andTelecommunications (tpt), and Services (ser),which span the full spectrum of the economy.

Productivity performance in these sectors offersinsight into how productivity contributes togrowth in the sectors individually, and hence theeconomy as a whole. Assuming a constant rateof technological progress, a random effects paneldata model is estimated to quantify total factorproductivity growth over the period 1991 to1997, which encompasses the prominent eighthfive-year period. The panel consists of data from30 provinces on output, capital and labour for thefive sectors, with total factor productivity growthbeing estimated separately for each of thesectors.

The plan of the paper is as follows. Section IIdiscusses the data and estimation. Section IIIanalyses the empirical results. Some concludingremarks are given in Section IV.

2. DATA AND ESTIMATION

Following Cornwell et al. (1990), Fecher andPestieau (1993) and Wu (1995), the paperemploys the random effects panel data modelwith a time variable to capture technologicalprogress, namely:

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tijtijtijiiitij uvty ,,,'

, ++++= xbha (1)

where

sertptconindagri , , , ,= , 19971991 , , t ⋅⋅⋅= ,

301 , , j ⋅⋅⋅= (provinces), tjagry , , tjindy , , and

tjcony , are the logarithms of gross output value,

tjtpty , and tjsery , are the logarithms of value-a d d e d o u t p u t ,

),, ,(, ¢= landfertilizermachinerylabourtjagrx ,

) ,(, ¢= sixed assetvalue of fnetlabourtjindx ,

),(, ¢= machinerylabourtjconx ,

) ,(, ¢= assetsfixedlabourtjtptx ,

) ,(, ¢= assetsfixedlabourtjserx , tijv , is an iid

error, and tiju , is the inefficiency term with non-positive values which is independent of the whitenoise error. Machinery is measured in kw for bothagr and con, fertilizer is measured in tonnage, andland is measured in hectares. Direct measures ofcapital stock for tpt and ser are not available so aproxy is used, namely: for 1993 to 1997, the sumof newly increased fixed assets through capitalconstruction and newly increased fixed assetsthrough innovation; and for 1991 and 1992, newlyincreased fixed assets were not available, so thesum of investment in capital construction andinvestment in innovation is used. Owing to thelagged effects of investment, newly increased fixedassets are preferred to investment. All data areexpressed in 1997 prices.

Model (1) is estimated using least squares. Theestimated residuals

)ˆˆˆ(ˆ ,'

,, tijiiitijtij ty xbhae ++-=

are used in 2,ˆ tt ijijijtij qdge ++= to estimate the

growth rate of total factor productivity (TFP),TFPD , as

)ˆ2ˆ(ˆ tTFP ijijiij qdh ++=D , (2)

and technical efficiency (TE) as

)ˆˆexp( max, ee -= tijijTE . (3)

3. EMPIRICAL RESULTS

The estimated coefficients of equation (1) aregiven in Table 1, with asymptotic standard errorsin parentheses.

Most of the coefficients are statisticallysignificant at the 5% level. Capital for tpt isnegatively related to output, but is statisticallyinsignificant. Land played a significantlynegative role in determining agricultural outputbecause the total area under cultivation has beendeclining continuously since the late 1970s,whereas total agricultural output has been risingdue to improvements in output per unit of land.

Table 1. Production Function EstimatesSector

agr ind con tpt sera 0.9264 (1.1057) -0.9107 (0.4187) 1.8960 (0.6590) 0.0135 (0.6813) 0.2329 (0.8653)

h 0.0122 (0.0092) 0.0410 (0.0549) 0.0845 (0.0076) 0.0050 (0.0081) 0.0066 (0.0096)

Labour 0.2347 (0.0777) 0.4459 (0.0501) 0.0431 (0.0350) 1.0517 (0.0723) 0.7108 (0.0533)

Machine 0.1976 (0.0979) - - - -

Fertiliser 0.5290 (0.0934) - - - -

Land -0.1347 (0.0705) - - - -

Capital - 0.3101 (0.0535) 0.7869 (0.0462) -0.0043 (0.0271) 0.2952 (0.0444)

