Structural change in China: the role of factor market distortions

Abstract

This paper proposes a systematic accounting framework to decompose the reallocation of labour out of agriculture into factor market distortions and market-driven forces. The findings are twofold. First, the removal of factor market distortions is a dominant driving force of the structural change in China in the last decades, which contributes 50.52%, and market-driven forces account for the rest 49.48%. Second, the contribution of market-driven forces has been increasing with the deepening of market-oriented reforms, while the impact of the removal of factor market distortions has been decreasing especially along with the slowdown of labour market reforms after China joined the WTO in 2001. The results imply that further reforms that aim at correcting factor market distortions could still be an important impetus of structural change in the future.

Keywords:

• Structural change
• factor market distortions
• market-driven forces

Notes

1. According to the data from the State Information Centre, average loan interest rate in China was 5.36% from December 2009 to December 2010. However, some SOEs obtained loans at much lower rates than the average. In 2010, the weighted average interest rate of short-term loans to Sinopec was 2.7%; the real interest rate of loans to Southern Airlines was 1.13–1.97%; China Telecom borrowed 20.7 billion RMB short-term loans from state-owned banks at rates 3.5–5.8%; the weighted average loan interest rate of the CNOOC was 3.4% (Data source: Szamosszegi and Kyle 2011).

2. Please refer to the Appendix 1 for the solution to the producers’ optimization problem.

3. Without factor market frictions, the equilibrium relationship of per capita capital stock in the agricultural sector and the non-agricultural sector is .

4. Note that in the counterfactual scenario, the capital stocks of the non-agricultural sector is calibrated according to Equation (33), and the growth rate of the technology progress of the non-agricultural sector is calibrated according to the equation . The same below.

5. The rural reform started in 1978. The reform of SOEs started in 1992 when Deng Xiaoping made his remarks during the southern tour. 2001 was the year of China’s WTO accession after which the country promoted further reforms on marketization.

⁶ Generally, . When these conditions are not satisfied in some circumstances, we calibrate the parameters to ensure .

⁷ The optimal production of the non-agricultural sector is the maximal production under capital input, K_nt, and labour input, L_nt of the non-agricultural sector.

⁸ Assuming away the capital market does not affect our results.