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Kar‐yiu Wong, (2008) "Economic growth and resource allocation: the case of China", Journal
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Growth and
Economic growth and resource resource
allocation: the case of China allocation
Kar-yiu Wong
Downloaded by UNIVERSITY OF INTERNATIONAL BUSINESS AND ECONOMICS At 04:10 31 December 2017 (PT)
Abstract
Purpose – This paper aims to examine the factors of growth of a developing country such as China.
Because of the existence of domestic distortions, the traditional approach of using the growth of gross
domestic product (GDP) to represent economic growth of the economy is not appropriate. This paper
seeks to estimate how a change in resource misallocation may affect the measured growth rate of GDP.
Design/methodology/approach – Using provincial data for four southern provinces of China for
the years from 2000 to 2004, the paper considers two hypothetical cases, one in which labor allocation
is fixed, and one in which labor allocation is assumed to be optimal both before and after growth. The
growth factors for GDP in these two hypothetical cases are compared with the observed growth
factors.
Findings – This paper argues that the growth rate of GDP has overestimated the growth rate of the
economy in this period. It can thus be said that the degree of the distortion caused labor misallocation
decreases over time in this period.
Research limitations/implications – Because of limitations of data, this study treats each
province as one sector, producing one homogeneous product, although the same methodology can be
applied to more than one sector in each province. Furthermore, the present work assumes constant
external prices.
Practical implications – The present study shows the importance of removing distortions in the
economy, and how an improvement in the efficiency may raise the GDP of the economy.
Originality/value – The methodology and approach introduced here are quite new and are useful in
assessing the implications of distortions on production and welfare.
Keywords Economic growth, Gross domestic product, Production management, Process efficiency,
Labour mobility, China
Paper type Research paper
1. Introduction
China opened up its economy to the rest of the world at the end of the 1970s. Since then,
its economy has been growing spectacularly, with growth rates much higher than the
corresponding world’s averages. The gross domestic product (GDP) of China grew
from US$183 billion (at constant US$2,000) in 1980 to US$ 1,885 billion in 2005, with a
compounded annual growth rate of 9.78 percent. The annual growth rate over this
period was much higher than that of the world as a whole. For example, the GDP of the
world grew from US$ 17,623 billion (also at constant 2000 US dollar) in 1980 to US$
36,411 billion in 2005, which implies a compounded annual growth rate of 2.95 percent.
With these high growth rates, the percentage of the Chinese economy in the world Journal of Chinese Economic and
economy has increased from 1.04 percent in 1980 to 5.18 percent in 2005. What is more Foreign Trade Studies
Vol. 1 No. 2, 2008
impressive is that the growth of the Chinese economy has been nearly uninterrupted, pp. 105-121
even during the years when many other Asian economies were hit hard by the Asian q Emerald Group Publishing Limited
1753-4408
financial crisis[1]. DOI 10.1108/17544400810885933
JCEFTS The growth of an economy refers to an expansion of its production possibility set
1,2 (PPS). However, since the PPS is not observable, it is natural to express economic
growth in terms of the growth rate of some observable variables such as GDP or per
capita GDP[2]. The question is, if the objective is to determine the growth of an
economy, is the use of the growth rate of GDP an appropriate approach? In other
words, could the growth rate of GDP overestimate or underestimate the growth of the
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106 economy?
To answer the above questions, it is important to note that the use of the growth
rate of GDP is sensitive to the pre- and post-growth commodity prices. For example, in
theoretical analysis, it is usually assumed that domestic (and also international) prices
do not change in the period considered, but this assumption is usually not valid,
especially if period of time considered is sufficiently long[3]. Furthermore, even if
domestic and international prices are constant, the growth rate of the GDP will depend
on what the prices are. Choosing a different set of prices could give a different growth
rate of the GDP.
In this paper, we argue that if domestic distortions are present so that production is
not efficient, the use of the growth rate of an economy’s GDP to represent the
economy’s growth is even more unreliable. Based on our analysis, explained in more
detail in the next section, one needs to be careful when trying to measure the growth of
the Chinese economy, because, like many other developing countries, domestic
distortions are common and widespread[4].
