De-industrialization of the Riches
and the Rise of China
MURAT ÜNGÖR
http://www.muratungor.com/
February 15, 2012
Employment Shares by Sector, U.S. 1840-2000
%90
80
70
Agriculture
60
50
40
30
20
10
0
1840
1860
1880
1900
1920
1940
1960
1980
2000
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Employment Shares by Sector, U.S. 1840-2000
%90
80
70
Agriculture
60
50
40
Manufacturing
30
20
10
0
1840
1860
1880
1900
1920
1940
1960
1980
2000
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Employment Shares by Sector, U.S. 1840-2000
%90
Services
80
70
Agriculture
60
50
40
Manufacturing
30
20
10
0
1840
1860
1880
1900
1920
1940
1960
1980
2000
3 / 55
Sources of Structural Change
I
Two channels that can account for structural change
I
Sectoral differences in productivity growth (Baumol 1967; Ngai
and Pissarides 2007)
I
Sectoral differences in income elasticities of demand
(Kongsamut, Rebelo, and Xie 2001)
I
The majority of the existing studies on structural change
examine the experience of a country in isolation
I
Critics of Closed Economy Models
I
I
Buera and Kaboski (2009), Matsuyama (2009)
Some Recent Attempts
I
Yi and Zhang (2011), Teignier (2011), Stefanski (2011)
4 / 55
Contribution
I
Important questions
I
How does structural change in one country will slow down or
speed up structural change in other countries?
I
How does an emerging giant alter the global allocation of
resources?
5 / 55
Contribution
I
I
Important questions
I
How does structural change in one country will slow down or
speed up structural change in other countries?
I
How does an emerging giant alter the global allocation of
resources?
This paper
I
Investigates impact of the rise of China on structural
transformation observed in U.S. between 1978 and 2005.
6 / 55
Contribution
I
I
Important questions
I
How does structural change in one country will slow down or
speed up structural change in other countries?
I
How does an emerging giant alter the global allocation of
resources?
This paper
I
Investigates impact of the rise of China on structural
transformation observed in U.S. between 1978 and 2005.
I
A closed economy model accounts for 32.8 percent of the
de-industrialization while an open economy model accounts for
62.6 percent of it.
7 / 55
Contribution
I
I
Important questions
I
How does structural change in one country will slow down or
speed up structural change in other countries?
I
How does an emerging giant alter the global allocation of
resources?
This paper
I
Investigates impact of the rise of China on structural
transformation observed in U.S. between 1978 and 2005.
I
A closed economy model accounts for 32.8 percent of the
de-industrialization while an open economy model accounts for
62.6 percent of it.
I
Open economy model has more explanatory power to explain
the de-industrialization in the post-1990 period accounting for
more than 80 percent of it.
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Structural Change in a Closed Economy
9 / 55
Households and preferences
U(Ā, C ) = Ā + log(C )
(1)
The instantaneous utility is defined over the agricultural good (Ā)
and the composite consumption good (C ):
C = (γ 1−η I η + (1 − γ)1−η S η )1/η
(2)
At each date, and given prices, the household chooses consumption
of each good to maximize his lifetime utility subject to the budget
constraint:
pA Ā + pI I + pS S = ω
(3)
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Firms and technologies
The production function for sector j is given by
Yj = θj Lj
(4)
Firm j problem is given by
max
pj Yj − ωLj
s.t.
Yj = θj Lj ,
Lj > 0
(5)
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Equilibrium
Given a set of prices {pA , pI , pS , ω}, a competitive equilibrium
consists of consumption decisions that are the household’s
allocations {Ā, I , S}, and factor allocations for the firms
{LA , LI , LS } such that given prices, the firm’s allocations solve its
profit maximization problem, the household’s allocations solve the
household’s utility maximization problem, and factor and product
markets clear:
LA + LI + LS = 1
(6)
Ā = YA , I = YI , S = YS
(7)
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Sectoral Employment Shares
Employment share in agriculture:
LA = Ā/θA
(8)
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Sectoral Employment Shares
Employment share in agriculture:
LA = Ā/θA
(8)
Employment share in industry:
LI =
∆(1 − (Ā/θA ))
,
1+∆
(9)
where
∆ ≡ (γ/(1 − γ))(θI /θS )−η/(η−1) .
