Efficiency gains a boost to growth
Huge efficiency gains are becoming an increasingly important factor in propelling China's economic growth for coming years, economists say.
China's TFP (Total Factor Productivity) growth has been running at 3.5 percent to 4.4 percent for the past two decades, significantly higher than the TFP growth rates of 1-2 percent seen in developing markets and 2-3 percent in developed markets, according to the latest report from MasterCard.
TFP refers to efficiency gains from how capital and labor are used and combined. The important point about TFP is that growth from this source can keep going up even without additional capital or labor inputs.
There are nine factors driving TFP growth in China. They include the rise of the private sector, urbanization, growth in foreign direct investment and foreign trade and improvement in infrastructure, said the report.
The strong TFP growth has led to extraordinarily high corporate profits. According to official data, profits of industrial companies have been rising by a high 36 percent per year on average since 1999, despite inefficient capital allocation.
"China's high rates of economic growth are likely to be more sustainable if TFP can be kept at the 3 percent annual growth level," the report said.
"This will, in turn, require a reduction in government administrative costs and a rise in the consumption-GDP ratio," the report said.
Input-driven growth was high from 1953 to 2005. Meanwhile, the average annual growth rate of human capital stock declined to 9.11 percent from around 10 percent in 1980s, showing the demographic trend of slowing growth among the younger age group as a result of an overall aging population, the report said.
"Critics who lambasted China for relying on the sheer weight of capital and labor to drive economic growth are partially correct. The results suggest that large gains in efficiency were behind China's economic growth," the report said.
Yuwa Hedrick-Wong, an economic adviser to MasterCard Asia-Pacific, said China's labor supply is expected to grow at 0.4 percent till 2010 and decline 0.2 percent annually from 2010 to 2016.
"China is now between the first and the second Lewis turning points, and is expected to reach the second in the next five to seven years," Wong said.
The first turning point appeared when the demand of labor in the manufacturing sector started to be faster than that of the total factor. This is the point when economic growth accelerates.
The second is when the wage growth of the manufacturing sector begins to catch up with the total productivity in manufacturing. It shows labor supply is reaching its limits.
Since 1998, wages have increased by about 14 percent every year while export prices have fallen and prices of imported commodities have risen in real terms. However, the output per worker over the same time period has increased by 20 percent per year.
"China's labor supply is sufficient at least for the next 20 years, but the cost will rise," said Fan Gang, director of National Economic Research Institute China Reform Foundation.
Fan added that 35 to 40 percent of China's laborers are in the agricultural sector, and are expected to transfer to non-agricultural sectors because of the low wages they earn in agriculture.
"The number is expected to be 200 million to 250 million. Only when the percentage of agricultural sector labor lowers to around 10 percent will the Chinese economy come to the second turning point."
Economists also list several factors that may be a drag on growth in the coming years, including an asset bubble, the expanding income gap and the cost of environmental protection.
(China Daily 11/27/2007 page15)
