THE FIFTH ASIAN DRAGON: SOURCES OF GROWTH IN
GUANGDONG, 1979-1 994
CHI-WA YUEN*
This paper presents a growth accounting exercise to uncover the sources of
spectacular growth in the Guangdong Province in China, the so-called “Fifth
Dragon” in Asia, ,for the post-open-door period 1979-1994. A large fraction of
Guangdong ‘s output growth cannot be attributed to the growth in its capital and
labor inputs. Of the unexplained residuals, ,foreign direct investment is a significant growth-spurring engine while export expansion is not. In this sense, China ’s
open door policy did not generate export-led growth although it did stimulate
capital accumulation through the importation of foreign capital. (JEL 012, F2 1)
“East Asia has a remarkable record of high and sustained economic growth.
From 1965 to 1990 the twenty-three economies of East Asia grew faster than
all other regions of the world. ... Most of this achievement is attributable to
seemingly miraculous growth in just eight economies: Japan; the ‘Four
Tigers’-Hong Kong, the Republic of Korea, Singapore, and Taiwan, China;
and three newly industrializing economies (NIEs) of Southeast Asia, Indonesia, Malaysia, and Thailand. ...” (World Bank, 1994, p. 1)
I. INTRODUCTION
reason, some people have even chosen to name
this region the Fifth Dragon. While casual observations and detailed descriptive accounts of
the development of the region abound (e.g.,
Sung et al., 1995), formal modelling and analysis at the theoretical and empirical levels still
are missing.
This paper seeks to fill the empirical gap
by investigating the source(s) of output growth
in Guangdong, the most notable province in
South China, in the post-open-door policy period. In particular, the paper examines three
plausible sources of growth in Guangdong:
factor accumulation, export-led growth, and
foreign direct investment. To this end, the analysis conducts a growth accounting exerciseto disentangle the growth in output into growth
in capital and labor inputs and growth in productivity. In addition, the analysis compares
the growth performance of Guangdong with
that of China.
Due to its remarkable record of high and
sustained economic growth in the past few decades, East Asia-especially its “Four Little
Dragons,” Hong Kong, Singapore, South
Korea, and Taiwan-has attracted the attention
of academics and policymakers alike (e.g.,
Lucas, 1993, World Bank, 1994, and Ito and
Krueger, 1995). More recently, their attention
has been diverted to China and particularly a
region in South China called the Pearl River
Delta (PRD). The spectacular economic performance of this region is viewed as a growth
miracle even surpassing in scale the East Asian
miracle: the average annual output growth rate
in the PRD has been standing at a record high
of more than 20% for the last decade. For this
*This is a revised version of a paper presented at the
Pacific Rim Allied Economic Organizations 2nd Biennial
Conference, Hong Kong, January 1996. The study was motivated by conversations with Assaf Razin. The author
thanks Yum-Keung Kwan for helpful discussion, Ida Liu
for research assistance and comments, and Darwin Hall
(the editor) and an anonymous referee for useful suggestions and criticisms. The usual disclaimer applies. This
r e s e a r c h i s s u p p o r t e d by t h e CRCG G r a n t No.
335101 1/0019 from the University of Hong Kong.
Yuen: Assistant Professor, School of Economics and
Finance, University of Hong Kong
Phone 852-2859-105 I , Fax 852-2548- I 152
E-mail [email protected]
ABBREVIATIONS
CES: Constant elasticity of substitution
FDI: Foreign direct investment
N1: National income
PRC: People’s Republic of China
PRD: Pearl River Delta
RMB: Renminbei
TFP: Total factor productivity
1
Contemporary Economic Policy
(ISSN 1074-3529)
Vol. XVI, January 1998, 1-1 1
OWestern Economic Association International
2
CONTEMPORARY ECONOMIC POLICY
11.