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Sectoral Employment Shares
Employment share in agriculture:
LA = Ā/θA
(8)
Employment share in industry:
LI =
∆(1 − (Ā/θA ))
,
1+∆
(9)
where
∆ ≡ (γ/(1 − γ))(θI /θS )−η/(η−1) .
Proposition
When 1/(1 − η) < 1 (gross complementarity), faster productivity
growth in industry leads to Baumol’s prediction: labor goes to the
slow-growing service sector.
∂LI
> 0, if 1/(1 − η) > 1;
∂θI
∂LI
< 0, if 1/(1 − η) < 1.
∂θI
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Calibration for the U.S., 1950-2005
I
Normalize productivity levels across sectors to 1 in 1950:
j
θ1950
=1
I
Use data on sectoral productivity growth to get time paths:
j
θt+1
= (1 + gtj )θtj
I
I
Calibrate the preference parameters to match the initial
employment shares
Consider 1/(1 − η) to be a free parameter in order to study
the implication of this parameter value for the findings
I
Bah (2009), Duarte and Restuccia (2010), Ngai and
Pissarides (2004, 2008), Rogerson (2008) argue and cite the
empirical literature that 1/(1 − η) ' 0.1 − 0.45
I
I study three values of 1/(1 − η)
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Sectoral Employment Shares, 1950 - 2005
Agriculture
%9
Model
Data
7
5
3
1
1950
1960
1970
1980
1990
2000
2010
17 / 55
Sectoral Employment Shares, 1950 - 2005
Industry
Services
%34
%82
77
28
72
67
22
62
Data
1/(1-η)=0.45
16
1950
1980
2010
57
1950
1980
2010
18 / 55
Sectoral Employment Shares, 1950 - 2005
Industry
Services
%34
%82
77
28
72
67
22
62
Data
1/(1-η)=0.30
1/(1-η)=0.45
16
1950
1980
2010
57
1950
1980
2010
19 / 55
Sectoral Employment Shares, 1950 - 2005
Industry
Services
%34
%82
77
28
72
67
22
62
Data
1/(1-η)=0.10
1/(1-η)=0.30
1/(1-η)=0.45
16
1950
1980
2010
57
1950
1980
2010
20 / 55
Problem with the Closed Economy
I
Differential productivity gains in industry do not necessarily
explain de-industrialization
I
A major problem is that productivity growth in industry
relative to services is not high enough to move labor out of
the industrial sector
I
This problem is robust under different values of the elasticity
of substitution between industry and services
21 / 55
Does Openness Matter?
China has experienced high productivity growth in industry
(especially after 1990)
If modeled, will improve upon
1. Technology-based explanations
(different rates of sectoral productivity growth)
2. Utility-based explanations
(different income elasticities for different goods)
that can’t account for last 3-4 decades in closed economy
framework
22 / 55
U.S. Trade in Goods: Imports from
%24
20
Canada
16
12
8
4
0
1978
1988
1998
2008
23 / 55
U.S. Trade in Goods: Imports from
%24
20
Canada
16
Japan
12
8
4
0
1978
1988
1998
2008
24 / 55
U.S. Trade in Goods: Imports from
%24
20
Canada
16
Dragons
Japan
12
8
4
0
1978
1988
1998
2008
25 / 55
U.S. Trade in Goods: Imports from
%24
20
Canada
16
Dragons
Japan
12
8
Germany
4
0
1978
1988
1998
2008
26 / 55
U.S. Trade in Goods: Imports from
%24
20
Canada
16
Dragons
Japan
12
Mexico
8
Germany
4
0
1978
1988
1998
2008
27 / 55
U.S. Trade in Goods: Imports from
%24
20
Canada
16
Dragons
Japan
12
Mexico
8
Germany
4
China
0
1978
1988
1998
2008
28 / 55
Structural Change in an Open Economy
29 / 55
Firm j Problem in Country i
max
pji Yji − ω i Lij
s.t.
Yji
= θji Lij
Lij > 0
where
pji is producer price for sector j in country i
Yji is output produced in sector j in country i
ω i is real wage in country i
Lij is labor employed in sector j in country i
θji is productivity of sector j in country i
30 / 55
The representative agent’s utility function in country i is
U(Āi , C i ) = Āi + log(C i )
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The representative agent’s utility function in country i is
U(Āi , C i ) = Āi + log(C i )
1/η
C i = (γ i )1−η (I i )η + (1 − γ i )1−η (S i )η
32 / 55
The representative agent’s utility function in country i is
U(Āi , C i ) = Āi + log(C i )
1/η
C i = (γ i )1−η (I i )η + (1 − γ i )1−η (S i )η
1/(1 − η) is substitution elasticity between industry and services
γ i is share of industry in non-agricultural consumption in country i
33 / 55
Industrial good consumption in country i
1/ρ
1−ρ
I i = (µi )1−ρ (Iii )ρ + (1 − µi ) (Iki )ρ
1/(1 − ρ) is the elasticity of substitution between home and foreign
goods
µi is home-product consumption bias
Consumption bias is a stand-in for trade costs
Free borrowing / lending in a complete set of asset markets
34 / 55
Industrial good consumption in country i
1/ρ
1−ρ
I i = (µi )1−ρ (Iii )ρ + (1 − µi ) (Iki )ρ
1/(1 − ρ) is the elasticity of substitution between home and foreign
goods
µi is home-product consumption bias
Consumption bias is a stand-in for trade costs
Free borrowing / lending in a complete set of asset markets
I
Solve the World’s social planner problem
35 / 55
Industrial good consumption in country i
1/ρ
1−ρ
I i = (µi )1−ρ (Iii )ρ + (1 − µi ) (Iki )ρ
1/(1 − ρ) is the elasticity of substitution between home and foreign
goods
µi is home-product consumption bias
Consumption bias is a stand-in for trade costs
Free borrowing / lending in a complete set of asset markets
I
Solve the World’s social planner problem
I
A sequence of static resource allocation problems
36 / 55
World’s Social Planner Problem
Max αU ĀUS , C US + (1 − α)U ĀCh , C Ch
s.t.
YAI = θAi LiA = Āi
YIi = θIi LiI = Iii + Iik
YSi = θSi LiS = S i
LiA + LiI + LiS = 1
37 / 55
Quantitative Analysis
1. Numerical experiments to answer
I
How does openness effect de-industrialization in the United
States?
I
What would have happened if the Chinese economy had
productivity in industry same as the U.S.?
I
How does the elasticity of substitution between home and
foreign goods affect the sectoral re-allocation of labor?
38 / 55
Quantitative Analysis
1. Numerical experiments to answer
I
How does openness effect de-industrialization in the United
States?
I
What would have happened if the Chinese economy had
productivity in industry same as the U.S.?
I
How does the elasticity of substitution between home and
foreign goods affect the sectoral re-allocation of labor?
