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Abstract
Rebalancing growth in favor of domestic consumption has been an objective of Chinese policy makers for over two decades. However, until recently little progress has been achieved. This article argues that the nature of the demand regime is a major reason for the limited rebalancing operated thus far. Until the great recession (2008–09), Chinese growth was profit-led, which means that an increase in the profit share of income had a positive effect on investment and net exports that exceeded the negative effect on consumption. The fact that the profit share increased by 10 percentage points explains why the rate of growth boomed over the 1996–2007 period. We show that after the great recession, China’s demand regime turned wage-led, which means that an increase in the wage share results in a positive effect on households’ consumption which exceeds the negative effect on investment and net exports. The conclusion is that a pro-labor policy may now contribute to rebalance China’s growth and make it less dependent on exports, overinvestment and carbon-intensive industries.
Notes
Notes
1 The competitiveness indicator shown here is the relative price of exports (China vs rest of the world), which is used as a determinant of exports in equation 6/table 4.
2 At the end of 2017, Non-financial Corporate debt (138% of GDP) is high, and the situation is even worse when the share of Local government Financing Vehicle (LGFV) credit to corporates is included (160%). This figure is much higher than comparable data in the USA (78%), Japan (103%), euro area (101%), South Korea (98%), Malaysia (67.2%) or Thailand (48%). For Chinese non-financial private companies, total debt stands at 208%, much above all other countries. Source: BIS, Total Credit Statistics, accessed 12 July 2018.
3 Ricardo, Mill and Marx had concluded that profit is the motive for industrialization and growth and the profit squeeze, due to a redistribution of income in favor of rents or wage by various means, a reason for a slowdown of investment and growth. For more development, see Setterfield, Citation2016, 367–368.
4 The labor share is calculated as compensation of employees divided by GDP. Source: Authors’ calculations with data from the National Bureau of Statistics of China. The detail is provided in appendix.
5 Although this may be considered a strong assumption, it is common practice in the empirical literature. Moreover, finding the determinants of public expenditure is controversial at best, let alone complicated in a country like China.
6 The inclusion of dummy variables in our regressions is justified statistically and economically (see appendix for further details). The structural change dummies used in this work indicate the change in the intercept that are not accounted for by the determinants of the variable of interest. Unless otherwise specified, all exogenous variables included in all of the estimated equations are statistically significant. As a matter of simplicity, we do not show the parameters belonging to these items in the corresponding tables.
7 Stationarity is here confirmed by the battery of specification tests on the estimated error term (homoscedasticity, non-autocorrelation and normality).
8 Note that, intuitively, this coefficient can be read as the dependency of the growth rate of consumption with respect to the difference between the observed (log) level of consumption and its fitted values (i.e. the corresponding error term) lagged one period. Its magnitude does not have a particular meaning, other than the fact that the higher its absolute value (though always necessarily less than 1) the speedier the adjustment between short and long-term deviations.
9 Total investment is the sum of private and public enterprises. The privatization of part of state-owned enterprises, and the emergence of a new private sector (whose definition is not clearly established) makes uncertain the distinction between a public and a private sector. Onaran and Galanis have estimated a data series for private investment and profit while Molero-Simarro uses total investment. The former finds that an increase in the profit share has no significant effect on private investment although there is a positive effect on total investment. The latter finds that both output (Y) and profit (Π) have a positive impact on total investment of the same magnitude (see ). At the very least, these results show that profits do play a role in financing investment.
10 Since the interest rate does not enter in logs in this specification, we cannot interpret the associated parameter (−0.10) as an elasticity. In order to calculate the latter, we would simply have to multiply IST40 by the average interest rate.
11 By exceptional we mean with respect to the postulated determinants of the corresponding equation.
12 Ratios of this sort are multiplied by 100 in order to avoid having negative values for ratios lower than 1.
13 This is likely to have a double effect. On the one hand, the straightforward link between the interest rate and inflation (i.e. higher/lower saving when the interest rate increases/decreases). On the other hand, perhaps more relevant at a global scale, the changes in the exchange rate that movements in the interest rate provoke and that are translated into changes in inflation via the pass-through effect (see Shu, Su and Chow, Citation2008).
14 Unfortunately, comparison with Molero-Simarro (Citation2015) is not possible, given that the author does not present the results of h1 and the multiplier.
15 The ratio Yf/Y (=0.867) and the result whereby eULC,RULC = ∂lnULC/∂lnRULC = 1/(1–βULC), where βULC is the effect of unit labor costs on prices, are taken from Onaran and Galanis (Citation2012).
16 On the long term, the two propensities are not too different (respectively 0.49% and 0.44%) but the speed of adjustment from the short to the long term is slow (see ).
17 Although imperfectly: for instance, Chinese imports are highly sensitive to domestic demand, respectively 1.7% and 1.43% on the long and short term (see Table 5), while, net export price elasticity and import income elasticity are expected to be low in a wage-led regime.
18 This is the highest growth registered in any developing country over the period. In India, real wages have increased by around 55% and in Indonesia by around 45%. Source: Authors’ calculations with ILO Global Wage Report 2018 data.
19 The ratio of processing imports to total exports has fallen from 35% in 2003 to 20% in 2015. Source: Hong et al., p. 13.
20 This is measured by the difference between the Gini index of the market income (primary income) and the Gini index of the disposable income after redistribution due to social security and welfare.
21 Source: IMF, Global debt data base, accessed on 25 January 2018. https://www.imf.org/external/datamapper/HH_LS@GDD/CHN?year=2017
22 Molero-Simarro (Citation2017) concludes that the slight recovery of the wage share he observed in the post-crisis period (2008–2014), led to a less unequal income distribution among urban households and to a decline of the overall Gini index.
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Bruno Jetin
Bruno Jetin is at Institute of Asian Studies, University of Brunei Darussalam, Gadong, Brunei Darussalam.
Luis Reyes Ortiz
Luis Reyes Ortiz is at Kedge Business School, Domaine de Luminy, Marseille, France.