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Published: 01:03, June 13, 2023 | Updated: 10:37, June 13, 2023
Is total factor productivity growth stalling in China?
By Ho Lok-sang
Published:01:03, June 13, 2023 Updated:10:37, June 13, 2023 By Ho Lok-sang

Loren Brandt and his team in 2020 published a working paper for the World Bank, concluding that Chinas total factor productivity (TFP) growth has stalled. The study used both macro data and sectoral data to come to their conclusions. Their results have been widely reported, and today the stalling Chinese TFP growth narrative is widely accepted among commentators and academics. But there may be more to the story than appears.

The authors found that earlier reforms led to State-owned enterprises (SOEs) catching up to private sector productivity levels in manufacturing, but convergence stalled after 2007, and believed that this may be due to limited market entry and exit, and lack of resource allocation to more-productive firms. They certainly were referring to the privileges that SOEs enjoy in accessing credit and other resources compared with firms in the private sector. However, there is some justification for such privileges. This is because SOEs have political missions to accomplish. For example, during the COVID-19 outbreak, all SOEs had to contribute what they could to build Wuhans Leishenshan Hospital in 10 days. Many private enterprises also helped, but they generally assume much lesser roles. The SOEs are also tasked with contributing to poverty eradication. For example, according to the State Council Leading Group Office of Poverty Alleviation and Development, a total of 96 centrally administered SOEs have offered targeted support to 246 poverty-stricken counties, or 41.6 percent of the total key counties under the national poverty-relief program.

I have been puzzled by the prevalent TFP slowdown narrative for a long time. It seems so incompatible with the many real stories that have been reported: The completion of Leishenshan Hospital in 10 days is a case in point. The efficiency of the delivery system in China is another. Those who had used FedEx, UPS and SF Express are all amazed how SF could manage such fast delivery at such low cost. The speed at which China builds various kinds of infrastructure against all odds is also astounding. All these stories simply do not hang comfortably with the TFP slowdown narrative.

According to the authors, there was hardly any growth in productivity in this sector. But this is only because the contribution of nonmarket services is not at all counted in the GDP! But it is important to the quality of life of the sick, the elderly and the handicapped, and the huge growth in employment in this sector may reflect Chinas greater focus on peoples livelihoods

I would argue that much of the so-called TFP slowdown is because the calculation of TFP has ignored the output of nonmarket goods: things that are desirable in their own right but that do not carry a price tag. We know for a fact that China has shifted its attention from rapid growth to quality growth. We know for a fact that the water bodies on the Chinese mainland have vastly improved in quality, that the air quality of virtually all our cities has improved significantly, that regional disparity between the inland regions and the coastal provinces has narrowed. We also know for a fact that Chinas people live healthier and longer lives year-in, year-out despite COVID-19, that our cities have become cleaner and safer, and that we have put up a great show in afforestation, in pushing back desertification, in preserving the Tibetan antelopes.

In general, using macroeconomic data to work out TFP suffers from the limitation that while inputs used to pursue nonmarket production are counted, only market production traded through the market or imputed under current national accounting practices will be counted. Improving the environment, building infrastructure to ensure water security, food security, improving public hygiene, making life easier for the handicapped people, etc, all require resources, but the outputs are invariably not counted in the GDP. This is why measuring TFP using macroeconomic data may be misleading. One might argue that if TFP is measured consistently over time, then changes in the TFP growth rate would still signal correctly the direction of change. However, if there is a shift in policy priority over time, so that much greater attention is placed on environmental protection and poverty eradication and the like, then inferring a slowdown in TFP growth because the measures derived from macro data show a declining TFP growth may be wrong.

Loren Brandt and his team did, however, also use sectoral and even firm-level data. However, the result that SOE productivity growth appeared stalled from 2007 is entirely consistent with the political mission story discussed above. If in 2007 China suddenly realized that the earlier growth path was unsustainable, there had to be a shift in policy priorities. Since the SOEs are tasked with greater responsibility in the new political mission, it is understandable that they could not continue to catch up with private-sector productivity levels. To the extent that they have done their job, helping alleviate extreme poverty, helping poor people live in safer and more hygienic homes, they may continue to be productive in other ways.

Brandt and his team also noted that there was a shift in employment to services. This is a natural development as the economy develops. But interestingly, they noted that in China, employment in nonmarket (community, social and personal) services jumped 12 percentage points since 1980 to 14 percent of the labor force by 2010. According to the authors, there was hardly any growth in productivity in this sector. But this is only because the contribution of nonmarket services is not at all counted in the GDP! But it is important to the quality of life of the sick, the elderly and the handicapped, and the huge growth in employment in this sector may reflect Chinas greater focus on peoples livelihoods!

The author is director of Pan Sutong Shanghai-Hong Kong Economic Policy Research Institute, Lingnan University.

The views do not necessarily reflect those of China Daily.

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