Measuring China's regional productivity performance in industry in 1985-2005

Abstract

For a large and dynamic transition economy like China, it is important to understand the role of individual regions in the national economy. Along with the reform-induced marketisation and integration with the international economy, there have been on-going changes in factor costs and hence comparative advantages of different regions, and interregional resource reallocations. A proper assessment of regional economies and their potentials relies essentially on an accurate measure of regional productivity. However, data problems, especially the lack of properly measured capital input (stock and services), have been major obstacles to such an assessment. At the current stage of economic development, industrial sectors are becoming more and more important to Chinese economy. In 2005, value-added of industry accounted for 42% of the country’s GDP. It is thus necessary to carefully measure the performance of Chinese industry to understand the whole economy. Therefore, this study re-estimates investment series, net capital stock, capital input, labour input, gross value of output and intermediate input. The whole framework is based on Jorgenson's translog function and the SNA standard to improve the quality of measurement. In the estimation of capital input, this study begins with a critical discussion of the problems in the official investment data. We first construct an alternative investment series for each major industry across regions, then calculate its net capital stocks, and finally estimate its capital services. The newly constructed capital input data are used in production function analysis to assess the effect of the reform on regional productivity disparities. We also compare two series of net capital stock, one is based on newly estimated investment series, and the other is the adoption of official statistics. Results show that there is significant difference between the two. So, a new evaluation of investment series is necessary to avoid possible bias of TFP estimation. In measuring labour input, we firstly decompose the number of employees according to different positions, and then use weekly working hours to get total working hours by sectors. Secondly, labour quality index from Wu & Yue's work (2007) is used to obtain labour input. Methodology is improved in quantity measurement and quality measurement of labour input compared with conventional headcount method. In measuring output, the output deflator is re-constructed based on official statistics of gross value of output in current prices and comparable prices. Then, intermediate inputs are estimated with derived GVO and GVA in constant prices. In the estimation of TFP, Jorgenson’s framework is followed, and it is the first time to apply Jorgenson's approach to study of Chinese regional economies. The present study has yielded the following findings. First, economic growth of China's industry was mainly investment-driven and FDI plays an important role in pushing regional disparity. Second, shares of different sectors in most regions became more diversified after 1993. The diversification is due to marketisation policy that started in 1993 and in line with regional comparative advantage. Third, most regions experienced positive TFP growth during 1985- 2005 and achieved significant productivity improvement since 1993. Regions that have higher weight of heavy industries perform better in TFP. Fourth, there is significant convergence trend among the regions in terms of labour productivity within 1985-2005. Convergence during 1994-2005 is much stronger than the period of 1985-1993