Structural Transformation and Growth in China: Loren Brandt (U. of Toronto) Chang-Tai Hsieh (Berkeley) Xiaodong Zhu (U. of Toronto) Preliminary and incomplete For 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

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%

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.