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Using the estimated coefficients, TFP and TEwere calculated according to equations (2) and(3), respectively, for each province. The nationalTFP and TE, which are presented in Table 2,were obtained by averaging the provincialestimates. TE measures efficiency against thebenchmark of best practice. In the present study,the larger is the TE for a province, the smaller isthe difference between the province and bestpractice, and hence the less is the variability. Inall sectors, best practice was observed in eitherShanghai or Jiangsu province, both of which areviewed as the most developed areas in China.The first half of Table 2 shows that theAgriculture sector has the smallest TE variabilityas its average TE is around 60 per cent over theperiod This is followed by the Services sector,whose average TE is well above 50 per cent.Although more TE variability is observed in theConstruction sector, it managed to improve its

Table 2. National TE and TFP

TEYear

agr ind con tpt ser1991 0.61 0.39 0.20 0.33 0.521992 0.59 0.41 0.24 0.28 0.561993 0.59 0.42 0.29 0.26 0.591994 0.59 0.43 0.33 0.26 0.611995 0.59 0.42 0.36 0.27 0.601996 0.60 0.41 0.38 0.29 0.581997 0.63 0.39 0.37 0.34 0.54

Year TFP1991 -0.02 0.09 0.35 -0.16 0.101992 -0.01 0.08 0.30 -0.11 0.071993 0.00 0.06 0.24 -0.05 0.041994 0.01 0.04 0.18 0.01 0.011995 0.03 0.02 0.13 0.06 -0.021996 0.04 0.01 0.07 0.12 -0.051997 0.05 -0.01 0.02 0.17 -0.08

Table 3. Agriculture: TE and TFP

East Central WestYear

TE TFP TE TFP TE TFP1991 0.71 0.01 0.56 -0.01 0.56 -0.061992 0.71 0.01 0.55 0.01 0.53 -0.041993 0.71 0.02 0.55 0.02 0.51 -0.021994 0.72 0.02 0.56 0.04 0.49 0.001995 0.73 0.03 0.58 0.05 0.49 0.011996 0.74 0.03 0.61 0.06 0.49 0.031997 0.76 0.04 0.64 0.08 0.50 0.05

TE to the extent that the average TE increased to37 per cent of best practice in 1997 against 20per cent in 1991.

The second half of Table 2 shows the TFPgrowth rate. The results indicate that both theAgricu l ture and Transportation, Post andTelecommunicat ions sectors experiencedsignificant accelerated TFP growth over theperiod, whereas the other three sectors haddeclining TFP growth. For the Industry andServices sectors, TFP actually decreased towardsthe end of the period.

Table 4. Industry: TE and TFP

East Central WestYear

TE TFP TE TFP TE TFP1991 0.59 0.12 0.37 0.09 0.23 0.071992 0.62 0.09 0.38 0.08 0.24 0.061993 0.65 0.06 0.40 0.07 0.25 0.051994 0.65 0.03 0.41 0.06 0.25 0.041995 0.64 0.00 0.42 0.05 0.25 0.021996 0.60 -0.03 0.43 0.04 0.24 0.011997 0.56 -0.06 0.43 0.03 0.23 0.00

Table 5. Construction: TE and TFP

East Central WestYear

TE TFP TE TFP TE TFP1991 0.23 0.24 0.20 0.18 0.17 0.231992 0.30 0.17 0.23 0.14 0.20 0.171993 0.38 0.10 0.26 0.11 0.23 0.111994 0.46 0.09 0.29 0.10 0.26 0.111995 0.52 0.06 0.31 0.10 0.27 0.101996 0.55 0.04 0.33 0.10 0.26 0.041997 0.55 0.01 0.33 0.06 0.25 -0.01

An analysis of the regional breakdown of thenational figures sheds greater light on sectoralTE and TFP movements.