A BRIEF OVERVIEW OF THE GROWTH
PERFORMANCE OFGUANGDONG
The emergence of market economy in South
China and more specifically the Pearl River
Delta (PRD) together with its rapid integration
with Hong Kong was a background for the miraculous growth performance of both areas. In
the past decade, Hong Kong GDP has grown
at around 5% a year. Due to a significant relocation of manufacturing activities into
Guangdong (mainly in the form of foreign direct investment), its GNP must have been
growing at much faster rates. The average annual output growth rate in the PRD has been
around 20%, and that in Guangdong around
the mid-teens, in the same period. Although
the PRD constitutes merely a small fraction of
the PRC population, it has been an important
locomotive for the development of the entire
country and that of Hong Kong.
As table la (based on table 1 below) reveals, the ratio of foreign direct investment
(FDI) to output, measured in terms of national
income (NI), in Guangdong increased from
below 1% in the early 1980s to more than 10%
in the early 1990s.’ Although the available FDI
data have not been broken into countries of
origin, a large portion (about 80% on average)
is known to have originated from Hong Kong
(HK). The FDI is largely in the form of infrastructure investment and relocation of manufacturing establishments from HK. FDI from
HK can thus be viewed as a tie-in product,
which involves both accumulation of HKowned capital in Guangdong, technology
transfer, and transfer of managerial skills,
which were almost absent before China opened
its doors.
Naturally, investment has two sources: domestic and foreign. Paralleling and partially
due to the FDI flows, an investment boom also
has occurred in Guangdong. The (net) investment-output ratio moved from about 26% in
the early 1980s to an average of 35% in the
later period. This rapid accumulation of capital
potentially explains the high growth performance in Guangdong, as suggested by the standard capital deepening theory (see Solow,
1956; Swan, 1956).
I . Other measures of output reported in the Sfatistical
Yearbook qf Guangdong include total product of society
(or gross provincial product), gross domestic product, and
national income available. Following Chow (1993), this
paper measures output with national income.
On the other hand, the export-output ratio
grew rapidly from about 15% in the late 1970s
and early 1980s to more than 50% in the early
1990s. This remarkable export expansion can
lead one to view trade policies as “explaining”
the growth of output, the export-led growth
theory. Many developing countries (such as
Taiwan) initially engage in import substitution
policies with multiple exchange rates and
highly regulated domestic capital markets. In
the next stage of development, these countries
embark upon liberalization policies whereby
they subsidize exports, unify exchange rates,
and gradually expose the economy to competition from imports. The export orientation facilitates specialization of these economies according to their comparative advantages and
results in a sharp increase in the share of the
traded sector in total output. The standard export-led growth story argues that this policy is
the major driving force behind the high growth
performance o f these e c o n o m i e s ( s e e
Kindleberger, 1962; Tsiang, 1984; for a critique of the story as applied to Taiwan and
South Korea, see Rodrik, 1995).
111. THE DATA AND EMPIRICAL METHODOLOGY
Unless otherwise specified, all data in this
study are from official sources including various issues of the Statistical Yearbook of
Guangdong (formerly Guangdong Sheng
Tongii Nianjian). Table 1 contains the basic
data used to construct variables of interest. The
original data series are expressed largely in
nominal terms: national income and accumulation in RMB and FDI and exports in U S .
dollars. Output and accumulation data in 1979
and 1981 are missing. Figures (in parentheses)
contained in table 1 are estimates obtained
from simple interpolation. Data on foreign direct investment (FDI) are not available in the
year 1978. Since that precedes the open door
period, one can safely assume it to be zero. As
for the years 1979-1982, only an aggregate
figure is reported: US$478.4 million. The four
figures in 1979-1 982 (in parentheses) reported
in the table are computed based on the assumption that FDI grew at a constant rate from 1979
to a value of US$400 million in 1983.
These series are converted into the same
currency units (RMB) by using the RMB-USD
exchange rates. All these nominal data are then
deflated by the GNP deflator in China to obtain
their real (constant 1990 RMB) counterparts.