In this paper, we try to provide an answer to the above question by focusing on a
distortion that is considered to have substantially affected the production of the
economy. It is the inefficient allocation of resources (including labor and capital).
Before the opening up of its economy, the Chinese government had strict restrictions on
the movements of capital and labor across firms, sectors, and geographical locations.
As the government permitted more and more trade and other economic relations with
other countries, it was also liberalizing the movements of labor and capital.
Furthermore, as the economy grew, the government was loosening its control on the
movements of the primary factors. Nowadays, workers have more freedom and choice
in terms of taking up a job in another firm, another industry, or even another city,
either legally or illegally. At the same time, capital owners can more easily move their
capital to other places. It is also important to note that previous growth of the Chinese
economy occurred in a very uneven way, in terms of both industries and locations.
This uneven growth of the economy thus creates bigger incentive to primary factors to
move. The resulting movements of factors help shift the production point closer to the
production possibility frontier.
This paper examines the growth factors of the Chinese economy from 2000 to 2005,
and the contribution of more efficient resource allocation to the growth of the economy.
The Chinese government publishes statistical yearbooks and census statistics of 27
provinces and four municipalities/cities: Beijing, Tianjin, Shanghai, and Chongqing[5].
The statistical yearbooks provide statistical data for estimating the aggregate
production functions of the provinces and cities.
The estimated production functions can be used to determine the output levels in
two hypothetical cases:
(1) Fixed resource allocation (FRA). In this case, the labor and capital endowments
in various provinces and cities in the year 2000 are used as bases, and then all
provinces and cities are assumed to have the same growth rates in the period for Growth and
labor and capital in 2001 to 2005. This case is used to find out how resource resource
allocation in the previous years may have contributed to the economic growth
of different provinces and cities. allocation
(2) Optimal resource allocation (ORA). In this case, factors are assumed to be
redistributed among the provinces and cities in each of the years to maximize
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the aggregate GDP of the economy at given commodity prices. The production 107
of the provinces and cities are then re-estimated, and the production points are
efficient. The growth rates of the provinces and cities are then better measures
of the economic growth of the economy.
108
Figure 1.
Measurement of economic
growth
The above GDP approach, which assumes efficient production points, is more
applicable to developed countries. This approach has been used in a number of
empirical studies of the factors of economic growth. For developing countries such as
China, however, this approach may not be so appropriate. The main reason is that the
economies of developing countries usually involve many distortions, and production
points are most likely not efficient. To see how the presence of distortions may distort
the measurement of economic growth, suppose that the observed pre-growth
production is represented by R 1 in Figure 1 while the post-growth production by R 2.
Both production points are below the corresponding PPF, thanks to the distortions. In
this case, the pre-growth GDP of the economy is represented by line EF, while the
post-growth GDP of the economy is represented by line GH. The observed growth rate
of the GDP is equal to FH/OF and can be measured empirically. However, the growth
rate of the GDP is in general no longer a good measure of the economic growth rate of
the economy. In particular, if the distortions present in the economy are diminishing so
that the production point is getting closer to the PPF, then the measured growth rate of
the GDP will overstate the growth rate of the economy:
FH BD
. : ð1Þ
OF OB
The difficulty of applying the above GDP approach to measure the growth of the
economies of developing countries is that distortions and market failure are common in
these economies. Then the important question is: How can the growth rates of these
economies be measured? It is also interesting and important to know how the change in
distortions may have affected the observed growth rates when the growth rates of GDP
are used.
If the distortions that lead to inefficient production in an economy can be identified
and somehow measured, this paper suggests two alternative approaches to measuring
the growth of the economy, both of which require a careful estimation of two
hypothetical cases. The first approach assumes that the magnitude of a distortion
remains fixed during economic growth. Then the growth rate of some observable Growth and
variables is determined and used to represent the growth rate of the economy. The resource
second approach is to examine another hypothetical case, in which the distortions are
removed. The growth rates of some appropriate variables such as GDP and per capita allocation
GDP are then measured and used to represent the economy’s growth.