Table 6. Transportation, Post andTelecommunications: TE and TFP

East Central WestYear

TE TFP TE TFP TE TFP1991 0.43 -0.08 0.27 -0.19 0.28 -0.211992 0.39 -0.04 0.23 -0.12 0.23 -0.151993 0.38 0.00 0.21 -0.06 0.20 -0.091994 0.38 0.04 0.20 0.00 0.19 -0.031995 0.40 0.09 0.20 0.06 0.19 0.041996 0.45 0.13 0.22 0.13 0.21 0.101997 0.53 0.17 0.26 0.19 0.24 0.16

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Tables 3 to 7 contain estimates of TE and TFPby region and sector. The East region, whichrefers to the eastern coastal area comprising 10provinces, including Shanghai and Jiangsu, isendowed with more developed infrastructure andtechnology, and much higher levels of labourforce skills, as compared with the other areas ofChina.

Table 7. Services: TE and TFP

East Central WestYear

TE TFP TE TFP TE TFP1991 0.59 0.17 0.49 0.04 0.48 0.081992 0.67 0.13 0.50 0.03 0.51 0.051993 0.74 0.09 0.51 0.01 0.52 0.021994 0.79 0.05 0.51 0.00 0.52 -0.011995 0.80 0.00 0.50 -0.02 0.51 -0.041996 0.79 -0.04 0.49 -0.03 0.47 -0.081997 0.75 -0.08 0.46 -0.05 0.43 -0.11

These favourable conditions have helped toattract foreign direct investment andtechnologies. The Central region includes 8provinces neighboring the coastal provinces, andthe West region covers 12 provinces in theinterior western area.

Agriculture

Table 3 shows that the East region clearly led theother two regions. TE in the East region rosesteadily from 71 per cent in 1991 to 76 per centin 1997. Generally, the East region led theCentral by 10 per cent and the West by 20 percent. Whereas the East and Central regions sawan upward trend in TE movements, the Westexperienced a downward trend from 57 per centin 1991 to 50 per cent in 1997.

The East also maintained a constant but mildTFP growth, whereas both the Central and Westregions recorded negative growth rates.However, the Central region enjoyed anaccelerated TFP growth after 1993 and surpassedthe East to become the region with the fastestTFP growth. The West managed to catch up tothe Central region in 1997. Therefore, risingTFP is observed in all regions, and rising TE isobserved in two of the three regions whichaccount for more than 70 per cent of the totalagricultural output.

Industry

Compared with Agriculture, the East regionclearly led the other two regions, and the Centralled the West. However, the magnitude of thedifference is almost twice as large as in the caseof Agriculture. For Agriculture, the average TEfor the East, Central and West regions were 72per cent, 61 per cent and 51 per cent,respectively. For Industry, these figures were 62per cent, 41 per cent and 24 per cent,respectively. While the East and West regionsrecorded a declining TE in the last two or threeyears, the Central defied the trend, showing asteady increase in TE.

While there was still one region experiencing arising TE, all regions witnessed a declining TFP.The East region suffered the most, with its TFPgrowing at 12 per cent in the beginning of theperiod and plummeting to a negative growth rateat the end. The other two regions also recorded acontinuous decrease in TFP growth butnevertheless maintained a positive growth rate.

Construction

As expected, the East region is more efficientthan the Central, which is more efficient than theWest. While TE rose continuously in all theregions, the gap between them increased rapidlyover the years, which was not observed in theother sectors. Initially, the East led the Centralby about 3 per cent, which was also the marginof the Central over the West. By the middle ofthe period, the gap between the East and Centralregions grew to 7 per cent, and then to 12 percent by the end of the period. The gap betweenthe Central and West regions also climbed to 8per cent.

In contrast to movements in TE, TFP growth fell,with the East and West regions falling moresignificantly than the Central. This was partlyreflected by the nation-wide fact that the powerof machines per worker, as measured bykw/person, fluctuated prior to 1995 and fellafterwards (over the seven-year period 1991 to1997, these figures were 4.0, 3.8, 4.3, 4.0, 4.7,4.6 and 4.1).

Transportation, Post and Telecommunications

This sector has the most variable TE across theregions. The East was significantly moreefficient than the other two regions. From 1995onwards, TE in the East was more than doublethose in the Central and West regions.

