Accounting for Growth: China and India

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Accounting for Growth China and India

• Paper by Bosworth and Collins
• Presentation by Matt McGlade and Rob Donnelly

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Rapid Growth in China and India
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Growth by Sector

• Chinas productivity was approx. 70 of Indias
  in each sector in 1978.
• By 2004, Chinese output was much higher than
  Indias
• 10 higher in agriculture
• 30 higher in services
• 120 higher in industry

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The Model

• Y AKa(LH) 1-a
• gt ?ln(Y/L) a?ln(K/L) (1-a) ?lnH ?lnA
• A is total factor productivity (i.e. technology)
• a is capitals share of income. a 0.4 is
  assumed.
• H is human capital (i.e. skills). Constant 7
  return to each year of education assumed.

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Sources of Growth Overall

• High growth in both countries.
• Despite Indias high level of growth, China has a
  considerably larger growth rate.

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Sources of Growth Capital

• Chinas growth has been capital intensive
  following the example of the Asian Tigers (e.g.
  Thailand, South Korea, etc.)
• Indias growth has not been as strongly based on
  physical capital.

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Sources of Growth Education

• Similar growth in education
• China started with a higher initial level.
• India lags behind the other growing East Asian
  economies.

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Sectoral Growth Model

• Economy divided into three sectors
• Agriculture
• Industry
• Service
• Total growth can be split into productivity gains
  within the sectors plus relocation gains.

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Agriculture
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Agriculture

• Green revolution positively benefited both
  nations agricultural sectors.
• Chinas agricultural growth has exceeded Indias
  as a result of fundamental institutional reforms.

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Industry
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Industry

• China is receiving the majority of its growth
  from industry. Productivity from this sector is
  very high.
• India has experienced less growth. Output per
  worker cannot keep up with China.

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Services
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Services

• India has come the closest to keeping up with
  Chinas growth in the service sector (especially
  recently).
• Despite lower physical capital growth, Indias
  factor productivity has been growing faster than
  Chinas.
• Chinas advantage resides with faster employment
  growth.

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Sectoral Growth and Reallocation

• Chinas sector reallocation gave it an initial
  growth advantage.
• Chinas biggest advantage is its industrial
  growth.
• More recently Indias service sector has started
  to close some of the gap.

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Conclusions

• China has experienced unprecedented growth
• Growth across all sectors
• Industrial growth has played a large role
• India has grown at a similar rate to other
  countries in East Asia
• Growth is lead by service sector
• Relatively little industrial growth

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Discussion Questions

• China has enacted policies to control population
  growth. What do we think this will do to the
  growth of GDP and GDP per capita?

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Discussion Questions

• India has a very large informal sector.
• Can we trust our data?
• Will this affect Indias growth?

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Discussion Questions

• China has essentially eliminated illiteracy among
  its youth, while Indias educational system still
  lags behind.
• What effects will this have on their growth?
• What policy changes should India consider to deal
  with the education of the bulk of its youth?

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Discussion Questions

• Chinas agricultural sector has shrunk more
  quickly as workers move into the more productive
  service and industrial sectors, while Indias
  agricultural sector remains relatively large.
• What factors do we think might explain this?
• How significant of a role does education play?

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Discussion Questions

• China has a national savings rate of 40, with
  private capital inflows equal to 10 of GDP.
  Indias savings are much lower.
• Could this represent excess investment?
• What effect will this have on the relative growth
  of China and India?

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Discussion Questions

• Will Chinas growth solow down?