In the first approach, even if the distortions can be identified and fixed, the
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measured growth rate of an observable variable may not be the same as that of the 109
economy, although it attempts to minimize the impact of the distortions. The second
approach will give us an appropriate measure of the growth of the economy, but it is
more difficult and requires more information.
In the present paper, we focus on one type of distortion: misallocation of resources,
especially labor, among sectors. This type of distortion is regarded to be severe and
widespread in China because of the government’s traditional restrictions on internal
migration. After China opened up its economy to the rest of the world, the government
took gradual steps to remove or reduce some of the restrictions on labor migration.
Furthermore, the rising gap between the per capita income levels of different geographic
locations and different industries had led to bigger and bigger incentives to workers to
move, legally or illegally, to places with more and better-paid job opportunities. Overtime,
labor migration has been increasing. Therefore it is believed that the magnitude of the
distortion caused by inefficient labor allocation is decreasing, and because of this, the
observed growth rate of GDP tends to overstate the growth rate of the economy[8].
The objective of this paper is twofold:
(1) To identify the two factors of the observed growth of GDP: the expansion of the
PPF and the rise in factor mobility.
(2) To measure the true growth rate of the economy. To achieve this objective, we
first need to determine how labor and capital should be allocated optimally. The
resulting growth rate of aggregate GDP can be interpreted as the growth rate of
the economy.
3. Methodology
Suppose that there are N sectors in the economy. In each of them, a homogeneous
product is produced using two primary factors, labor and capital, and the following
production function:
Y i ¼ f i hi L i ; K i ; A ; ð2Þ
where Li and Ki are the labor and capital inputs, respectively, hi the amount of human
capital, and Ai a technological index in sector i, i ¼ 1, 2, . . . , N. In the production
process, hiLi can be interpreted as the effective labor input. The production function is
assumed to be linearly homogeneous and increasing in effective labor and capital,
concave, and stationary over time[9]. Totally differentiate both sides of (2) and
rearrange the terms to give:
^ i;
Y^ i ¼ fiL h^ i þ L^ i þ fiK K^ i þ fiA A ð3Þ
where the operator “ˆ” represents the percentage change of a variable, and fji is the
output elasticity of input j; for example, Y^ i ; dY i =Y i and fKi ; ð›Y i =Y i Þ=ð›K i =K i Þ.
JCEFTS Equation (3) explains the factors of growth of the sector’s output. If the production
function is known and statistical data are available, one can estimate these growth
1,2 factors. Since the technology index is not observable, it is measured as a residual:
^ i ¼ Y^ i 2 fiL h^ i þ L^ þ fiK K^ i :
a^ ; fiA A ð4Þ
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110
One can extend this approach to the whole economy, with the aggregate output (real
GDP) defined as
!
X
N
Y¼ pi Y i =p; ð5Þ
i¼1
X
N
Li ¼ L; ð7Þ
i21
by choosing L1, L2, . . . ., LN, where L is the given labor endowment. Differentiate both
sides of (6) with respect to Li, using constraint (7), to give:
›Y i
pi ¼ l; ð8Þ
›L i
where l is the Langrange multiplier. The N equations in (8) plus the one equation in (7)
can be solved for the optimal labor distribution among the sectors[12]. This system can
be slightly simplified as follows. From equations (8), l can be eliminated, and the
remaining N 2 1 equations can be solved for the N 2 1 labor inputs, with the last
labor input obtained from (7).
The above way to determine the optimal labor allocation, however, could be difficult
if the number of sectors is big because the equations in (8) is usually highly non-linear.
There is an alternative way, described as follows.
