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Sectoral Productivity Growth in China
Baiding Hu and Michael McAleer
Department of EconomicsUniversity of Western Australia
Abstract: Rapid economic growth in the 1990s in China raised the
question of whether the high growthwas achieved by augmenting
economic scales and increasing investment, through productivity
lifting andefficiency improvement, or both. This paper analyses and
evaluates total factor productivity growth andtechnical efficiency
in five sectors that encompass the full spectrum of the economy.
Assuming a constantrate of technological progress, a random effects
panel data model is estimated to quantify total factorproductivity
growth over the period 1991 to 1997, which covers the prominent
eighth five-year period. Thepanel consists of data from 30 Chinese
provinces on output, capital and labour for (i) Agriculture,
(ii)Industry, (iii) Construction, (iv) Transportation, Post and
Telecommunications, and (v) Services. Strongtotal factor
productivity growth was recorded in Agriculture and Transportation
, Post andTelecommunications over the sample period. In the other
three sectors, total factor productivity growthslowed down and even
declined.
Keywords: sector, total factor productivity, technical
efficiency, panel data model, regions, provinces.
1. INTRODUCTION
Rapid economic growth in the 1990s in Chinaattracted world-wide
attention, with the real GDPgrowth rate from 1991 to 1997 averaging
over 10per cent per annum (China Statistical Year Book,1998). It is
important to investigate whether thehigh growth was achieved by
augmentingeconomic scales and increasing investment,through
productivity lifting and efficiencyimprovement, or both. Previous
productivitystudies on China’s economy have been concernedlargely
with productivity differentials betweendifferent ownerships, or
with productivity in asingle sector or a section of the economy
(see, forexample, Jefferson et al. (1992, 2000), Hu (2001),Zhang et
al. (2001), Xu and Wang (1999), Zhenget al. (1998), Zhang and Zhang
(2001), Liu andZhuang (2000), Wu (1995, 2000), Xu (1999),
Chen(1996), and Liu and Yoon (2000)).
The paper analyses and evaluates total factorproductivity growth
and technical efficiency in fivesectors, namely, Agriculture (agr),
Industry (ind),Construction (con), Transportation, Post
andTelecommunications (tpt), and Services (ser),which span the full
spectrum of the economy.
Productivity performance in these sectors offersinsight into how
productivity contributes togrowth in the sectors individually, and
hence theeconomy as a whole. Assuming a constant rateof
technological progress, a random effects paneldata model is
estimated to quantify total factorproductivity growth over the
period 1991 to1997, which encompasses the prominent eighthfive-year
period. The panel consists of data from30 provinces on output,
capital and labour for thefive sectors, with total factor
productivity growthbeing estimated separately for each of
thesectors.
The plan of the paper is as follows. Section IIdiscusses the
data and estimation. Section IIIanalyses the empirical results.
Some concludingremarks are given in Section IV.
2. DATA AND ESTIMATION
Following Cornwell et al. (1990), Fecher andPestieau (1993) and
Wu (1995), the paperemploys the random effects panel data modelwith
a time variable to capture technologicalprogress, namely:
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tijtijtijiiitij uvty ,,,'
, ++++= xbha (1)
where
sertptconindagri , , , ,= , 19971991 , , t ⋅⋅⋅= ,
301 , , j ⋅⋅⋅= (provinces), tjagry , , tjindy , , and
tjcony , are the logarithms of gross output value,
tjtpty , and tjsery , are the logarithms of value-a d d e d o u
t p u t ,
),, ,(, ¢= landfertilizermachinerylabourtjagrx ,
) ,(, ¢= sixed assetvalue of fnetlabourtjindx ,
),(, ¢= machinerylabourtjconx ,
) ,(, ¢= assetsfixedlabourtjtptx ,
) ,(, ¢= assetsfixedlabourtjserx , tijv , is an iid
error, and tiju , is the inefficiency term with non-positive
values which is independent of the whitenoise error. Machinery is
measured in kw for bothagr and con, fertilizer is measured in
tonnage, andland is measured in hectares. Direct measures ofcapital
stock for tpt and ser are not available so aproxy is used, namely:
for 1993 to 1997, the sumof newly increased fixed assets through
capitalconstruction and newly increased fixed assetsthrough
innovation; and for 1991 and 1992, newlyincreased fixed assets were
not available, so thesum of investment in capital construction
andinvestment in innovation is used. Owing to thelagged effects of
investment, newly increased fixedassets are preferred to
investment. All data areexpressed in 1997 prices.