16078
( 1 8920)
21761
(25027)
28293
30409
39738
46727
56496
65625
8945 7
10349 1
113221
I3803 I
179359
257284
325129
Year
1978
1979
1980
1981
1982
1983
I984
1985
1986
1987
1988
1989
1990
1991
1992
1993
I994
22759.5
23049.5
23677.8
24237.9
25213.8
25697.0
26374.9
27311.1
28119.2
29109.9
29947.2
30412.7
31181.0
32592.0
33672.1
34339.1
3493 1.5
Labor
'000s
4195
(4441)
4687
(6327)
7967
8338
11409
17198
202 16
23188
320 14
36060
3361 5
40982
68807
102419
126371
Accumulation
RMB mn
(0.0)
(43.0)
(75.1)
(131.2)
(229. I )
400.0
650.1
65 1.3
643.9
594.0
919.1
1156.4
1459.8
1822.9
355 1.6
7498.1
9397.1
FDI Utilized
US$ mn
Source:
Columns 2-7: Statistical Yearbook of Guangdong, various issues
Columns 8-9: Internarional Financial Statistics, I995
Note: Figures in parentheses are estimates obtained from simple interpolation.
Nat'l
Income
RMB mn
450.2
622.7
502.7
836.5
952.1
985.0
1356.6
3038.8
6529.5
7767.6
FDI
Utilized
from HK
US$ mn
Guangdong Province 1978-1 994
TABLE 1
1388
1719
2195
2419
2274
2399
2515
2953
4290
5560
7484
8168
I0560
13688
18440
27027
46993
Exports
USD mn
E/R
1.6836
1.5550
1.4984
1.7045
1.8925
1.9757
2.3205
2.9367
3.4528
3.7221
3.7221
3.765 1
4.7832
5.3234
5.5146
5.7620
8.6187
RMBNJSD
55.3
57. I
59.4
60.7
60.7
61.5
64.3
70.1
73.4
77.2
86.3
94.0
100.0
105.7
111.1
127.6
159.2
1990=100
PRC GNP
Deflator
.
i
P0
2
0
U
I
0
Z
n
P
7
2
0
&P
2
4
71
-A
n
I
-1
z
n
C
CONTEMPORARY ECONOMIC POLICY
4
TABLE la
FDI Utilized, Accumulation and Total Exports to National Income Ratios
Year
FDI Utilizedl
National Income YO
Accumulation/
National Income YO
Total Exports/
National Income ‘YO
I978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
0.00
0.35
0.52
0.89
1.53
2.60
3.80
4.09
3.94
3.37
3.82
4.21
6.17
7.03
10.92
16.79
24.91
26.09
23.47
21.54
25.28
28.16
27.42
28.71
36.81
35.78
35.33
35.79
34.84
29.69
29.69
38.36
39.8 1
38.87
14.53
14.13
15.11
16.47
15.21
15.59
14.68
18.56
26.22
31.54
31.14
29.72
44.61
52.79
56.69
60.53
124.57
Derived From Table I.
Note: The big jump in exchange rate in 1994 led the export-output ratio to be greater than 100%.
Source:
Both the exchange rate and deflator series are
extracted from the International Financial Statistics (1995). Since price deflator data are not
available at the provincial level, similar data
at the national level are used instead. Data on
retail price index (1950 = 100) in Guangdong
are available. The nation-wide GNP deflator is
chosen instead because it more comprehensively covers goods produced. Note, however,
that the inflation rate in China may be different
(possibly lower) than that in Guangdong. Since
price deflator data for the various components
of output such as accumulation and exports
simply are not available (except consumption),
more accurate estimates of the real values of
these components cannot be derived. It is
therefore possible that some of them are undervalued in real terms and some overvalued.
(For other problems relating to the measurement of the “true” inflation rate in China, see
Feltenstein and Ha, 1991.)
