Chinas Structural Transformation: Process and Causes

1
Chinas Structural Transformation Process and
Causes
2
Part I Agricultural Sector

• How important is agricultural sector to Chinas
  rapid growth?
• How has the productivity of Chinas agricultural
  sector changed? What are the causes of the
  change?
• Future challenges

3
Five Roles of Agriculture in Development Theory

• Supplying high-quality labor to other sectors
• Producing low-cost food that will keep wages down
  for industrial workers
• Supplying production inputs to other sectors
• Earn foreign exchange
• Raise rural incomes

4
Role of Agriculture before 1978

• Did not
• Supply labor to the nonagricultural sector
• Supply sufficient supplies of food to consumers
• Supply abundant raw inputs to industry
• Export to foreign markets
• Raise agricultural income

5
Pre-Reform Land Reform

• Soon after 1949 the largest and one of the most
  comprehensive land reforms in the history of the
  world
• Almost every household has land
• Different methods were used to divide land
  equally among households
• Obligations to sell produce to the state
• 1954-1958 from mutual assistance
  team/cooperatives to collectives to communes
  (eliminating household farming except for private
  plots)

6
Weakness of the Agricultural System between 1958
and 1978

• Absence of incentives
• Individual families were not the residual
  claimants of production
• Rewarding based on production inputs (the
  work-point system)
• Output suffered from concentration of decision
  making in the hands of collective leaders
• Output prices were fixed by the state at low
  level
• Between 1962 and 1978 the price of grain remained
  almost unchanged.
• Little competition

7
Work Points System

• Farmers retard is based on their reported
  production inputs (e.g. days of attending the
  farming) but not on production output. This may
  bring mis-reporting and shirking problem,
  reducing the productivity of the agricultural
  sector.

8
Food Coupons

• Using food coupons may also be a way to reduce
  consumption inequality in cities.
• We also discuss the possibility of peoples
  trading food coupons for money. This seems common
  but does not appear to have happened in a large
  scale. More evidence is needed.

9
Role of Agriculture after 1978

• Labor
• Raw materials
• Food
• Exports
• Maybe income (table 13.9)

10
Table 13.3.

• What do you see?
• How to explain the pattern?

11
Possible Causes of the Rising Productivity in
Agriculture

• Incentive
• Communes dismantled Household Responsibility
  System (HRS) introduced
• Plan prices from 1978 to 1983 above-quota prices
  increased by 41 for grain and 50 percent for
  cash crops
• Market
• Market liberalization did not begin prior to
  1985.
• Machinery, fertilizer, and the seed systems were
  virtually unchanged in 1980s.
• Agricultural research and plant breeding remain
  almost completely organized by the government.
  Reform of the research system generates only
  mixed outcomes.

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Real Prices of Grain Before and After the Reform

• Price cap on grain was raised so that farmers
  might increase their revenue. This appeared to
  have motivated farmers to work harder and produce
  more. The increased supply of grains seems to
  have driven grain prices down later.

13
Future Challenges

• Leaving the farm large scale migration and
  urbanization
• Increasing farm size
• High rental transaction costs
• Rural education
• Property right reform
• Land privatization?

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Part II Industrial Sector

• What is the general trend of transition for this
  sector?

15
Pre-Reform System

• Chinas industry before the reform was already
  substantial, employing more workers than the
  combined total of all other third-world nations.
• Largely state owned and urban
• Profits of the sector served as the most
  important source of government revenue
• Cellular economy Central planning determined
  only a modest percentage of resource allocation
  and investment. The planning and resource
  allocation right was devolved to governments at
  the provincial level or below beginning in the
  1960s.

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Initial Reform

• Incentive and autonomy at the firm level
• Dual-track pricing
• By 1995, 78 percent of producer goods were
  transacted at market prices
• TVEs
• Attracting FDI (establishing SEZs)

17
Later reform

• Marketization
• Entry
• Competition

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How Far has China Come?

• Absence of major change in concentration.
• Increased production quality and variety
• Figure 15.7-15.9
• Table 15.10

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Part III Sources of Productivity Growth

• How to measure productivity?
• Why the NBS data may not be used directly in the
  calculation?
• What has contributed to the aggregate labor
  productivity growth in China? How is this
  inferred?

