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Trade globalization is in favor to the sustainable development of China's econom

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Professor, Vice President, Peking University National Development Research Institute

 

Professor Harald Uhlig of the University of Chicago has just described five points to promote economic growth. I think it is very good and I have learned a lot. I have two comments on this. The first comment is about the progress of technology and economic growth, the second is on the aging issue, I mainly want to focus on the the application of these economic theories in China.

 

First, technological progress and the role it plays. Professor Krugman, the Nobel laureate in economics of 2008 once said: productivity is not everything, but it is almost everything in the long term run. He found that the early economic development of the Southeast Asian countries emerged with only capital accumulation and increased labor investment. There is no improvement on total factor productivity. So he predicted that these Southeast Asian countries will sooner or later encounter economic crisis. As he predicted, in 1997, 3 years after his paper was published, economic crisis outbroke in the Southeast Asian countries.

 

Did China’s total factor productivity grow in recent years? economists have different research findings. For example, studied China's macro industry data, Professor Young found that China did not achieve total factor productivity growth over the 1990s. Young was pessimistic about the future development of China's economy. In fact, this is due to the aggregation bias of macroscopic data. Recently, some scholars, including myself conducted researches with micro-enterprise data in China, which is scaled industrial enterprises data, and found that total factor productivity grew rapidly over 2000 and 2008 among China's enterprises.

 

Why there are different estimations on total factor productivity (TFP)? Besides errors of the macro data, the main reason lies with the use of different methods of measurements. But we also noticed that the latest frontier measures on productivity are robust and stable. If China's total factor productivity is measured by value added, the annual growth rate would be 2.7%; if it is measured by gross output, the annual growth rate can reach to 7%. This number is more reliable. Because without a 7% annual growth rate among Chinese manufacturing enterprises, it is difficult to have macro GDP growth rate higher than 8%.

 

In fact, this finding is consistent with Professor Uhlig's finding. Professor Uhlig mentioned that China's current TFP is still lower than that of the United States, but grow faster. In the end China is likely to achieve economic catch-up, achieving high economic level as OECD countries.

 

So how can we achieve a more sustainable growth of TFP? There are at least three possible ways. The first is to improve investment on education and training; the second is to carry out research and development; the third way to achieve high TFP is through the globalization of trade.

 

First, as mentioned by Professor Uhlig, the promotion of human resources is a very important way to achieve TFP growth. The increase in the number of years of education can improve the labor productivity of workers. But here, I would like to emphasize that the improvement of higher education resource resources includes not only formal education but also informal education. As an important form of informal education, on-the-job training is also an important way to promote workers' labor productivity. Professor Acemoglu of MIT and his collaborators have done some pioneering research in this area.

 

The second way is enterprises R&D. We know that the Chinese government is currently encouraging the "mass entrepreneurship and mass innovation", which is naturally a good thing, but I would like to emphasize that we also need to distinguish two different types of research and development. R&D aims to optimize manufacturing and production process, and R&D on the development of new products. The first type of R&D is more applicable to the traditional labor-intensive industries (such as the garment industry and etc.) and the second type is more effective for technology-intensive industries or capital-intensive industries.

 

There is one issue here. As a developing country, most R&Ds in China started from product and process innovation. But, is it possible that technology development in China may have an “overtaking” journey, which, in Professor Krugerman’s words, a “leapfrog theory” process. With huge advantages on traditional and mature technologies, developed countries are reluctant to try new technology. But for developing countries, as they just started in a certain area, they may have similar scale of investment on both mature and new technologies. Therefore, developing countries are more likely to conduct R&D on new products with new technology. For example, Huawei, China's largest and most successful private telecommunications industry, invests 11 billion USD on R&D annually. Its success may not be achieved without such huge investment on R&D.

 

The third way to increase total factor productivity is through trade liberalization. To be more specific, there are three different ways to realized trade liberalization: to reduce of foreign tariffs, reduce China's final tariffs and reduce Chinese intermediate tariffs. All these three ways can be employed to enhance the overall factor productivity. First, let look at the effect of lifting of foreign tariffs may impact the change of TFP. As a member of the WTO, when China reduce its import tariffs, trade partners will also reduce their import tariffs on Chinese exports. This may help Chinese enterprises to expand their oversea market share, bringing higher profits and improve the total factor productivity of enterprises.