Model (1) is estimated using least squares. Theestimated
residuals
)ˆˆˆ(ˆ ,'
,, tijiiitijtij ty xbhae ++-=
are used in 2,ˆ tt ijijijtij qdge ++= to estimate the
growth rate of total factor productivity (TFP),TFPD , as
)ˆ2ˆ(ˆ tTFP ijijiij qdh ++=D , (2)
and technical efficiency (TE) as
)ˆˆexp( max, ee -= tijijTE . (3)
3. EMPIRICAL RESULTS
The estimated coefficients of equation (1) aregiven in Table 1,
with asymptotic standard errorsin parentheses.
Most of the coefficients are statisticallysignificant at the 5%
level. Capital for tpt isnegatively related to output, but is
statisticallyinsignificant. Land played a significantlynegative
role in determining agricultural outputbecause the total area under
cultivation has beendeclining continuously since the late
1970s,whereas total agricultural output has been risingdue to
improvements in output per unit of land.
Table 1. Production Function EstimatesSector
agr ind con tpt sera 0.9264 (1.1057) -0.9107 (0.4187) 1.8960
(0.6590) 0.0135 (0.6813) 0.2329 (0.8653)
h 0.0122 (0.0092) 0.0410 (0.0549) 0.0845 (0.0076) 0.0050
(0.0081) 0.0066 (0.0096)
Labour 0.2347 (0.0777) 0.4459 (0.0501) 0.0431 (0.0350) 1.0517
(0.0723) 0.7108 (0.0533)
Machine 0.1976 (0.0979) - - - -
Fertiliser 0.5290 (0.0934) - - - -
Land -0.1347 (0.0705) - - - -
Capital - 0.3101 (0.0535) 0.7869 (0.0462) -0.0043 (0.0271)
0.2952 (0.0444)
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Using the estimated coefficients, TFP and TEwere calculated
according to equations (2) and(3), respectively, for each province.
The nationalTFP and TE, which are presented in Table 2,were
obtained by averaging the provincialestimates. TE measures
efficiency against thebenchmark of best practice. In the present
study,the larger is the TE for a province, the smaller isthe
difference between the province and bestpractice, and hence the
less is the variability. Inall sectors, best practice was observed
in eitherShanghai or Jiangsu province, both of which areviewed as
the most developed areas in China.The first half of Table 2 shows
that theAgriculture sector has the smallest TE variabilityas its
average TE is around 60 per cent over theperiod This is followed by
the Services sector,whose average TE is well above 50 per
cent.Although more TE variability is observed in theConstruction
sector, it managed to improve its
Table 2. National TE and TFP
TEYear
agr ind con tpt ser1991 0.61 0.39 0.20 0.33 0.521992 0.59 0.41
0.24 0.28 0.561993 0.59 0.42 0.29 0.26 0.591994 0.59 0.43 0.33 0.26
0.611995 0.59 0.42 0.36 0.27 0.601996 0.60 0.41 0.38 0.29 0.581997
0.63 0.39 0.37 0.34 0.54
Year TFP1991 -0.02 0.09 0.35 -0.16 0.101992 -0.01 0.08 0.30
-0.11 0.071993 0.00 0.06 0.24 -0.05 0.041994 0.01 0.04 0.18 0.01
0.011995 0.03 0.02 0.13 0.06 -0.021996 0.04 0.01 0.07 0.12
-0.051997 0.05 -0.01 0.02 0.17 -0.08
Table 3. Agriculture: TE and TFP
East Central WestYear
TE TFP TE TFP TE TFP1991 0.71 0.01 0.56 -0.01 0.56 -0.061992
0.71 0.01 0.55 0.01 0.53 -0.041993 0.71 0.02 0.55 0.02 0.51
-0.021994 0.72 0.02 0.56 0.04 0.49 0.001995 0.73 0.03 0.58 0.05
0.49 0.011996 0.74 0.03 0.61 0.06 0.49 0.031997 0.76 0.04 0.64 0.08
0.50 0.05
TE to the extent that the average TE increased to37 per cent of
best practice in 1997 against 20per cent in 1991.
The second half of Table 2 shows the TFPgrowth rate. The results
indicate that both theAgricu l ture and Transportation, Post
andTelecommunicat ions sectors experiencedsignificant accelerated
TFP growth over theperiod, whereas the other three sectors
haddeclining TFP growth. For the Industry andServices sectors, TFP
actually decreased towardsthe end of the period.