A. Construction of Capital Stock Series
Regarding data construction, the most difficult task is to derive the capital stock series.
is given by:
By definition, gross investment (II)
where K,, and K, are capital stocks in two
consecutive periods t + 1 and t respectively
and 6 is the rate of depreciation of capital.
K,, - Kf represents net investment and SK, replacement investment in period t. Rearranging
terms, capital stock in the next period (Kt+,)
can be expressed in terms of investment (I,)
and capital (K,) in the current period as follows:
K,+I =If+ (1 - 6)Kf
Equation (1) says that capital in the ensuing
period is given by either (i) the sum of gross
investment and undepreciated capital in the
current period or (ii) the sum of net investment and capital stock in the current period.
Since the term “accumulation” in table 1 refers to net investment, the latter expression
(ii) can be used to construct the capital stock
series without estimating the rate of capital
depreciation (6).
YUEN: THE FIFTH ASIAN DRAGON-SOURCES
In order to apply recursively equation (1)
to derive the capital stock in the period 19791994, knowledge about the capital stock in
1978 (i.e., K,,,,, the initial capital) is needed.
For lack of information at the provincial level,
the capital-output ratio in Guangdong is assumed to equal its counterpart in China in the
year 1978. Granted this, the output data in both
places together with Chow’s (1993) estimate
of the capital stock in China can then be combined to get
Output in 1978 for Guangdong and China was
16,078 and 301,000 million RMB respectively, and, from table V of Chow ( I 993), the
capital stock in 1978 for China was 1,084,230
million RMB. Using equation ( 2 ) , one can estimate the capital stock of Guangdong in 1978
to be 57,914 million RMB. This nominal figure is then deflated to a real value (1990
prices) of 104,727 million. This completes the
construction of the capital stock series in
Guangdong for the period 1978-1 994.2
Among other things, the series is displayed in
column 2 of table 2 .
B. Growth Accounting
To analyze the sources of output growth in
Guangdong, the production technology is assumed to take the Cobb-Douglas form:
(3)
Y, =AX K:-a,
where Y, denotes output, K, capital input, N,
labor input, and A , the productivity level in
period t, and a the labor share of output. In
per capita terms, it can also be expressed as
where y is output per unit labor (YIN) and k
the capital-labor ratio (KIN).
2. For industrial data in the state sector, see Chen et
al. (l988a) which includes a construction of the time series
of fixed capital stock for independent accounting units
within the Chinese state industry in the period 1952-1985.
Using these data, Chen et al. (1988b) also carry out a productivity analysis, an analogue of the one in this paper at
the industry level.
OF GROWTH IN GUANGDONG. 1979-1994
5
Taking logarithms on both sides of equation
(3) and subtracting the time-t- 1 version of the
resulting expression from its time-t version
yield the following:
Denoting the growth rate of any variable zI
(i.e., Z,/Z,-, - 1) by g,, and using the approximation ln(z,/z,-,) =gZr one can rewrite the
above equation as
This is precisely the growth accounting equation. It decomposes the growth in output (8,)
into growth in factor inputs (g,,, and g K ) and
growth in productivity (gA). The latter (gA)is
sometimes termed “total factor productivity”
(TFP) or the “Solow residual” since it accounts for any residual output growth that is
unexplained by factor acc~mulation.~
Analogously, equation (3a) implies that
To determine the magnitude of the TFP for
the period 1979-1 994, one has to calculate the
growth rates of output, capital, and labor (g,,,
g,, and g,,,,; or gyl and gkr)and to estimate the
labor share parameter (a).Given real data on
inputs and outputs, one easily can compute
their growth rates, which are reported in columns 3-5 of table 2 .
One can estimate the parameter a and the
TFPs (gAt)simultaneously either by running a
restricted regression of gy on g,,,and gK (using
equation [4]) with the restriction that the coefficients on both regressors sum to unity or
3. For productivity analysis in China at the more disaggregative levels, see, e.g., Chen et al. (1988b) [state industry, 1953-1 9851, Jefferson et al. (1992) [state and collective industry, 1978-19881, and Wu (1995) [agriculture
and state and rural industry, 1985-1991].