First, with efficient allocation of labor, denote the unit cost function of sector i by
ci ¼ ci ðw; r i ; K i ; Bi Þ, where w is the wage rate (i.e. the amount each unit of labor
receives), ri the rental rate of capital in the sector, and Bi the technology index, which is
related directly to Ai and the amount of human capital, hi. Note that the unit cost
function of each sector depends not only on Ai and the amount of human capital, but
also on the sector-specific capital. Note further that with efficient (and optimal) labor
allocation, the wage rates in all sectors are equalized. The GDP function can be given
by:
X
N
g p; K; L ¼ min wL þ r i K i : ci w; r i ; K i ; Bi $ pi for all i; ð9Þ
i¼1
choosing the optimal values of {w; r 1 ; r 2 ; :::; r N }; where p ¼ ½p1 ; p2 ; :::; pN and
K ¼ ½K 1 ; K 2 ; :::; K N . If all goods are produced, all the weak inequality signs in (9) are
replaced by equality signs. The first-order conditions are (assuming an interior
solution):
X
N
L¼ mi aLi w; r i ; K i ; B ð10Þ
i¼1
JCEFTS K i ¼ mi aKi w; r i ; K i ; Bi ; ð11Þ
1,2 where aji is the amount of factor j used per each unit of output; mi is the Lagrangian
multiplier, aLi ¼ ›ci =›Li , and aKi ¼ ›ci =›K i . The system of equations can be
simplified as follows. First, from equation (11), mi can be expressed as:
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112 Ki
mi ¼ : ð12Þ
aKi w; r i ; K i ; Bi
Second, using the zero-profit condition, ci w; r i ; K i ; Bi ¼ pi , we can express the rental
rate in sector i as follows:
r i ¼ r i pi ; w; K i ; Bi : ð13Þ
Substitute (12) and (13) into (10), we have:
X N
K i aLi w; r i pi ; w; K i ; Bi ; K i ; Bi
L¼ : ð14Þ
i¼1
aKi w; r i pi ; w; K i ; Bi ; K i ; Bi
In equation (14), there is only one unknown, w, when given the factor endowments and
the output prices. It can be solved for the equilibrium wage rate, w.
~ Once this wage rate
is obtained, the optimal labor allocation and the resulting outputs can be obtained.
The advantage of the way as described by equation (14) is that it is much simpler
because the number of equations to be solved is equal to the number of mobile factors,
M. In the previous approach as represented by (7) and (8), the number of equations to
be solved is equal to (the number of sectors minus one) multiplied by the number of
mobile factors, M ðN 2 1Þ.
4. The estimation
The present project covers four southern provinces in China, Guangdong, Guangxi,
Hunan, and Yunnan. This paper examines the growth of these four provinces and the
role of resource allocation on output and economic growth.
is the most populous while Yunnan has the smallest population. Similarly, Guangdong
has the biggest labor force[13].
Guangdong has the largest amount of capital stock, thanks a lot to the inflow of
foreign direct investment, mainly from Hong Kong. Its capital stock is more than twice
of that in the next one, Guangxi. The sizes of the capital stock in Hunan and Yunnan
are comparable and less than one third of that in Guangdong. Guangdong also has the
highest level of human capital, as measured by the average education years. The
educational level in Yunnan is the lowest.
Despite its size in terms of area, Guangdong has the biggest economy, with its real
GDP much higher than those in the other provinces. The ratio of Guangdong’s output
to those of the other provinces is higher than the corresponding ratios as expressed in
terms of labor force, showing the higher productivity of the labor force in Guangdong.
Y i ¼ Ai ðhi LÞai K 12
i
ai
; ð15Þ
where the variables are defined in equation (2), and the capital stock is given
exogenously. Since we allow the possibility that the technology may be improved over
time, and because only statistical yearbooks for these four provinces are available
online for five years, 2000 to 2004, we avoid estimating the production function using
any econometric techniques[15]. For each province, variable ai is assumed to be the
percentage of labor compensation in the sum of the payments to labor and capital
depreciation in the province over these years[16]. The amount of human capital is
given the following formula
hi ¼ ð1:07Þsi ð16Þ
JCEFTS where si is the average education level in the province. The capital stock is computed
using the perpetuality method, assuming an annual depreciation rate of 5 percent and
1,2 using the series of investment on fixed assets from 1978. The capital stock is then
deflated by the price index of investment on fixed assets[17]. The output is the GDP at
current prices, deflated by the general retail price index with 1978 as the based
year[18].
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114 For these provinces for the years from 2000 to 2004, the values of Yi, Li, hi, and Ki
can be computed or estimated. So the value of Ai is obtained from equation (15):
Yi
Ai ¼ : ð17Þ
ðhi Li Þai K 12
i
ai
The technology index obtained in equation (17) is used to determine the outputs of the
provinces under the FRA and ORA approaches.
