[MUSIC] How has structural change contributed to China's economic growth? As countries develop, we know that the structure of the main sectors of the economy often changes, and China is no exception. We've seen in China that industry has become much more important, especially given that China has become the factory of the world. Also, the service sector has become increasingly dominant, and in fact is now the largest of the three sectors in China. Now in addition to this structural change across the main sector to the economy, we can also think about structural changes occurring within these big sectors. So, even within industry, we can be moving from low productivity types of products to much more higher, or productivity, higher value added products. And, in China, we really want to understand how much of the growth has been achieved by reallocating the workers from low productivity agriculture to higher productivity industry. The remaining opportunities for structural change also will affect how we think about the potential for future growth in China. Now, if we just look at the broad structure of GDP in the economy, we can see that the primary sector has shrunk tremendously. And secondary sector has been large. And in the most recent period, has grown slightly. And in this tertiary sector, or service sector, which has been the main growing sector over the reform period. Now, if we looked at employment, it would look somewhat similar. But the primary sector would continue to be much larger. Because even though GDP is a small share, employment is still about 30% of the workforce. If we compare China to India, which is known for its service sector economy, we can see that there's a huge difference in the relative importance of the secondary industry. Mainly industry, manufacturing, and India where it's relatively undeveloped. So that's an important contrast in the structural change that has occurred in China and other places. Now, why is structural change important for growth? Well, mainly because typically there's very large gaps in the labor productivity of the primary sector versus the nonprimary sector. And here is an illustration plotting cross-country evidence. Usually when most of the employment is in the primary sector. So, if you're higher on this x-axis, you see that the ration of labor productivity in primary to nonprimary is very low. So, as little as 20% as productive if you're in agriculture or primary sector compared to the nonprimary sector in countries where they have a very large agricultural sector. And as you industrialize, this ratio shrinks. In other words, as you become more industrial, this gap in the productivity between the primary and the nonprimary sectors become smaller and closer to 1. So in this case, it's moving kind of to the left along the x-axis. And so there's big gains to move labor from the primary sector to the nonprimary sector. If we look at China's data over time, you can also see, as in other countries, a big gap between the labor productivity of workers in agriculture compared to the workers in nonagriculture. So, you can see that by the end of the period plotted here, the productivity in nonagriculture is actually about three times greater than the productivity in agriculture. And so shifting labor away from agriculture can lead to increases in output. Now if we do a kind of a standard decomposition of how much growth comes from the reallocation of resources from one sect from the primary sector to the nonprimary sector. And then, how much is due to improvements in the labor productivity within those two sectors? We come up with results that are shown in this figure, where for the overall periods studied, 1978 to 2004, you can see that reallocation accounts for about 25%, or so, of total GDP growth. And the output per worker growth in nonagriculture accounts for the majority share. And in particular, if we look at the more recent period from 1988, that importance of the productivity growth in nonagriculture has been even more important. In addition, if we then divide the nonagriculture into the state sector and the nonstate sector, and we know from our earlier modules that the state sector is not as productive as the nonstate sector. We can see that there are these big differences in the growth in total factor productivity in these different sectors. So the state sector growth has been much more modest, much slower in than in the nonstate, nonagricultural sector. And this means that keeping resources in the state sector is definitely going to be slowing overall growth. If we look at the change in the share of employment and share of GDP in the three sectors, you can see that this nonstate, nonagricultural sector has grown tremendously over the reform period. And that's, of course, a good thing. Because this is the most productive sector of the economy. And more and more resources are being re-allocated to that sector. Now, what about growth going forward? Well, we've seen that structural change has been an important source of growth. Accounting for about 25% of overall economic growth thus far. And the key aspect here has been moving resources from the agricultural sector to the nonagricultural, nonstate sector. Now, can structural change continue contributing to future economic growth? Well, official data suggests that 30% of labor is still in agriculture. So there's still an opportunity, obviously, to move those people out of agriculture into higher return activities. There are also large gaps between the nonstate and the state sectors. And so, we could get higher growth by reallocating resources away from the state sector to the nonstate sector, as well. The lack of a fuller adjustment of labor out of agriculture and out of the nonstate sector. I'm sorry, the state sector into the nonstate, nonagricultural sector. May reflect a number of institutional barriers related to inter-regional or a rural-urban or state, nonstate mobility of both labor and capital. So, for instance, if banks are not making loans to private firms, this is going to reduce the speed of structural change if restrictions on migration or discrimination against rural migrants in cities is reducing the amount of labor flow. That of course also will reduce the speed of structural change.
