Structural transformation and its implications for the Chinese economy

AuthorGaofeng Han
DOIhttp://doi.org/10.1111/1468-0106.12292
Published date01 August 2020
Date01 August 2020
ORIGINAL MANUSCRIPT
Structural transformation and its implications
for the Chinese economy
Gaofeng Han
Hong Kong Institute for Monetary Research, Two
International Finance Centre, Hong Kong
Correspondence
Gaofeng Han. Hong Kong Institute for Monetary
Research, 55/F, Two International Finance Centre,
8 Finance Street, Central, Hong Kong.
Email: ghan@hkma.gov.hk
Abstract
This study examines Chinas structural transformation
under the assumption that its employment structure con-
verges to that in major developed economies in one and a
half decades. The required annual output differentials
between tradable and nontradable sectors, productivity
increment in the nontradable sector, and government
expenditure increment are estimated with the goal of
employment stability conditional on population ageing. It
appears that labour transfer from the tradable sector to the
nontradable sector would be accompanied by relatively
large aggregate output changes due to population ageing
and efficiency changes in the tradable sector. Consumer
price and real exchange rates are less affected during
structural transformation. Although fiscal deficit would
increase, government expenditure as a tool to stabilize
employment is welfare improving as long as job switching
is not cost prohibitive.
1|INTRODUCTION
The Chinese economy is experiencing a structural transformation, characterized by a growing tertiary
industry and a slowly shrinking secondary industry, along with a huge decline in output share of the
primary industry (Figure 1). Although this structural change is partly attributable to the global down-
turn and international competition in the tradable goods market, it has, as its inherent driving force,
domestic demand for service goods, which increases with higher household income and productivity
gains. The changing industrial structure is accompanied by a changing employment pattern. Specifi-
cally, employment continues to grow in the tertiary industry, while employment in the primary indus-
try is falling. Secondary industry employment has reached its turning point and started to decline
(Figure 2). These are stylized facts of structural transformation once observed in developed econo-
mies (see Herrendorf, Rogerson, & Valentinyi, 2014).
Received: 26 May 2018 Revised: 26 October 2018 Accepted: 12 January 2019
DOI: 10.1111/1468-0106.12292
Pac Econ Rev. 2020;25:339383. wileyonlinelibrary.com/journal/paer © 2019 John Wiley & Sons Australia, Ltd 339
The primary industry has been a source of surplus labour over the past two decades, while the
secondary and tertiary industries are net labour receivers. As employment in the secondary industry
is expected to decline in future due to a reduction in production capacity and an improvement in pro-
cess efficiencies, the tertiary industry must bear the pressure of providing opportunities for the excess
labour force. A crucial question is: Under what circumstances could job creation be large enough to
0
20
40
60
1995 1998 2001 2004 2007 2010 2013
Primary industry
Secondary industry
Tertiary industry
%
Year
FIGURE 1 Share of output in total GDP
Sources: CEIC and authors estimates [Color figure can be viewed at wileyonlinelibrary.com]
100
200
300
400
1995 1998 2001 2004 2007 2010 2013
Primary industry
Secondary industry
Tertiary industry
Million persons
Year
FIGURE 2 Employment dynamics
Sources: CEIC and authors estimates [Color figure can be viewed at wileyonlinelibrary.com]
340 HAN
offset job loss so that, at an aggregate level, employment remains stable?
1
In view of the fact that
structural transformation and employment stability may not be automatically achieved in an open
economy, macro and industrial policies could play a role in promoting growth to accommodate
employment shifting. In this regard, tackling this question has important policy implications.
We apply a two-sector model to explore this issue. To do this, we classify industries into tradable
and nontradable sectors, where the tradable sector consists of manufacturing and mining industries
except tobacco, alcohol and food processing, while the nontradable sector consists of the primary and
tertiary industries as well as the rest of the sub-industries in the secondary industry. This classification
suggests that our focus is labour force movement from manufacturing to services, rather than from
agriculture to non-agriculture. The question in this context is: Under what circumstances can the
excess labour force in the tradable sector be absorbed by the nontradable sector?
The production in each sector is carried out using constant returns to scale technologies under free
labour and capital mobility.
2
Meanwhile, the demand side is described by a constant elasticity of sub-
stitution (CES) utility function. In line with Zhao (2011), we expect that in one and a half decades,
the employment share of the nontradable sector will increase from the current 58% to 70%, which is
equivalent to a net labour transfer of 2.1% annually from the tradable sector.
3
Considering the shrink-
ing working age population (or the natural labour force adjustment) after 2017, the excess labour
force the nontradable sector must absorb will be less than that moving out of the tradable sector.
We consider two scenarios in the tradable sector: one is a reduction in production capacity with
negative investment shocks; the other is with an improvement in process efficiency; both tend to
reduce hiring in the tradable sector. To absorb the resultant excess labour force, the nontradable sec-
tor must grow faster than the tradable sector, which leads to a downward-sloping output differential
curve. It turns out that the annual output growth in the nontradable sector has to be 3.5 percentage
points higher than in the tradable sector at the start to meet the labour reallocation requirement, when
the natural labour force adjustment is considered. Such output differentials suggest that productivity
growth in the nontradable sector must increase by as much as 1.5 percentage points to meet labour
reallocation requirements if job loss in the tradable sector is caused by negative investment shocks.
The required productivity growth in the nontradable sector will be smaller if job loss in the tradable
sector is caused by efficiency changes. In the absence of technological progress in the nontradable
sector, the government could increase its expenditure on service goods to absorb the excess labour
force. The required government consumption increment in general is declining. It must reach 4 per-
centage points at the start after considering the natural labour force adjustment, if the tradable sector
faces negative investment shocks. The required government consumption increment is much lower if
the tradable sector improves its process efficiency. Such a fiscal expansion is welfare improving for
1
Job creation is crucial for social and political stability, and the goal of employment stability was explicitly set by the govern-
ment right after the global finance crisis in 2008, accompanied by the massive fiscal stimulus, and confirmed by the testimony
of the Minister of Human Resources and Social Security before the Congress in 2009. Since then, employment stability has
been frequently highlighted in official reports and speeches on various occasions. In August 2018, it was emphasized in a
report of the State Council, Report on the Performance of the Economic and Social Development Plan.
2
While free capital mobility is assumed throughout the paper, labour mobility could be costly, which we will discuss later on.
3
The assumed time span for structural transformation and the employment share of the nontradable sector are in line with Zhao
(2011), in a report published by the Development Research Center of the State Council, which projects structural evolution of
the Chinese economy towards 2030. By using the CGEDRC modelling method, Zhao (2011) predicts that the share of output
of the secondary industry in 2030 will fall to 38.645.4%, while the share of employment of the secondary industry will shrink
to 29.331.2%. Coincidently in 2016, the State Council released a plan on demographic development, alleging that the degree
of urbanization would reach 70% in 2030, measured by the share of population living in urban areas for at least half a year.
HAN 341

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT