Structural Change and Energy Use in China: A SAM-based CGE Analysis

Abstract

This article presents a structuralist computable general equilibrium (CGE) model for China based on a three productive activities—agriculture, energy and industry—social accounting matrix. Four simulation exercises are conducted using this model: industrial investment demand increase, industrial wage increase, exchange rate depreciation, and government spending increase in industry. Our results show that structural change associated with raising industrial labor productivity and employment-share are likely to result in simultaneous intensification of per worker energy-use and a slight reduction of energy productivity in China. Industrial wage increase creates cost-push inflation and output contraction, and exchange rate devaluation is expansionary. Furthermore, when the industrial exports are insensitive to relative price changes, currency devaluation becomes contractionary and wage increase results in a slight contraction in real GDP due to the “forced saving” effect. The model illustrates some policy challenges China faces in its attempt to achieve “green growth” objectives with a high level of employment.

Keywords:

• China
• energy sector
• policy simulation
• structuralist CGE

ACKNOWLEDGMENTS

We would like to thank Rudiger von Arnim, Massimiliano La Marca, Jose Caraballo, and an anonymous referee of this journal for valuable comments on earlier versions of this article. We would also like to thank Antrim Ross for her excellent research assistantship. The usual disclaimer applies.

Notes

“China has been the world’s largest greenhouse gas (GHG) emitter since 2006. Under the 2009 Copenhagen Accord, China pledged to reduce its emissions intensity by 40%–45% from 2005 levels by 2020. In a joint announcement with the United States in Beijing in November 2014, China announced two new goals: peaking greenhouse gas emissions by around 2030 and increasing nonfossil sources to 20%of total energy by 2030. China later included these two goals in its intended nationally determined contribution (INDC) to the new international climate agreement to be concluded in Paris in December 2015, along with a goal of reducing carbon intensity 60%–65% below 2005 levels by 2030.” Center for Climate and Energy Solutions October, 2015 http://www.c2es.org/international/key-country-policies/china.

For example, labor transfer from the agricultural to the industrial sector.

For a complete description of how SAM functions as a snapshot and the interconnections among the various accounts, see Khan and Thorbecke (1988a, 1988b, 1989), James and Khan (1993, 1997) and Khan (1997).

Notice here that the SAM is constructed in such a way that capitalist households do not consume anything, which conforms to the classical theory of saving.

Khan (1989) gives an explanation of how to build a SAM step-by-step starting with an input-output table in the context of an input-output table and SAM for South Africa. Khan (1982a, 1982b, 1983, 1997) describes how to disaggregate and link energy sectors to the rest of the economy. To link distribution and production in nonlinear SAM-based models, see Khan (2002a, 2002b, 2002c) and Khan (2004a, 2004b).

This assumption is also reflected in the SAMs in Tables 12 where capitalist household (K-house) consumption accounts are all zero.

Notice the subtle difference between this model and models of dualism. In the latter, there is surplus labor in the traditional-agriculture to begin with and even in the Harris-Todaro model, the movement is in response to perceived job opportunities that may not necessarily correspond to an actual increase in labor demand in the nonagricultural sectors. For a historically motivated analysis of various dualistic models, see Khan (1997, ch. 2) and for a model with more sectors and households that modifies the Harris-Todaro model, see Khan (2006).

It can be demonstrated in structural models of economies modeled either in Banach or Vector Lattice that increasing returns can produce multiple equilibriums (Khan, 1998, 2002a, 2002b, 2002c). Given the base-year social accounting matrix, we identify one equilibrium among many.

Fisher’s index is the geometric mean of the Laspeyres and Passche price indices.

In fact, the strength of the inflationary response in agriculture, to a large extent, depends on the size of the floor level of consumption in the linear expenditure system of the model. High consumption floor limits household’s ability to shift away from foodstuff during a positive demand shock, henceforth the high agriculture inflation. It is a feature of structuralist CGE models.

This is similar to the dual-dual model mechanism verified for Africa by Stifel and Thorbecke and for South Asia by Khan.