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Improvement in TE only happened in the Eastregion over the period 1991 to 1997, rising to 53per cent in 1997. A slight drop in TE in 1997relative to 1991 levels was recorded in the otherregions.

TFP was rising steadily across all the regions.The East started in a leading position relative tothe other two regions, but the gap was decreasingover the years. The Central region matched theEast in 1996 and managed to surpass it in 1997.By 1997 the gap between the East and Westregions narrowed to less than 1 per cent from 12per cent in 1991.

Services

TE in the East region was generally risingsteadily, from just under 60 per cent in 1991 to75 per cent in 1997. The Central and Westregions initially saw a rising TE, then a mildreduction from 1991 to 1997.

TFP growth slowed down and declined duringthe last two to three years. The biggest plunge inTFP growth was recorded in the East region,where it dropped to –8 per cent in 1997 from17.3 per cent in 1991. A declining TFP could bedue to a massive labour movement rushing intothe retail and catering trade sector to seek re-employment or self-employment. They includedsurplus labour force from the agricultural sectorand laid-off employees at state-ownedenterprises. Statistics show that employment inthe wholesale, retail and catering services sectorjumped by 60 per cent over the 1991 to 1997period, whereas investment increased by only12.8 per cent in real terms.

4. CONCLUSION

Rapid economic growth in the eighth five-yearperiod raised the question of whether the highgrowth was achieved by augmenting economicscales and increasing investment, throughproductivity lifting and efficiency improvement,or both. This paper analysed and evaluated totalfactor productivity growth and technicalefficiency in the five sectors that cover the fullspectrum of the economy.

A random effects panel data model wasestimated, which assumed a constant rate oftechnological progress, to quantify TFP growthand TE. The panel consisted of 30 provinces

over 7 years, which enabled regionalcomparisons to be made and encompassed theprominent eighth five-year period. Supportingthe fact that the East region is more developedthan the Central and West regions, there wasstrong empirical evidence that the East was muchmore efficient in all five sectors. The efficiencygap between the East and the West regionsincreased in all sectors. The Central region had ahigher growth rate of technical efficiency inAgriculture towards the end of the period, whichhelped reduce the difference between the Centraland East. The West region experienceddeclining efficiency over time. In theConstruction sector, all the regions improvedtheir efficiency over time, but the Eastaccelerated much faster than the other tworegions. The gap between the Central and Westregions also widened, but to a much smallerextent. For Industry, the East region led theCentral by the same margin as Central over theWest, which seemed to show that economicwell-being in the region determines its industrialsophistication. For the S e r v i c e s andTransportation, Post and Telecommunicationssectors, the Central and West regions wereequally efficient. This outcome shows that,while the Central region was more developedthan the West, it had not yet reached the level ofdevelopment in the East to boost its tertiaryindustry.

Strong total factor productivity growth wasrecorded in Agriculture and Transportation, Postand Telecommunications. For Agriculture, theEast led the other two regions in the first twoyears, the Central took over and maintained itslead throughout the rest of the period, and theWest surpassed the East in the final year. ForTransportation, Post and Telecommunications,the beginning saw the East region leading theCentral, which led the West. The margin bywhich the East led the other regions diminishedover the years due to higher total factorproductivity growth rates in the Central andWest regions. In all other sectors, total factorproductivity growth slowed down and was evennegative.

The paper also showed that high economicgrowth in the eighth five-year period wascharacterised by both investment andproductivity growth. Of the five sectors, growthin Agriculture and Transportation, Post andTelecommunications can be attributed to bothinvestment and productivity increases. Growth

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in the other three sectors relied on investmentaugmentation as their productivity growthdeclined.

Acknowledgements

The first author wishes to acknowledge thefinancial support of a C.A. Vargovic MemorialFund award and an Individual Research Grantfrom the Faculties of Economics & Commerce,Education and Law, University of WesternAustralia. The second author wishes toacknowledge the financial support of theAustralian Research Council.

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