In 1978, after nearly 30 years of socialist planning under Mao Zedong, China was one of the world’s poorest countries, saddled with an inefficient, inward-looking economy. Today, China is an upper-middle income country and the world’s largest trading nation, contributing more to global economic growth than any other nation. How could such a remarkable transformation take place? This course will examine in detail the reforms that have contributed to China’s economic development and the current challenges facing the Chinese economy. After completing this course, you will be able to: - describe the origin and consequences of China’s key economic reforms since 1978; - explain how features of China’s fiscal and financial systems have impacted development outcomes; - assess the extent to which China has integrated itself into the global economy and the consequences of such integration for China and other countries; - explain the importance of different sources of economic growth during different periods since 1978; and - critically assess the economic and policy challenges facing China going forward. This course does not offer certificate at the moment. Course Overview video: https://youtu.be/YBkhpvWUoIw
4.5 Productivity Growth
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Из курса от партнера The Hong Kong University of Science and Technology
China’s Economic Transformation Part 1: Economic Reform and Growth in China
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The Hong Kong University of Science and Technology
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Module 4: Economic Growth and Structural Change
In this module, we will focus on China's economic growth and structural change.
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Albert ParkDirector of the Institute for Emerging Market Studies, Chair Professor of Social Science and Professor of Economics
[MUSIC]
We have learned that productivity growth has been the most important
source of economic growth in China during the reform period.
But what causes productivity growth?
Well, here economists have some difficulty.
Because in many ways, understanding productivity growth is a black box.
It's a black box because it's very difficult to measure technological change.
We can observe the growth in inputs of capital and
labor but to explain why output grows faster than inputs Is very hard.
In fact, total factor productivity is really defined as part of the output that
we can't explain, that can't be explained by the amount of inputs that are observed.
We do know that in China, Total Factor Productivity growth has been quite high,
about six and a half percent per year.
But what are the factors that contribute
to creating such a high rate of Total Factor Productivity growth.
We also know that the non-state,
non-agricultural sector has been the key driver of productivity growth In China.
So what are the factors?
Let's think about them.
I think, certainly one of the more important factors is competition.
We have to think about the incentives that firms have
to really try to maximize profits and increase profits.
And a big part of that is that they have to feel some competitive pressure
from other firms.
China, the one thing it has done from the very beginning, has really opened up
markets and forced households and firms to really be competitive in an open market.
And I think this has really contributed to the drive that individual households and
firms have had to try to maximize profits and increase their productivity.
Incentive reforms have also been important.
Even if you face markets if you don't have an ability to keep
the profits that you earn, then you still will be under-incentivize.
And so the decentralization reforms in various sectors and for
the government have all contributed to I
think to making people more motivated to improve productivity.
Globalization has played a key role in particular in enabling firms to
transfer technologies from the rest of the world through a foreign direct
investment by being able to import capital equipment or
other more sophisticated inputs and to learn from them.
And also to export to consumers in other countries that
have a high Demand for high-quality products, which forces the firms
to understand better how to improve the quality of their production.
Globalization can also increase competition through imports, so
that Chinese firms have to not only compete with other Chinese firms, but
they have to compete with firms globally.
Finally, innovation really lies at the heart of
sustained productivity growth going into the future.
And here we can think of innovation in different Product and services but
also management processes or production processes that improved productivity.
We can look at a couple of indicators that are often use to proxy for
the investment and innovation and this are for
example research in doubt expenditures and
patenting activity by firms.
What supports innovation is also very complicated, and
we'll come back to this point in the conclusion of this presentation.
So, if we turn to the two indicators that we have, first if we look at research and
development, expenditures as a share of GDP, we can see that China has risen from
a somewhat low level to almost the same level as the other advanced economies.
So it's increased the share of the GDP that it's investing back into research and
development steadily over time since the mid 1990s.
If we look at patenting activity for
inventions, China's progress is even more spectacular.
In this domain China is actually gone from a position of considerably lagging
Japan and United States to quickly surpassing them.
So that now much more patenting activities occurs in China than in any other country
in the world.
Another important aspect of innovation is what is the purpose
of the innovation activity, in terms of trying to save different types of costs.
What I mean here is there is a hypothesis are called the induced innovation
hypothesis which states that, the demand for technology is biased toward
economizing on the relatively scarce production factors.
So, for China, which was originally a labor-abundant country,
it means that, initially, most innovation and
investment was designed to try to save on land and capital.
Meaning raise output per unit of land, raise output of unit of capital but
not so much raise output per unit of labor because labor was very cheap.
So that was the focus,
it doesn't mean that output per unit of labor didn't increase somewhat.
But not nearly as much as would be the case if the goal of innovation
was to try to improve labor productivity.
Now this has changed quite a bit in recent years.
Because in recent years, wages have been increasing quite dramatically in China.
So the cost of labor has gone up a lot.
Whereas the cost of capital has actually declined a lot in relative terms.
Because as a richer country, capital is more abundant.
And this means that there is now a much greater demand for
labor saving technology.
And the types of technologies we are probably referring to are automation,
replacing workers with robots.
The future of manufacturing many people feel is going in this direction and
all of this is now happening in China.
We'll talk a bit more about that in the next module.
What's important to realize in this respect is that
labor-saving technology is the key to increasing labor productivity.
And thus wages and as wages rise so do incomes and consumption per capita.
So when a country reaches the point where it's really trying to
raise labor productivity, the innovation's often actually
much more directly improve the standard of living of the people.
Now in conclusion, what have we learned about productivity growth?
First, we have seen that economic reforms
played a very important role in spurring productivity growth.
Especially in the non-state sector by promoting competition,
improving incentives and giving firms and households an incentive to innovate.
In recent years, the indicators of innovation that we have suggest that China
may be transitioning from a strategy of mainly trying to copy global technologies,
to a strategy of trying to innovate themselves.
And this of course will be the key to sustaining growth into the future
in terms of how innovation occurs.
It's a complicated problem but we do know that in China both the public sector,
the government and the private sector have both played very important roles.
The government by making key investments in research and development,
basic research, a whole system of research institutes of various types and
also by giving concrete incentives to firms to
innovate by providing subsidies and other types of support.
However, the real driving force of production relevance Invention and
innovation are firms themselves.
And in China, because China has been so competitive and
successful in it's exports and in globalizing it's economy.
Many firms in China are facing fierce competition and are making great efforts
to innovate and remain profitable in a highly competitive environment.
In the long run, China needs to create an effective innovation ecosystem.
Now, what are all the ingredients to a successful innovation ecosystem?
There are many institutional
factors that are going to be more important for innovation.
And that includes protecting intellectual property rights,
having a very good legal system that protects property rights, and
having a good well thought out kind of public-private
balance in developing new inventions and applying those new inventions
to applications that will increase actual economic output.
Many countries want to create a new Silicon Valley People disagree on
exactly what the formula is.
There is evidence of a high level of innovation of activity in China.
Shenzhen, the city near Hong Kong, has now become a center of innovation in China,
and many firms we know are investing in research and development and inventions.
But the extent to which China can sustain this success into the future
is something we will have to observe going forward.
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