 

Final tariff reduction also helps to promote the TFP through participating fierce competition. How to understand it? For example, Chery, domestic Chinese car manufacturer, may face more intense competition when China reduce tariffs on imported Toyota. Enterprises with lower productivity will be tide out while the strong ones become even stronger.

 

Last but not least, the decline in tariffs on intermediate goods also has a positive effect on total factor productivity. For example, when China reduces the import tariffs on tires, domestic manufacturer, such as Chery may also enjoy lower cost. This is beneficial to higher profitability and productivity of enterprises.

 

Now the problem is under various forms of trade liberalization, which way may promote TFP to the greatest extent? In my paper published in the Economic Journal, I used the microeconomic data of China to study this issue. At the beginning, we found that the decline in the final product tariffs had a greater effect on the overall factor productivity. But things may change if we take into account that manufacturing and processing industries contribute half of China’s trade volume (about 1 trillion USD), and the fact that processing trade is exempt from tariff. In particular, without considering processing trade, we found that the reduction of intermediate tariff has a greater effect on the TFP of enterprises. This finding is in line with other results of developing countries.

 

In conclusion, since the new century, TFP of China's micro-enterprise has made great progress. Trade liberalization is an important factor behind, explaining 15% of China's total factor productivity growth.

 

My second comment is about China's aging issue and its macroeconomic revelation. Professor Ulhig also mentioned that with the growth of aging population, savings may become surplus and returns on wealth may decline. China is facing a fast-growing elderly population. At present, the population dependency ratio is 37% (which is the proportion of people over 65 and less than 15 years old) for a total population of 1.37 billion people. Although 37% is relatively low compare to the world level, the number is increasing rapidly in terms of time. China’s population of over 60 years old reached to 222 million, accounted for 16% of the total population. Aging will become a realistic problem that we have to face.

 

The aging population has three effects on the growth of China's economy. First, the greater degree of population aging indicates that China is no longer a country with cheap labor. China has realized that our labor is not infinitely available, and the era of the great demographic dividend (before 2004) has passed. The decline of demographic dividend is mainly caused by two reasons. First, declining labor supply, and second, the implementation the minimum wage laws across the country.

 

In short, China is no longer a labor-intensive country. Let’s look at specific examples. For example, now in Guangdong, the monthly wage of a blue-collar worker 3,500 yuan, 10 times of an Ethiopian worker. At the same time, the productivity of Dongguan workers is twice that of Ethiopian workers. Therefore, comparing with low-income countries, China does not have comparative advantages on labor-intensive industries.

 

So, the second question is how much work can be outsourced? The current total employment in China is $ 780 million, with manufacturing employment accounted for 35%, which is about 250 million US dollars. There are at least 80 million workers work for manufacturing sector—a small part of outsource may have positive impact on the local employment of the destination countries.

 

So where should China export its labor-intensive industries to? The common answer is Southeast Asian countries, which are close in distance and could be ideal destination. But actually, it is not true. Labor cost Southeast Asian countries is also rising. Enterprises that transfer their manufacturing bases to Southeast Asian countries may lose their advantages in one or two years and may need to move again. So Southeast Asian is not the ideal choice. African countries with good investment environment and secured social conditions are better choices.

 

Moreover, when labor-intensive industries are moved out, how do domestic workforce find employment? I think they should transfer from labor-intensive industries to service-focused industries. At present, China’s tertiary industry accounts for only about 50% of GDP, much lower than the 75-80% of many OECD countries. There is still room for development in China. Initiated by students, the OFO bicycle project is one of the successful examples of “mass entrepreneurship”.

 

Finally, I would like to emphasize that China should improve product quality and added value as soon as possible. Although the quality of the product and the domestic value added are not the same concept, they are generally relevant. In short, only the quality of products get enhanced, enterprise's productivity can be improved, and the economy can continue to grow.





◆please indicate the source if authorized: National Economics Foundation

◆photo:National Economics Foundation