Beyond The Great Wall

Why is China growing so far? An answer to this question is the subject of a recent study by two economists at the International Monetary Fund. Zuliu Hu, (currently director, National Centre for Economic Research, Beijing) and Mohsin Khan (Director, IMF Institute, Washington DC) have decomposed Chinas macroeconomic growth rate to discover that the key to Chinas prosperity has been a phenomenal increase in labour productivity. (Why is China Growing So Fast?, IMF Economic Issues Series, No 8, April 1997).

Although capital accumulation, that is the growth in the countrys stock of capital assets, such as new factories, manufacturing machinery, and communications systems was important, say Zuliu and Khan, a sharp sustained increase in productivity (that is, increased worker efficiency) was the driving force behind the economic boom. During 1979-94 productivity gains accounted for more than 42 per cent of Chinas growth and by the early 1990s had overtaken capital as the most significant source of that growth.

 

To get a feel of what this means in comparative terms it will be useful to know that while this aggregate increase in labour productivity translates into an annual rate of increase of 3.9 per cent for the 1979-94 period, the comparable figure for the 1953-78 period was close to 1.1 per cent. The figure appears even more impressive when we compare it with the rate of growth of labour productivity in the US for the period 1960-89, the post-War boom era, which Zuliu and Khan estimate to have been 0.4 per cent. For the Asian tigers the comparable estimate for the 1961-90 period is around 2 per cent.

Interestingly, Zuliu and Khan show that while capital stock grew by a sizeable 7 per cent per year during 1979-94, there was no increase in the capital-output ratio. Thus, while capital formation accounted for as much as 65 per cent of pre-1978 growth, its contribution to post-1978 growth was a mere 32 per cent. By contrast, expansion in labour force contributed to 17 per cent of pre-1978 growth and to 26 per cent of post-1978 growth. Together, however, the share of capital formation and labour force expansion in overall growth declined from 82 per cent in the pre-1978 era to 58 per cent in the post-1978 era.

Increased labour productivity more than doubled in significance, contributing a massive 42 per cent to post-1978 economic growth compared to a share of 18 per cent in the pre-1978 era.

In short, during the recent period of high growth in China labour productivity increased by twice as much as in the tiger economies of East Asia and ten times as much as in the US. Zuliu and Khan concede there are problems with Chinese economic data but argue that their results are not materially affected by such problems.

In further analysing the date, Zuliu and Khan come to several unorthodox conclusions. Did the political turmoil in China in the 1960s, the Great Leap Forward and the Cultural Revolution harm the Chinese economy? they ask. Only marginally, they conclude. Even if the period 1958-70 is dropped the average growth in productivity for the 1949-78 period increases only marginally from 1.1 per cent to 1.6 per cent. Politics was not the key stumbling block to higher productivity in Maos China, lack of material incentives for better performance and excessive regulation of the economy were, believe Zuliu and Khan.

What stimulated the productivity boom in Dengs China? According to Zuliu and Khan, the encouragement given to non-farm village enterprise triggered increased rural labour productivity. Reforms expanded property rights in the countryside and touched off a race to form small non-agricultural businesses in rural areas. Decollectivisation and higher prices for agricultural products also led to more productive family farms and more efficient use of labour.

Together these forces induced many workers to move out of agriculture and while the share of farm employment decreased that of non-farm employment increased rapidly. The resulting rapid growth of village enterprises has drawn tens of millions of people from traditional agriculture into higher-value-added manufacturing conclude Zuliu and Khan. A positive fall-out of this phenomenon of rural industrialisation is the fact that China has successfully moved millions of workers from farms to factories without creating an urban crisis. For countries with a large segment of the population underemployed in agriculture say Zuliu and Khan, the Chinese example may be particularly instructive. Some Indian economists who have studied the Chinese economy have said this before. Their view is now supported by economists at the Fund, albeit one a Chinese national and another a Pakistani!

Next to rapid growth of rural enterprise, Zuliu and Khan view the increase in foreign direct investment and exports as two other important stimuli to labour productivity. What can upset this applecart? Inflation may pose the single greatest threat to Chinese growth, through thus far it has been largely contained say Zuliu and Khan. More to the point, growing inequality could also destabilize the growth process. Zuliu and Khan do not address this question of how the fruits of increased productivity have been shared. Can an increasingly inegalitarian society sustain such high rates of growth of labour productivity? The Chinese must have already figured a way out, for they always do.