6
C O N T E M P O R A R Y E C O N O M I C POLICY
TABLE 2
Capital Stock and Growth Rates
Year
1979
1980
1981
1982
1983
1984
I985
1986
1987
1988
1989
I990
1991
1992
1993
I994
K
112313.66
120091.24
1279813 1
138405.21
15 1530.41
165088.14
182831.53
207365.05
234907.28
264943.55
302039.73
34040 1.43
3740 16.43
412788.43
474720.92
554986.59
gK
giv
gY
TFP
6.99
6.70
6.36
7.83
9.06
8.57
10.21
12.59
12.47
12.03
13.10
11.96
9.42
9.86
13.98
15.62
1.27
2.69
2.34
3.95
1.90
2.60
3.49
2.92
3.46
2.84
1.54
2.50
4.43
3.26
1.96
1.71
13.07
10.04
1 1.82
12.27
5.90
22.3 1
7.57
14.39
9.93
19.84
6.03
2.80
14.27
21.21
22.23
I .28
10.37
6.35
8.47
7.35
2.2 1
18.2 1
2.39
9.05
4.2 1
14.70
1.59
-2.07
8.59
16.29
17.26
-3.92
N.B. mean of T F P = 7.57%, and standard deviation = 6.71%.
by running an unrestricted regression of g, on
gk (using equation [4a]). The regression coefficients will provide an estimate of a and the
regression residuals an estimate of g, (the
Solow residuals). Both exercises reveal that
the estimated a is unreasonably low-about
0.15. (The labor share a is about 2/3 in the
U.S. and exceeds 0.5 in most other countries.)
Instead of reporting the detailed results (which
will not be used anyway), a scatter plot of gy
against g, is displayed in figure 1.
Alternatively, one can get an estimate of
a from other sources and use it directly (along
with the growth rates of labor, capital, and output) to find the TFPs. Kwan and Chow (1996)
estimate a to be 0.7495 with a standard error
of 0.0108 for China in the period 1952-1993.
(This estimate is higher than the 0.4 estimate
in Chow (1993). But since the sample period
in Chow (1993) does not include the post-1980
years, his estimation may miss the effects of
the open door policy. Kwan and Chow’s (1996)
estimate of 0.7495 is therefore used in this
study.) This is a reasonable estimate for China
and certainly also for Guangdong-although
the labor share may be slightly lower there perhaps due to the adoption of more capital-intensive technology. Therefore, in computing the
TFPs, a = 0.7495 is assumed. The TFPs so obtained using either equation (4) or (4a) are reported in the last column of table 2.
C. The Role of Exports and Foreign Direct
Investment (FDI) in TFP Growth
By definition, the TFPs include everything
that contributes to output growth, other than
increases in capital and labor inputs. The goal
here is to assess the role of China’s open door
policy in such productivity changes. As in Wei
(1995), two “open door” indicators are chosen:
exports (A‘) and foreign capital ( K f ) . Exports
represent goods exported from Guangdong,
which include both goods shipped out of the
country as well as goods transported to other
provinces in China. Foreign capital did not
exist prior to the adoption of open door policy,
so that q978
= 0. Using an analogue of equation (I), one can construct the foreign capital
stock series from data on foreign direct investment (FDI), i.e., @+, = FDI, + @ (assuming a
zero rate of depreciation). Since foreign investment arrangements contracted for may
never be realized, FDI utilized is used instead
of FDI contracted. Table 1 reveals that a very
large percentage of such FDI originated from
Hong Kong.