4.2.1. The FRA approach. Under this approach, labor is distributed among these
four provinces according to the observed percentages in 2000. In other words, it is
assumed that labor does not move across provinces from 2001 to 2004, and any labor
force increase will be distributed among the provinces according to their shares in
2000. Both the physical and human capital stocks in each sector remain unchanged.
The output is obtained by using the production function in (15). The new output series
of each province is then compared with the observed series in order to reveal the
impacts of resources allocation. The growth rates of the output levels are also
computed and compared with the observed ones.
4.3.2. The ORA approach. We first note that for sector i, the unit cost function
corresponding to the production function in (15) is equal to ci ¼ Bi w ai r 12
i
ai
; where:
" ai 12ai #
1 1 2 ai ai
Bi ¼ ai þ : ð18Þ
A i hi ai 1 2 ai
The labor-output and capital-output ratios of the sector are then given by:
12ai
aLi ¼ ai Bi r i =w
a
aKi ¼ ð1 2 ai ÞBi w=r i i :
The two first-order conditions (10) and (11) for the determination of the GDP functions
can be combined together to give:
X
N
ai r i K i
L¼ : ð19Þ
i¼1
1 2 ai w
Equation (20) is solved for the equilibrium value of w. Once it is obtained, the
corresponding distribution of labor and the outputs of the sectors can be determined.
5. Results Growth and
The growth factors of the output levels of these four provinces from 2000 to 2004 in the resource
following cases are presented below: based on the observed data, in the hypothetical
case in which there is no resource allocation, and in the hypothetical case in which allocation
resources are optimally allocated[19].
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(a) Guangdong
Y^ 11.65 11.90 16.11 14.40 13.50
ð1 2 aÞK^ 3.67 3.68 3.50 2.53 3.34
aL^ 1.29 1.39 4.72 4.85 3.04
ah^ 0.31 0.32 0.36 0.35 0.33
A^ 6.37 6.51 7.54 6.66 6.78
(b) Guangxi
Y^ 11.28 12.18 11.17 16.83 12.84
ð1 2 aÞK^ 3.16 3.65 3.78 3.26 3.46
aL^ 0.35 0.32 0.35 1.38 0.60
ah^ 0.42 0.45 0.48 0.45 0.45
A^ 7.36 7.76 6.57 11.74 8.34
(c) Hunan
Y^ 9.19 9.86 6.22 16.44 10.37
ð1 2 aÞK^ 3.40 3.32 2.77 2.05 2.88
aL^ 0.68 0.81 1.10 1.13 0.93
ah^ 0.47 0.47 0.49 0.52 0.49
A^ 4.64 5.27 1.86 12.73 6.07
(d) Yunnan
Y^ 7.84 9.68 10.55 14.66 10.65
ð1 2 aÞK^ 3.29 3.70 3.25 1.98 3.05
aL^ 0.88 0.60 0.38 1.53 0.85
ah^ 0.45 0.46 0.47 0.46 0.46
A^ 3.22 4.91 6.44 10.69 6.30
(e) Aggregate
Y^ 10.65 11.24 12.84 15.09 12.44
ð1 2 aÞK^ 3.45 3.55 3.30 2.42 3.18
aL^ 0.85 0.86 2.01 2.53 1.56
ah^ 0.41 0.42 0.48 0.46 0.44
A^ 5.94 6.41 7.05 9.68 7.26
Table II.
Notes: (i) Columns 2 to 5 give the growth rates of the province and the growth factors in these years Observed growth rates of
over the previous year, while the last column shows the compounded annual growth rates from 2000 to the provinces and growth
^ is calculated as a residual; i.e. it is equal to the observed growth rates of the province minus
2004; (ii) A factors, 2001-2004
the contributions of various growth factors; (iii) Aggregate represents the four provinces as a whole (percent)
JCEFTS 1.29 percent due to labor accumulation, while 0.31 percent due to human capital
1,2 accumulation. Technological improvement, which is the residual, is 6.37 percent. The
next three columns show the corresponding growth rates in 2002 to 2004 (annual rates
over the previous years). The last column gives the compounded annual growth rates
over 2000 to 2004 (four years).
