Industry origin of aggregate TFP growthOn average, 73% (0.63 percentage points) of the 0.86% aggregate TFP growth from 1981 to 2012 could be attributed to the contribution of industries and 27% (0.23 percentage points) to the reallocation of factors across industries (Table 2). By decomposing the industry origin TFP into four ICT-specific groups, we find that China is no exception to the international trend. Both ICT-producing and ICT-using manufacturing groups played a remarkable role, especially the contribution (0.92 percentage points) of ICT users. This is about 2.5 times the contribution of ICT producers (0.37 percentage points).
Table 2 also shows losses in TFP growth for both the ICT-using services (0.14 percentage points) and non-ICT (0.52 percentage points) groups. The poor TFP performance of the ICT-using group makes China an outlier. Most of the industries in this group (trade, transportation, finance, scientific research, and so on) are state-owned. We can then substantiate the claim in Wu (2106) that industries prone to government interventions were less productive than those close to the market, by showing that state-monopolised industries are inefficient, even if they are highly exposed to ICTs.
Table 2 Decomposition of China’s aggregate TFP growth, 1981-2012
(Contributions shown in Items 1-3 are weighted-growth rate in percentage points)
Source: Wu and Liang (2017). Results are reorganised.
We split the industry-origin TFP performance, by industry group, over sub-periods (Table 2). In Figure 1, we can show the composition of our estimated TFP growth in two connected panels. Panel A shows how ICT-specific groups contribute to the industry-origin TFP growth, and Panel B shows how the items in Panel A, together with factor reallocation effects, make up the aggregate TFP growth.
Panel A shows, as we might expect, the period following China’s WTO accession in 2001 was a contrast with the 1990s. Between 2001 and 2007 the ICT-using services joined the other two ICT-related groups and made a significant contribution to industry-origin TFP growth. But the non-ICT group did not sustain its TFP growth from the 1990s, and suffered a big loss in productivity. The Global Crisis was a shock to TFP growth (-2.08% per annum), yet attributable mainly to the non-ICT industries (-2.13 percentage points, as in Table 2). In contrast, the ICT-related groups showed strong resilience to the crisis. The ICT-producing group remained TFP-positive, whereas the other two ICT groups made a small loss in TFP growth.
Figure 1 Decomposition of China’s aggregate TFP growth, 1981-2012
(Contributions are weighted-growth rate in percentage points)
Source: Table 2.
Notes: The sum of the four items in Panel A equals to the total TFP (industry origin) growth through the Domar aggregation, which is exactly the same as 'TFP (industry origin)' in Panel B (both could be measured by their altitudes). The sum of the three items in Panel B equals to the aggregate TFP growth. 'ICT-using 1' is ICT-using manufacturing, as in Table 2, and 'ICT-using 2' is ICT-using services, as in Table 2.
Factor reallocation and policy implicationsPanel B of Figure 1 shows that, in addition to the industry-origin TFP growth, there have also been considerable capital and labour reallocation effects on China’s aggregate TFP growth. This has not typically been observed in market economies. Jorgenson et al. (1987) show that, when not negligible, the reallocation of capital tends to be positive and the reallocation of labour tends to be negative. This is because capital grew more rapidly in industries with high capital-service prices, whereas labour grew relatively slowly in industries with high marginal compensation.
We find the opposite. China’s labour reallocation effect was positive over time. This may suggest that there was continuous improvement of the labour market during the reform period, increasing labour mobility. Nonetheless, China’s capital reallocation effect remained negative, implying that there was a severe misallocation of capital resources.
In a nutshell, while sharing 29% of China’s 9.38% annual value-added growth (as in official accounts), Chinese ICT-producing and ICT-using manufacturing industries contributed 149% of China’s 0.86% annual aggregate TFP growth between 1981 and 2012. This enabled the economy to compensate for heavy productivity losses caused by persistent misallocation of capital resources, and the inefficiency of sectors in which the government intervened.
Editors’ note: The main research on which this column is based first appeared as a Discussion Paperof the Research Institute of Economy, Trade and Industry (RIETI) of Japan.
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Endnotes[1] For details of thess data, see Wu (2015), Wu and Ito (2015), and Wu et al. (2015).