2. Data and Parameters
I
Feed the path of actual sectoral productivity growth rates
I
Parameterization of the model
39 / 55
Time Path of Exogenous Variables
The exogenous variables are sectoral productivities in each country
40 / 55
Time Path of Exogenous Variables
The exogenous variables are sectoral productivities in each country
i
θj,1978
=1
Normalization
41 / 55
Time Path of Exogenous Variables
The exogenous variables are sectoral productivities in each country
i
θj,1978
=1
Normalization
Use data on the growth rate of sectoral value added per worker in
country i to obtain the time paths of sectoral productivity
i
i
i
,
)θj,t
θj,t+1
= (1 + gj,t
for
t = 1978, 1979, ...2004
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Parameters
Subsistence in agriculture: Āi
I
to match employment share of agriculture in 1978
Consumption weight on industrial goods: γ i
I
to match employment share of industry in 1978
Home-product consumption bias: µi
I
to match the average import ratio
η: elasticity of substitution between tradables and nontradables
I
0.45
ρ: elasticity of substitution between home and foreign goods
I
International Economics Literature: 1.5
43 / 55
Sectoral Employment Shares in China
Agriculture
%72
54
36
Data
Model
18
1978
1987
1996
2005
44 / 55
Sectoral Employment Shares in China
Industry
Services
%45
%40
38
33
31
26
24
19
Data
Autarky
17
1978
1993
2008
12
1978
1993
2008
45 / 55
Sectoral Employment Shares in China
Industry
Services
%45
%40
38
33
31
26
24
19
Data
Autarky
Open w/o wedge
17
1978
1993
2008
12
1978
1993
2008
46 / 55
Sectoral Employment Shares in China
Industry
Services
%45
%40
38
33
31
26
24
19
Data
Autarky
Open w/o wedge
Open with wedge
17
1978
1993
2008
12
1978
1993
2008
47 / 55
Sectoral Employment Shares in the U.S.
(a) Agriculture
%2.9
(b) Industry
(c) Services
%29
%81
26
78
23
75
20
72
2.2
1.5
Data
Autarky
Open
Data
Model
0.8
1978
1993
2008
17
1978
1993
2008
69
1978
1993
2008
48 / 55
What would have happened if the Chinese
economy had productivity in agriculture /
industry / services / all sectors same as the
United States?
49 / 55
Role of Productivity Differentials
Industrial Employment Share in the U.S.
%29
26
23
20
Data
Autarky
Open
All Sectors
17
1978
1988
1998
2008
50 / 55
Role of Productivity Differentials in Industry and Services
(a) Role of Industry
(b) Role of Services
%29
Industrial Employment Share in the U.S.
Industrial Employment Share in the U.S.
%29
26
23
20
Data
Autarky
Open
All Sectors
Industry Only
17
1978
1988
1998
2008
26
23
20
Data
Autarky
Open
All Sectors
Services Only
17
1978
1988
1998
2008
51 / 55
Sensitivity Analysis in the Open Economy
Sensitivity for η
Sensitivity for ρ
%29
%29
26
26
23
23
20
20
Data
1/(1-ρ)=1.2
1/(1-ρ)=1.5
1/(1-ρ)=2.0
Data
1/(1-η)=0.30
1/(1-η)=0.45
1/(1-η)=0.74
17
1978
1993
2008
17
1978
1993
2008
52 / 55
Trade Variables
TB to GDP
%0.4
TV to GDP
RER
2.4
%3.3
2.0
1.6
2.2
log(RER)
-0.8
-2.0
1.2
0.8
1.1
0.4
0.0
Data
Model
-3.2
1978
1993
2008
0
1978
1993
2008
-0.4
1978
1993
2008
53 / 55
Discussion on the Chinese Data
Chinese Industrial Productivity
8
Holz
Maddison-Wu
7
U.S. Industrial Employment Share
%29
26
1978 = 1
6
5
23
4
3
20
Data
Autarky
Holz Data
Maddison-Wu Data
2
1
1978
1992
2006
17
1978
1992
2006
54 / 55
Concluding Remarks
I
Openness matters for sectoral reallocation of labor!
I
If the Chinese economy had productivity in industry same as
the U.S., then the role of openness is diminished
I
The higher the elasticity of substitution between home and
foreign goods is, the more accelerated structural
transformation
I
Several additional questions can be profitably addressed in
future work
55 / 55