Table 4. Industry: TE and TFP
East Central WestYear
TE TFP TE TFP TE TFP1991 0.59 0.12 0.37 0.09 0.23 0.071992 0.62
0.09 0.38 0.08 0.24 0.061993 0.65 0.06 0.40 0.07 0.25 0.051994 0.65
0.03 0.41 0.06 0.25 0.041995 0.64 0.00 0.42 0.05 0.25 0.021996 0.60
-0.03 0.43 0.04 0.24 0.011997 0.56 -0.06 0.43 0.03 0.23 0.00
Table 5. Construction: TE and TFP
East Central WestYear
TE TFP TE TFP TE TFP1991 0.23 0.24 0.20 0.18 0.17 0.231992 0.30
0.17 0.23 0.14 0.20 0.171993 0.38 0.10 0.26 0.11 0.23 0.111994 0.46
0.09 0.29 0.10 0.26 0.111995 0.52 0.06 0.31 0.10 0.27 0.101996 0.55
0.04 0.33 0.10 0.26 0.041997 0.55 0.01 0.33 0.06 0.25 -0.01
An analysis of the regional breakdown of thenational figures
sheds greater light on sectoralTE and TFP movements.
Table 6. Transportation, Post andTelecommunications: TE and
TFP
East Central WestYear
TE TFP TE TFP TE TFP1991 0.43 -0.08 0.27 -0.19 0.28 -0.211992
0.39 -0.04 0.23 -0.12 0.23 -0.151993 0.38 0.00 0.21 -0.06 0.20
-0.091994 0.38 0.04 0.20 0.00 0.19 -0.031995 0.40 0.09 0.20 0.06
0.19 0.041996 0.45 0.13 0.22 0.13 0.21 0.101997 0.53 0.17 0.26 0.19
0.24 0.16
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Tables 3 to 7 contain estimates of TE and TFPby region and
sector. The East region, whichrefers to the eastern coastal area
comprising 10provinces, including Shanghai and Jiangsu, isendowed
with more developed infrastructure andtechnology, and much higher
levels of labourforce skills, as compared with the other areas
ofChina.
Table 7. Services: TE and TFP
East Central WestYear
TE TFP TE TFP TE TFP1991 0.59 0.17 0.49 0.04 0.48 0.081992 0.67
0.13 0.50 0.03 0.51 0.051993 0.74 0.09 0.51 0.01 0.52 0.021994 0.79
0.05 0.51 0.00 0.52 -0.011995 0.80 0.00 0.50 -0.02 0.51 -0.041996
0.79 -0.04 0.49 -0.03 0.47 -0.081997 0.75 -0.08 0.46 -0.05 0.43
-0.11
These favourable conditions have helped toattract foreign direct
investment andtechnologies. The Central region includes 8provinces
neighboring the coastal provinces, andthe West region covers 12
provinces in theinterior western area.
Agriculture
Table 3 shows that the East region clearly led theother two
regions. TE in the East region rosesteadily from 71 per cent in
1991 to 76 per centin 1997. Generally, the East region led
theCentral by 10 per cent and the West by 20 percent. Whereas the
East and Central regions sawan upward trend in TE movements, the
Westexperienced a downward trend from 57 per centin 1991 to 50 per
cent in 1997.
The East also maintained a constant but mildTFP growth, whereas
both the Central and Westregions recorded negative growth
rates.However, the Central region enjoyed anaccelerated TFP growth
after 1993 and surpassedthe East to become the region with the
fastestTFP growth. The West managed to catch up tothe Central
region in 1997. Therefore, risingTFP is observed in all regions,
and rising TE isobserved in two of the three regions whichaccount
for more than 70 per cent of the totalagricultural output.
Industry
Compared with Agriculture, the East regionclearly led the other
two regions, and the Centralled the West. However, the magnitude of
thedifference is almost twice as large as in the caseof
Agriculture. For Agriculture, the average TEfor the East, Central
and West regions were 72per cent, 61 per cent and 51 per
cent,respectively. For Industry, these figures were 62per cent, 41
per cent and 24 per cent,respectively. While the East and West
regionsrecorded a declining TE in the last two or threeyears, the
Central defied the trend, showing asteady increase in TE.
While there was still one region experiencing arising TE, all
regions witnessed a declining TFP.The East region suffered the
most, with its TFPgrowing at 12 per cent in the beginning of
theperiod and plummeting to a negative growth rateat the end. The
other two regions also recorded acontinuous decrease in TFP growth
butnevertheless maintained a positive growth rate.
Construction
As expected, the East region is more efficientthan the Central,
which is more efficient than theWest. While TE rose continuously in
all theregions, the gap between them increased rapidlyover the
years, which was not observed in theother sectors. Initially, the
East led the Centralby about 3 per cent, which was also the
marginof the Central over the West. By the middle ofthe period, the
gap between the East and Centralregions grew to 7 per cent, and
then to 12 percent by the end of the period. The gap betweenthe
Central and West regions also climbed to 8per cent.