Table 3 reports the growth rates of export
and foreign capital. To determine the significance of these two factors on productivity
growth in Guangdong, three sets of regressions
are run on (i) export growth, (ii) foreign capital
growth, and (iii) growth in both exports and
foreign capital:
YUEN: THE FIFTH ASIAN DRAGON-SOURCES
7
OF GROWTH IN G U A N G D O N G , 1979-1994
FIGURE 1
Growth in Per Capita Output vs. Growth in Capital-Labor Ratio, 1979-1994
25
*O
I
+
+
15
i
ij
t
f
+
10
+
+
+
+
+
+
5
+
++
+
0
I
2
6
4
8
10
12
14
+
16
-5
C.pitaIJ.bor ratio growth X
TABLE 3
Growth of Productivity, Exports, and Foreign Capital
Year
TFP
1979
1980
1981
1982
1983
1984
1985
1986
1987
I988
1989
1990
1991
I992
1993
1994
10.37
6.35
8.47
7.35
2.2 1
18.21
2.39
9.05
4.2 I
14.70
1.59
-2.07
8.59
16.29
17.26
-3.92
gx
10.24
16.79
20.44
4.28
8.34
16.36
30.97
48.94
28.39
18.57
I .35
43.43
31.10
28.35
28.77
73.46
gk'f
0.00
0.00
96.23
78.93
72.19
65.49
62.98
43.40
32.99
23.56
25.51
23.36
27.3 1
27.32
37.78
47.21
CONTEMPORARY ECONOMIC POLICY
8
TABLE 4
Decomposition of Output Growth
Year
gY
K-share
N-share
TFP-share
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
13.07
10.04
1 1.82
12.27
5.90
22.3 1
7.57
14.39
9.93
19.84
6.03
2.80
14.27
21.21
22.23
I .28
13.40
16.70
13.49
15.99
38.45
9.62
33.80
2 1.93
3 1.46
15.20
54.47
107.04
16.53
I 1.65
15.75
306. I9
7.26
20.08
14.83
24.12
24.10
8.75
34.56
15.19
26.13
10.71
19.18
66.83
23.25
11.52
6.61
100.31
79.34
63.22
7 I .69
59.89
37.45
81.63
3 1.64
62.88
42.4 1
74.09
26.34
-73.87
60.22
76.83
77.64
-306.49
where the
sions.
E’S
are residual terms in the regres-
IV. THE FINDINGS AND THEIR
INTERPRETATIONS
Table 4 shows the role of factor accumulation in output growth. By K-share and N-share
are meant the percentage contribution of capital and labor to growtb-i.e., 100% multiplied
by ( I-a)gK / g y and a g N / g yrespectively and
similarly for TFP-share-i.e., 100% multiplied
by g A / g p The table shows that capital and
labor contribute about equally, but much less
significantly than does TFP, to output growth.
This seems to contradict Chow’s (1993) conclusion that growth in China was largely a consequence of capital accumulation and that TFP
was almost non-existent.
Is Guangdong so different from China?
Since Chow’s study stops at 1980, his results
are not quite comparable to the results here. A
more updated study has been done by Kwan
and Chow ( 1 996). They measure growth rates
in both output and capital in per capita terms
(see their table I). Thus, the data in table 4
must be transformed to g y ( = g y - g N )and kshare (= loo* (1 - a ) (gK- gN)/ g y )to facilitate
the comparison. Panel (a) of table 5 reports the
transformed calculations for Guangdong and
panel (b) reports calculations based on Kwan
and Chow for China. A glance at the two panels reveals that, although Guangdong grew
faster on average in both output and TFP than
did China, no noticeable difference exists between their TFP-shares in output growth. If
this is not a result of errors in measuring quantities of factor inputs, then the findings reported here imply that a sizable portion of output growth remains ~nexplained.~
The regressions summarized by equation
(5) are then carried out to estimate how much
of the residual growth in output (i.e., TFP
growth) can be explained by external factors.
