Structural Transformation and Growth in China: 1978-2004

Loren Brandt (U. of Toronto)

Chang-Tai Hsieh (Berkeley)

Xiaodong Zhu (U. of Toronto)

Preliminary and incompleteFor seminar at CCER, Beijing University

October 11, 2006

Growth Rates of Output per Worker

Observations

• Labor productivity grew faster in agriculture than in non-agriculture

– Alwyn Young (2003) made similar observation and concludes: “To the degree that the reforms have improved efficiency, these gains may lie principally in agriculture”

Observations

• Labor productivity grew faster in agriculture than in non-agriculture

– Alwyn Young (2003) made similar observation and concluded: “To the degree that the reforms have improved efficiency, these gains may lie principally in agriculture”

• But, aggregate labor productivity grew faster than that in both sectors

Observations

• Labor productivity grew faster in agriculture than in non-agriculture

– Alwyn Young (2003) made similar observation and concludes: “To the degree that the reforms have improved efficiency, these gains may lie principally in agriculture”

• But, aggregate labor productivity grew faster than that in both sectors

positive contribution of labor reallocation

Objectives of the paper

• Providing a quantitative account of structural transformation in China

Objectives of the paper

• Providing a quantitative account of structural transformation in China

• Quantifying the contribution of structural transformation to growth

Objectives of the paper

• Providing a quantitative account of structural transformation in China

• Quantifying the contribution of structural transformation to growth

• Quantifying the impact of various labor market barriers on growth and structural transformation

Data

• Significant revisions of official data• We use separate deflators for each of the three

sectors in calculating real GDP– Similar to Alwyn Young’s method, but we construct

our own service sector deflator instead of using the service component of CPI

• We construct our own series of employment in the primary sector. Official series significantly underestimate labor reallocation.

Decomposing aggregate labor productivity growth:simple accounting

Fig.1 fraction of labor force in agriculture

00.10.20.30.40.50.60.70.8

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

model

data

Fig.2 Labor productivity in agriculture

0

0.5

1

1.5

2

2.5

3

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

Fig.3 Reallocation barriers

0.40.45

0.50.55

0.60.65

0.70.75

0.80.85

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

Fig.4 fraction of labor force in agriculture (no ag TFP growth)

00.10.20.30.40.50.60.70.8

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

model

data

Fig.5 fraction of labor force in agriculture (no reduction in barriers)

00.10.20.30.40.50.60.70.8

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

model

data

Two driving forces of labor reallocation

Productivity growth in agriculture:

• Without the growth, fraction of labor force in agriculture in 2004 would be 54% instead of 32%

Reduction in barriers:

• Without the reduction, fraction of labor force in agriculture in 2004 would be 41% instead of 32%

Fig.6 Wage premium of SOEs over NSOEs

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

Fig.7 SOEs' share of employment in non-agriculture sector

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

Fig.8 Wage wedge between agriculture and NSOE secotr

0.40.45

0.50.55

0.60.65

0.70.75

0.8

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

Fig.9 TFPs of SOEs and NSOEs

0

12

3

45

6

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

NSOEs' TFP SOEs' TFP

Fig.10 Capital-to-labor ratios of SOEs and NSOEs

0

20

40

60

80

100

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

NSOEs' capital-to-labor ratio SOEs' capital-to-labor ratio

Counterfactual exercises

Conclusions

• TFP growth in agriculture the main factor for labor reallocation. However, modest contribution to overall growth (about 1%).

Conclusions

• TFP growth in agriculture the main factor for labor reallocation. However, modest contribution to overall growth (about 1%).

• Reduction in labor market barriers another factor for labor reallocation. More important, it contributed significantly to overall growth (more than 2%) by allowing for more efficient allocation of resources---especially capital.

Conclusions

• TFP growth in agriculture the main factor for labor reallocation. However, modest contribution to overall growth (about 1%).

• Reduction in labor market barriers another factor for labor reallocation. More important, it contributed significantly to overall growth (more than 2%) by allowing for more efficient allocation of resources---especially capital.

• The single most important factor for China’s growth over the last two and half decades is the TFP growth of the non-state sector (more than 4.5%).

Conclusions

• TFP growth in agriculture the main factor for labor reallocation. However, modest contribution to overall growth (about 1%).

• Reduction in labor market barriers another factor for labor reallocation. More important, it contributed significantly to overall growth (more than 2%) by allowing for more efficient allocation of resources---especially capital.

• The single most important factor for China’s growth over the last two and half decades is the TFP growth of the non-state sector (more than 4.5%).

• There are still significant barriers, which prevent more efficient allocation of capital.