The table compares the performance of the four provinces. It is clear that
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116 Guangdong had the highest growth rate of the real GDP. Another interesting feature is
that out of the 13.50 percent growth rate, more than 3 percent came from the labor
force, which was much higher than the corresponding contributions of labor force in
other provinces. The reason is obvious: Because of its higher growth rate and bigger
economic flexibility, Guangdong had been a magnet to labor force from other provinces
in China. The contribution of physical capital to Guangdong’s growth was also
significant, but what is a bit surprising is that Guangxi had experienced an even bigger
contribution from its capital stock. This seems to suggest that Guangxi had also
experienced substantial capital accumulation. Another feature of the table is that the
contribution of human capital to each province’s growth in these years was small as
compared with what other factors did. It is probably because human capital
accumulation through education takes much more time to have a significant impact on
growth.
We now examine how a region consisting of these four regions would grow over
these years. First, let us aggregate the variables. The aggregate output is the sum of
the nominal GDP deflated by a price index, which is the weighted average of the retail
price indices of these four provinces, with weights given by the share of the nominal
GDP. The aggregate labor force and the aggregate physical capital stock are the sum of
the corresponding stocks of the provinces. The average education years is the total
education years divided by the total labor force. The production function given by (15)
is again used to determine the contribution of each of the factors. The results are given
in panel (e) of Table II.
It is shown that the main contribution to the growth of this region is the residual,
which is often interpreted as technological progress. The contribution of physical
capital was around 3 percent, and that of labor was about 1.6 percent, while that of
human capital was less than 0.5 percent.
force, which confirms the common belief that Guangdong had served as a magnet to
labor force from other provinces. What is interesting is that all other provinces had a
negative outflow of labor force to Guangdong.
The changes in employment led to similar changes in outputs, as panel (b) shows. If
with labor mobility restrictions a province experiences a drop in its labor force, there
will also be a drop in its output level. A more interesting result is the changes in the
aggregate output of the region consisting of the four provinces. In all these years, a
restriction on labor mobility will cause a drop in the aggregate output, which suggests
that the observed movement of labor among the provinces had led to a more efficient
allocation of labor.
Panel (c) of Table III presents the changes in the growth rates of the provinces as a
result of the restriction on inter-provincial labor movement. Because of the loss in labor
inflow, Guangdong experienced a drop in its growth in GDP. On the other hand, all
other provinces got a rise in their growth in GDP. The more important result is the
change in the aggregate GPD of this region. The last row shows that the aggregate
GDP had low growth rates, showing that restricting labor mobility had caused a drop
in production efficiency.
as compared with the corresponding observed level. The table shows that labor will be
used more efficiently in Guangdong than in the other three provinces. On the whole,
Guangdong should have its labor force roughly doubled, while the labor force of the
other provinces should be reduced by more than 90 percent. That a substantial
redistribution of labor force is needed for efficient production is due to three factors:
Guangdong has a much larger capital stock, a much longer average education period,
and a much higher technological index.
The changes in labor force in these provinces lead to changes in outputs. Panel (b) of
Table IV presents the estimated output changes. Guangdong gains in output at the
expenses of the other three provinces.
We also determine how the aggregate output may be affected by the labor
reallocation. The output of the region is obtained as a weighted average of the real
GDPs of the provinces, where the weights are equal to the shares of the nominal GDPs.
The aggregate GDPs are then compared with the aggregate GDPs obtained from the
observed data. The result is presented in the last column of panel (b) of Table IV. The
result clearly shows the effects of the efficient labor reallocation: The aggregate output
level in each of the years is more than 30 percent higher than the corresponding
observed one. In other words, inefficient labor allocation alone has caused a substantial
drop in the aggregate output.
Another interesting result that will be presented is the growth rates of the region
under the condition that labor is distributed efficiently. The result is presented in Table V.
region. Furthermore, as we showed, because labor allocation is getting more and more 119
efficient, the observed growth rate of the aggregate GDP over-estimates the growth rate
of the region.
