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Ch 6. Growth and Structural
Change
Contents
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Overview
Growth
Investment
Structural Change: Common Patterns
Structural Change in China: Labor
Structural Change in China: GDP
Structural Change and Globalization
Conclusion
Overview
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Economic development: increase in percapita GDP (growth) combined with
certain structural changes.
 Based on capital accumulation and technology
progress.
 Structural changes, such as urbanization &
industrialization.
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China’s economic development process
 shares many common features of structural
changes with other developing countries (focus of
this chapter)
 With some peculiar features, too.
Overview
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This comparative & structural
perspective illuminates several aspects
of China’s economy.
 Help to understand unusual and distinctive
pattern of China’s development.
 Help to understand why China is growing so
rapidly.
 Allow to project future development, with China
following the regular growth pattern (similar to
other EA economies).
1. Growth
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Comparison between pre- and post-reform.
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Acceleration of economic growth rate (6% vs 9.6%) with
lowered population growth rate (1.9% vs 1.1%).
Per-capita GDP growth more than doubled (4.1% vs 8.5%).
(1.1) Data and the Measurement of Growth
Reliability of China’s official data?
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Most reliable, because of no plausible alternatives.
No clear demonstration the data are consistently flawed.
However, not precise (& reliable) as experts want.
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As both a transition economy and a developing country.
China changed its data-collection system in 1998, and the
resulting GDP statistics revised upward by 16% in 2005.
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In particular, 1998-1999 data & energy data not reliable.
Another revision for 2007 growth rate in late 2008.
Growth (cont’d)
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Three sets of problems afflict China’s
GDP data : prices, coverage, and
politics.
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1) Not adequately correct for the effects of
inflation.
 GDP deflator (an inflation measure converting
nominal GDP to real GDP) grew less than other
inflation measures.
Use of alternative price indexes lowered the GDP
growth rate by 1.6 percentage point for 1978-1998.
 This problem most acute in the 1980s, with high
inflation.
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Growth (cont’d)
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2) Difficulty in accounting for a rapidly
expanding economy.
 Some newly produced items valued at high prices
of early period, so that overall growth rate overestimated.
 Other products are valued with lower initial (plan)
prices, such as health care, housing, leading to
under-estimation.
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3) The NBS has monopoly on statistical
collection.
 Local officials have incentives to exaggerate
(distort) the data, like GRDP used as success
(evaluation) indicator.
Growth (cont’d)
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(1.2) Growth in Comparative Perspective
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No doubt on China’s remarkable economic
growth.
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Other data confirm it (export growth, fiscal revenue
growth, etc)
Re-calculation of growth rate: about 8.1% per
year for 1978-2005.
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About 7% growth per year in per-capita GDP.
Still very impressive (the most sustained period of rapid
economic growth in human history.)
<cf: only comparable cases are Japan (1955-1973),
Asian NIEs (1982-1996), but China’s case affecting
many more people.
Growth (cont’d)
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(1.3) Instability in Growth
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Fig. 1 show pronounced cyclical pattern of
growth.
Four periods of growth rate around 10% per
year (peaks): 1978, 1984-88, 1992-95,
2003-2007.
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 Peak periods entail serious strains on the
economy (inflation, sectoral bottleneck, etc)
 Followed by period of retrenchment and slower
growth, but soon returning to high growth period.
<Figure : Growth rate of China’s real GDP (1978~2008)
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2. Investment: a key source of
growth
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China’s high growth can be explained
by sustained high investment
 Mainly based on high domestic saving.
 Investment rate (=investment/GDP) was
high even before reform, reaching around
30% by 1978.
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Maintained thruout 1980s, with reduced state
investment offset by substantial increase in
non-state investment.
2. Investment: a key source of growth
(cont’d)
 Investment rate climbed further, with
revival of state investment growth & the
increase in FDI.
Over 35% in the mid-1990s and over 40%
since 2004.
 Exceptionally high, with few comparable
cases.
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Only a few East Asian countries for shorter period.
Domestic saving has always been the most
important source of the investment.
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FDI played an important role qualitatively (identify
more productive investment projects, etc).
 High investment is not sufficient condition
for sustained high growth.
2. Investment (cont’d):
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Key channels of economic growth.
1) Capital formation: equip workers with
capital goods to make them more
productive.
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Human capital also make workers more productive.
Sufficient for growth if workers available almost free.
2) Improved “total factor productivity (TFP)”.
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Overcome “diminishing returns” to the increased capital.
Key factor: technology advance (include ‘catching up’).
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Endogenously determined by institutions, education,
policy.
Another source of productivity increase :
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Workers (& capital investment) move to sectors, where
productivity (current or future) is higher.
Out of traditional sector(s) to modern sector(s).
 The two channels are interacting.
3. Structural Change: Common Patterns
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Long term economic development is associated with
major structural changes of the economy.
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Relative shrinkage of the primary sector.
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Change in the composition of both labor force & GDP.
Decline in agriculture’s share- “Iron law of development”.
However, growth of agriculture- an early & integral
part of overall development.
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Domestic supply of food at reasonable prices, allowing
infant industries to pay modest wages, making profits.
Release workers to the growing modern sector, with the
increase in agricultural productivity.
Significant source of domestic saving initially, invested for
creating modern industrial sector.
Important market for modern sectors.
3. Structural Change: Common Patterns
(cont’d)
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The share of the secondary sector tend to
grow to a certain level, then leveling off.
 (Average pattern) Typically peaks with 20-25%,
roughly around $10,000 per-capita GDP.
 The (labor) productivity continues to rise, while
the share of workforce declines.
 However substantial diversity exists. eg. Germany
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Tertiary (service) sector shows even more
diverse pattern.