In contrast to movements in TE, TFP growth fell,with the East
and West regions falling moresignificantly than the Central. This
was partlyreflected by the nation-wide fact that the powerof
machines per worker, as measured bykw/person, fluctuated prior to
1995 and fellafterwards (over the seven-year period 1991 to1997,
these figures were 4.0, 3.8, 4.3, 4.0, 4.7,4.6 and 4.1).
Transportation, Post and Telecommunications
This sector has the most variable TE across theregions. The East
was significantly moreefficient than the other two regions. From
1995onwards, TE in the East was more than doublethose in the
Central and West regions.
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Improvement in TE only happened in the Eastregion over the
period 1991 to 1997, rising to 53per cent in 1997. A slight drop in
TE in 1997relative to 1991 levels was recorded in the
otherregions.
TFP was rising steadily across all the regions.The East started
in a leading position relative tothe other two regions, but the gap
was decreasingover the years. The Central region matched theEast in
1996 and managed to surpass it in 1997.By 1997 the gap between the
East and Westregions narrowed to less than 1 per cent from 12per
cent in 1991.
Services
TE in the East region was generally risingsteadily, from just
under 60 per cent in 1991 to75 per cent in 1997. The Central and
Westregions initially saw a rising TE, then a mildreduction from
1991 to 1997.
TFP growth slowed down and declined duringthe last two to three
years. The biggest plunge inTFP growth was recorded in the East
region,where it dropped to –8 per cent in 1997 from17.3 per cent in
1991. A declining TFP could bedue to a massive labour movement
rushing intothe retail and catering trade sector to seek
re-employment or self-employment. They includedsurplus labour force
from the agricultural sectorand laid-off employees at
state-ownedenterprises. Statistics show that employment inthe
wholesale, retail and catering services sectorjumped by 60 per cent
over the 1991 to 1997period, whereas investment increased by
only12.8 per cent in real terms.
4. CONCLUSION
Rapid economic growth in the eighth five-yearperiod raised the
question of whether the highgrowth was achieved by augmenting
economicscales and increasing investment, throughproductivity
lifting and efficiency improvement,or both. This paper analysed and
evaluated totalfactor productivity growth and technicalefficiency
in the five sectors that cover the fullspectrum of the economy.
A random effects panel data model wasestimated, which assumed a
constant rate oftechnological progress, to quantify TFP growthand
TE. The panel consisted of 30 provinces
over 7 years, which enabled regionalcomparisons to be made and
encompassed theprominent eighth five-year period. Supportingthe
fact that the East region is more developedthan the Central and
West regions, there wasstrong empirical evidence that the East was
muchmore efficient in all five sectors. The efficiencygap between
the East and the West regionsincreased in all sectors. The Central
region had ahigher growth rate of technical efficiency
inAgriculture towards the end of the period, whichhelped reduce the
difference between the Centraland East. The West region
experienceddeclining efficiency over time. In theConstruction
sector, all the regions improvedtheir efficiency over time, but the
Eastaccelerated much faster than the other tworegions. The gap
between the Central and Westregions also widened, but to a much
smallerextent. For Industry, the East region led theCentral by the
same margin as Central over theWest, which seemed to show that
economicwell-being in the region determines its
industrialsophistication. For the S e r v i c e s
andTransportation, Post and Telecommunicationssectors, the Central
and West regions wereequally efficient. This outcome shows
that,while the Central region was more developedthan the West, it
had not yet reached the level ofdevelopment in the East to boost
its tertiaryindustry.
Strong total factor productivity growth wasrecorded in
Agriculture and Transportation, Postand Telecommunications. For
Agriculture, theEast led the other two regions in the first
twoyears, the Central took over and maintained itslead throughout
the rest of the period, and theWest surpassed the East in the final
year. ForTransportation, Post and Telecommunications,the beginning
saw the East region leading theCentral, which led the West. The
margin bywhich the East led the other regions diminishedover the
years due to higher total factorproductivity growth rates in the
Central andWest regions. In all other sectors, total
factorproductivity growth slowed down and was evennegative.
The paper also showed that high economicgrowth in the eighth
five-year period wascharacterised by both investment
andproductivity growth. Of the five sectors, growthin Agriculture
and Transportation, Post andTelecommunications can be attributed to
bothinvestment and productivity increases. Growth
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in the other three sectors relied on investmentaugmentation as
their productivity growthdeclined.
Acknowledgements
The first author wishes to acknowledge thefinancial support of a
C.A. Vargovic MemorialFund award and an Individual Research
Grantfrom the Faculties of Economics & Commerce,Education and
Law, University of WesternAustralia. The second author wishes
toacknowledge the financial support of theAustralian Research
Council.
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