6. Concluding remarks
In this paper, we provided a way to examine the common practice of using the growth
rates of the real GDP (or real per capita GDP) of an economy to represent the economy’s
economic growth rates. We argued that this is not an appropriate approach when
distortions are present, as the production of the economy may not be efficient. To see
the extent of any possible inaccurate estimation of the growth rate of an economy, we
investigate four southern provinces of China from 2000 to 2004. We considered one
type of distortion in the region, labor misallocation, and examined how this distortion
may have distorted the production of the region. Such distortion then makes the use of
the growth rate of GDP an incorrect representation of the growth rate of the region.
We use two approaches to determine the impacts of labor misallocation on growth
rates: fixed labor allocation and optimal labor allocation. We showed that if labor
movement in that period was not allowed, the GDP of the region dropped, suggesting
that actually labor allocation is getting more and more efficient over time. We also
estimated the efficient labor allocation, the one that maximizes the value of GDP of the
region, in each of the years. With the efficient labor allocation, the outputs of the
provinces and the region were determined. It was found that the estimated economic
growth rate of the region is less than the growth rate of GDP of the region based on the
observed data.
Although the present paper covers only four provinces of China due to limitations of
time and research resources, the methodology can be extended to the whole Chinese
economy and to other developing countries. At the same time, the present approaches
are based on some assumptions, such as the assumed production functional form, and
they may be relaxed in future research.
Notes
1. The figures in this section were taken from the WDI Database of the World Bank.
2. The use of the growth rate of GDP to represent the growth of an economy is common in the
literature. See Long and Wong (1997) for a survey on the endogenous growth theory.
3. Bhagwati and Hansen (1973) analyze whether domestic prices or international prices should
be used when calculating the growth rate of an economy. In reality, GDP is usually
computed using domestic prices, but they argue that when distortions are present, using
international prices may give more reliable results.
4. See Dekle and Vandenbroucke (2008) for a recent estimate of the growth factors of China.
5. The four municipalities are administered directly by the Central Government.
JCEFTS 6. In the present paper we consider only four provinces but the methodology can be extended to
the entire country.
1,2
7. This can be the case of a small open economy under free trade facing given world prices.
8. When labor moves to a new location, it is assumed that the labor is able to acquire the
prevailing human capital in the new sector for free. Such an assumption of course is a strong
one, but it allows us to avoid considering explicitly workers with various levels of human
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References
Bhagwati, J.N. and Hansen, B. (1973), “Should growth rates be evaluated at international prices?”,
in Bhagwati, J. and Eckaus, R. (Eds), Development and Planning: Essays in Honour of Paul
Rosenstein-Rodan, MIT Press, Cambridge, MA, pp. 53-68.
Bosworth, B. and Collins, S.M. (2003), “The empirics of growth: an update”, mimeo, Brookings
Institution, Washington, DC.
Collins, S.M., Bosworth, B.P. and Rodrik, D. (1996), “Economic growth in East Asia:
accumulation versus assimilation”, Brookings Papers on Economic Activities, No. 2,
pp. 135-203.
Dekle, R. and Vandenbroucke, G. (2008), “Whither Chinese growth? A sectoral growth
accounting approach”, mimeo, University of Southern California, Los Angeles, CA.
Long, N.V. and Wong, K.-Y. (1997), “Endogenous growth and international trade: a survey”, in Growth and
Jensen, B.S. and Wong, K.-Y. (Eds), Dynamics, Economic Growth and International Trade,
University of Michigan Press, Ann Arbor, MI, pp. 11-74. resource
allocation
About the author
Kar-Yiu Wong is a Professor of Economics at the University of Washington. He serves as
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Director of the Research Center for International Economics (RCIE), and President of the 121
Asia-Pacific Economic Association (APEA). Professor Wong’s research interests cover
international trade, economic development and growth, and Asia studies. He is the author of
International Trade in Goods and Factor Mobility (MIT Press), and has published widely in
international journals, including Journal of Economic Theory, Journal of International Economics,
Journal of Development Economics. Kar-yiu Wong can be contacted at: karyiu@
u.washington.edu
1. Fei Jin School of Economics and Resource Management, Beijing Normal University, Beijing, China Qi
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