 (Average pattern) The share of the tertiary sector
show not much change in the initial stage of
development.
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It begins to rise as the economy grows further above
the threshold level ($10,000 per-capita GDP).
4. Structural Change in China: Labor
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Huge labor force: 740million of economically
active population (2000).
 Very high, increasing share of population has
been of working age.
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Relative small portion of population: elderly or kid.
 Very large share of the working-age population
participate in the labor force
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Very high participation by female labor force.
 Young and economically active population
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Favorable condition for economic development with low
dependency ratio.
Structural Change in China: Labor
(cont’d)
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Substantial change in employment structure
during reform period (Fig. 6.3).
 71% of workforce in agriculture in 1978 (76% in
all kinds of rural jobs).
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Reflect both under-development & policy distortions.
 Clear reduction in agriculture share of labor force
& even reduction in absolute numbers since
1991.
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Especially rapid in 1983-87, 1991-96, after 2003.
The first change reflect early success of rural reforms,
rise in agricultural productivity & growth of TVEs.
The second burst arose in the early 1990s with rapid
economic growth & loosened migration control.
Structural Change in China: Labor
(cont’d)
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Dramatic slowdown in the exodus of workers from
agriculture in 1996-2002.
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China no longer a predominantly agri. economy.
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Due to moderation of growth & restructuring of SOE sector
(massive lay-offs, with increasing urban unemployment).
Return to the expected direction of structural change since
2003, with the growth rate increasing again.
With less than 50% of agriculture’s share in workforce.
But still more structural change ahead waiting.
Stable share of industry in labor force (a little over
20%), with steady rise in its share in GDP (shown
later).
 Reflect surplus (redundant) workers in SOEs as legacy from
pre-reform system.
 Reflect recent distortion?,(high growth of heavy industry).
Structural Change in China: Labor
(cont’d)
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Gradual growth of service sector evident.
 The share of workers in service sector only 12%
in 1978 (remarkably low).
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Partially due to undercount (work-unit system).
Partially reflect the reality of neglect of service sector.
 Steady but gradual expansion in service sector
employment observed during the reform period.
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Reaching over 30% in 2004 (higher than industry).
New jobs are created dominantly by service sector in
recent years, showing a favorable sign.
Lower than expectation on service sector employment
<cf; 40% in many middle-income developing countries.
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Due to (potential) undercount problem & (near) monopoly
over many modern service sectors by the state.
5. Structural Change: GDP
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To measure the changing shares of GDP
contributed by the three sectors, we need
appropriate price standard. <cf: labor
 This is particularly important for China, because
the Big Push strategy distorted both price
structure and economic structure.
 Price distortion in pre-reform period:
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Relatively high price for industrial output, with low price
for agriculture & service.
Industry’s share in GDP artificially inflated, understating
the share of agriculture & service in GDP.
 High priority for industry led to relatively high
share (real) of secondary sector in GDP.
Structural Change: GDP (cont’d)
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Sectoral composition of GDP varies
substantially, as price criteria change.
 Measured in the (constant) prices of 1978.- agri.
28%, industry 48%, service sector 24% in 1978.
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Industrial workers are 7 times more productive than
agricultural workers (considering labor shares).– real?
 Price distortion eliminated over the reform period.
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Due to opening to market competition & price decontrol.
 Sectoral composition of GDP measured with
current prices shows no consistent trend.
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Industry share 48% in 1978 & 46% in 2004 (not make
sense).
 The best way is using (constant) prices of recent
year (eg. 2004)- as shown in Fig. 6.4.
Structural Change: GDP (cont’d)
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Composition of GDP measured at 2004
constant prices (more rational)- Fig. 6-4.
 In 1978, share of agri. & industry was 42% & 29%
according to this new measure.
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Labor productivity 3 times larger in industry than
agriculture, comparable to other developing countries.
China as of 1978 was less extreme outlier than the
current price data suggest.
 Clear picture of structural change since 1978,
which is more consistent with the general pattern.
 Two periods can be discerned in the figure.
Structural Change: GDP (cont’d)
Two phases
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Modest structural change in 1979-1990.
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Agriculture’s share steadily declined, slowly at first (until
1985), & more rapidly thereafter.
Service’s share steadily increasing.
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Strong recovery from the repression of pre-reform system.
Industry’s share increased relatively slowly.
More pronounced structural change with the renewal
of economic reform and rapid growth after 1991 .
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Rapid industrial growth dominated, with it’s share
jumping from 32% (1990), to 42% (1995), to 46%
(2004).
The share of services has leveled off around 40% due to
overwhelming industrial boom. <cf: other countries
Agri. share dropped sharply to 13% (04) from 29%
(1990).
Structural Change and Globalization
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A key characteristic of China’s economic
structure is ‘high’ ratio of “manufacturing”.
 Unprecedented phenomenon (maintain 35%).
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<cf: Secondary (industry) sector > manufacturing.
 Related with high investment rate & gov’t policies
fostering industrial growth.
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Irony that investment rate & manufacturing share have
risen since China abandoned the Big-Push strategy.
 China emerging as ‘world factory’.
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As cluster of certain stages of Asia-wide manufacturing
networks (related with multinational corporations).
Globalization and international trade created new
opportunities for specialization.
<cf: India- increasing share of service sector(over 50%)
Conclusions
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Economic growth intertwined with structural
change thruout development process.
 Identified China’s unique path, by examining the
benchmark (regular pattern) of structural change.
 China’s Big Push strategy created divergence
from the benchmark (both in labor and GDP).
 China still follows general pattern of
development.
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China has some uniqueness.
 Unusually large manufacturing sector, highly
developed urban centers, lagging service sector,
and underdeveloped rural areas.
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The process of structural change is well
under way, and will continue into the future.