Table 6 reports results for the three sets of regressions. While export growth and foreign
4. The TFP estimates reported here are incredibly large
in comparison to those Young ( I 995) obtains for the Four
Dragons. H e demonstrates rather dramatically that without
adjusting for demographic changes, labor force participation, massive elementary education, and other factors that
lead to a one-time, neoclassical gain in efficiency, one can
mistakenly attribute the observed rapid output growth to
TFP. See his table 15, which shows how the large but naive
TFP estimates can be successively chipped away by introducing one adjustment at a time. Due to data limitations,
a similar exercise cannot be carried out in this paper.
YUEN: THE FIFTH ASIAN DRAGON-SOURCES
OF GROWTH IN GUANGDONG, 1979-1994
9
TABLE 5
Comparison of TFP-shares between Guangdong and China
Year
gu
K-share
TFP-share
TFP
Panel (a): Guangdong Province
1979
11.81
1980
7.35
1981
9.48
1982
8.32
1983
4.0 I
1984
19.70
1985
4.08
1986
11.47
1987
6.47
1988
17.00
1989
4.48
1990
0.30
1991
9.84
1992
17.95
I993
20.27
I994
4.43
12.15
13.65
10.64
11.69
44.80
7.59
41.29
21.13
34.89
13.55
64.59
78 1.48
12.70
9.22
14.85
-805.96
87.85
86.35
89.36
88.3 1
55.20
92.42
58.71
78.87
65. I 1
86.45
35.4 I
-68 1.48
87.30
90.78
85.15
905.96
10.37
6.35
8.47
1.35
2.2 1
18.2 1
2.39
9.05
4.2 1
14.70
I .59
-2.07
8.59
16.29
17.26
-3.92
Panel (b): PeopIe’s Republic of China
1979
5.96
1980
3.06
1981
0.46
1982
6.00
1983
7.17
1984
9.00
1985
15.08
1986
5.72
1987
2.94
1988
8.14
1989
0.68
1990
4.67
1991
3.15
1992
12.51
1993
18.67
23. I8
42.92
254.6 1
16.92
14.68
12.42
8.20
26.46
50.83
17.51
2 18.98
-206.38
40.02
9.88
7.48
76.82
57.08
-154.61
83.08
85.32
87.58
91.80
73.54
49. I7
82.49
-1 18.98
306.38
59.99
90. I2
92.52
4.58
1.75
4 . 71
4.99
6.12
7.88
13.84
4.20
I .44
6.72
4.80
-2.04
I .89
1 I .27
17.28
capital growth individually are found to be significant determinants of TFP growth (first two
sets of regressions), the marginal effect of the
former-i.e., partial derivative of TFP with respect to export growth-vanishes as soon as
the latter also is included as an explanatory
variable (third set of regressions). One can regard this as a rejection of the export-led
growth hypothesis and a confirmation of the
traditional view that capital accumulation (domestic and foreign) is the engine of growth. In
other words, although support has been found
for the role of China’s open door policy in the
growth of Guangdong’s output, the inflow of
foreign capital-which
adds directly to the
pool of productive resources in Guangdongappears to be a much more important driving
force than does its export of goods and services
to other provinces in China and the rest of the
world.
A caveat is in order. The possibility of reverse causation has not been investigated. In
other words, the causation may have run from
productivity growth to FDI instead of the other
way round. Empirically, this issue may be settled (though less than perfectly) by performing
a Granger causality test. This issue is left for
future research.
CONTEMPORARY ECONOMIC POLICY
10
TABLE 6
The Role of Exports and FDI in TFP Growth
Exports only
Export growth
Growth of foreign capital
0.160 (0.071)**
-
FDI only
Exports & FDI
-
0.046 (0.090)
0.107 (0.057)***
0.127 (0.041)*
N.B. Standard errors are in parentheses.
*,**, and *** mean significance at the I%, 5%, and 10% levels respectively.
V.
CONCLUSION
A large fraction o f output growth i n
Guangdong is not attributable to the growth in
its capital and labor inputs. As expected, the
size of its Solow residual compares favorably
to that in China as a whole. But the share of
TFP in output growth is still too big to be credible. Using Page’s (1994) terminology, one
may identify this as corroborating evidence for
the mystics rather than the fundamentalists.