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Labor Productivity

• Labor productivity real output per worker
• Real output Nominal output value deflated by
  total inflation since the base year

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Measurement of Employment

• Hours?

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Inflation
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Real Labor Productivity (1978-2004)

• Table 17.2

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Comparison of Labor Productivity for State and
non-State Sectors

• Is there data on output for state and non-state
  sectors?
• How could wage per worker approximate labor
  productivity?
• Assumption 1 Average value of labor equals
  marginal value of labor
• Assumption 2 Wages are proportional to value of
  labor
• Assumption 3 Labor share is the same for
  different sectors
• How problematic are the assumptions?
• What are the findings (given the assumptions)?

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Decomposing the Growth of Labor Productivity

• How to interpret the following models?
• ytyatlatynt(1-lat)

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Understanding Labor Productivity Growth

• What are the main components of aggregate labor
  productivity growth?
• How could the aggregate growth rate exceed the
  growth rates of both agricultural and
  non-agricultural sector?

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Understanding Labor Productivity Growth

• Are the reallocation effect correctly estimated?
• Assumption 1 Reallocation was not affected by
  productivity growth in the two sectors
• Assumption 2 Reallocation does not affect the
  productivity growth of the two sectors
• Assumption 3 Average productivity equals
  marginal productivity

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TFP

• What are the problems with using labor
  productivity to measure the productivity of an
  economy?
• What is the relationship between TFP growth and
  labor productivity growth?

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Model Setup

• Two sectors (two goods) Agricultural and
  non-agricultural
• We may further divide the non-agricultural sector
  into state and non-state sectors
• Three (production) factors Labor, capital, and
  land
• Land is fixed. Capital can increase due to
  investment
• Given friction of the economy and the
  productivity (TFP) of each sector, the size of
  each sector may be determined
• In a frictionless economy (and food is
  necessary), the agricultural sector would exist
  and wage will be the same for different sectors.

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Full Model

• Technology
• Cobb-Douglas Land is only for agricultural
  sector physical capital is only for
  non-agricultural sector. Labor share is 0.5 in
  all three sectors.
• Preferences
• U(cat,cnt)aln(cat-abar)(1-a)ln(cnt)
• Frictions in labor market
• wat(1-µt)wnst and wst(1?t)wnst
• So, wat(1-?t)wnt

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Model Implication
35
What could Drive Farmers out of the Agricultural
Sector?

• Subsistence constraints
• Labor market frictions (barriers)
• Investment rates
• TFP of the agricultural sector
• Land size

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What can we infer from the model?

• We need
• TFP in each of the three sectors
• Investment rates
• Barriers to labor mobility (i.e. wage wedge)
• Relative price of capital
• Parameters for production function
• Peoples preference for agricultural good
  (long-run demand)
• Subsistence consumption of agricultural good
  (short-run demand)
• We get
• Employment shares of agriculture
• Labor productivity in the three sectors
• Relative price of agriculture to non-agriculture

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Trends in TFP

• Increasing in all sectors
• TFP growth was 5.38, 4.33, and 1.66 percent for
  the agricultural, nonstate nonagricultural, and
  state sector, respectively.
• In 1978 TFP levels in state and nonstate
  nonagricultural sectors were about the same.

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Trends in Labor Market Frictions (Barrier)

• The barriers declined sharply in the early years
  but reversed trend and increased in the later
  years
• One explanation Early decline was dominated by
  the relaxation of agr-nonagr migration
  restriction (due to TVEs) while the later
  increase was more driven by rural-urban
  restrictions

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Investment and Capital Allocation

• Fixed investment increased from 23 percent of GDP
  in 1978 to 45 percent in 2004.
• Capital-labor ratio grew from RMB14,000 in 1978
  to RMB59,000 in 2004.
• Capital-labor ratio growth rates were 5.13, 2.51,
  and 6.43 percent for the agricultural, nonstate,
  and state sectors, respectively.
• Preferential treatment for state sector in terms
  of investment.

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Driving Forces of Labor Reallocation

• Table 17.3

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Forces Driving Labor Productivity Growth

• Table 17.4