(While the “fundamentalists” attribute the miraculous growth in East Asia to high rates of
physical and human capital deepening, the
“mystics” emphasize the role of TFP change.)
More correctly interpreted, however, these results simply indicate that little about the underlying driving force for growth can be unravelled b y examining the limited existing
data. In large part, they are a reflection of the
standard problems in growth accounting-i.e.,
the difficulty in measuring the quantity of “effective” input (e.g., number of labor hours instead of pure head counts, the rate of utilization of machines, and the quality of these productive i n p ~ t s ) .In
~ particular, the analysis
here does not examine the role of the single
most important determinant of growth identified by the new growth theories, viz., human
capital. Improvement in data quality (and
quantity) is required to sharpen these estimates.
Of the unexplained residuals, FDI is a more
significant growth-spurring engine than export
expansion. This analysis takes a simplistic
5. “Productive” (as distinguished from “non-productive”) investment figures also are reported in the Statistical
Yearbook of Guangdong. The overall investment figures
are chosen so as to facilitate comparison of provincial level
results with the national level results of Kwan and Chow
(1996). Future research can make more fruitful use of the
“productive” investment data.
view of FDI-i.e.,
a flow that augments the
stock of foreign capital. in reality, one can
think of FDI as a tie-in product that encompasses the transfer of foreign technology and
managerial skills as well as the inflow of foreign capital. Viewed this way, FDI can contribute to output growth in three different directions: capital input, skilled labor or entrepreneurial input, and technological improvement. (See, e.g., Borensztein et al., 1995;
Razin et al., forthcoming.) Additional data and
a more rigorous analysis using alternative
specifications of production functions and
methods of estimation are required to break
TFP down further along these dimensions (see,
e.g., Young, 1992; Kim and Lau, 1994; Wan,
1995).
REFERENCES
Borensztein, Eduardo, Jose De Gregorio, and Jong-Wha
Lee, “How does Foreign Direct Investment Affect
Economic Growth?” NBER Working Paper No. 5057,
Cambridge, Mass., May 1995.
Chen, Kuan, et al., “New Estimates of Fixed Investment
and Capital Stock for Chinese State Industry,” China
Quarterly, June 1988a. 243-266.
, “Productivity Change in Chinese Industry:
1953-1985,” Journal of Comparative Economics, December 1988b, 570-591.
Chow. Greeorv C.. “Caoital Formation and Economic
Grow& in’ China,” Quarter1-v Journal of Economics,
August 1993, 809-842.
Feltenstein, Andrew, and Jiming Ha, “Measurement of Repressed Inflation in China,” Journal of Development
Economics, October 1991, 279-294.
International Monetary Fund, International Financial Statistics, 1995.
Ito, Takatoshi, and Anne 0. Krueger, Growth Theories in
Light ofthe East Asian Experience, University of Chicago Press, Chicago, Ill., 1995.
Jefferson, Gary H., et al., “Growth, Efficiency, and Convergence in China’s State and Collective Industry,”
Economic Development and Cultural Change, January 1992, 239-266.
YUEN: THE FIFTH ASIAN DRAGON-SOURCES
Kim, Jong-ll, and Lawrence J. Lau, “The Sources of Economic Growth in the East Asian Newly Industrialized
Countries,” .Journal of the Japanese and International Economics, September 1994, 235-27 l .
Kwan, Yum K., and Gregory C. Chow, “Estimating Economic Effects of Political Movements i n China,”
Journal of Comparative Economics. October 1996,
192-208.
Kindleberger, Charles P., Foreign Trade and the National
Economy, Yale University Press, New Haven, Conn.,
1962.
Lucas, Robert E., Jr., “Making a Miracle,” Econometrics,
March 1993. 25 1-272.
Page, John, “The East Asian Miracle: Four Lessons for
Development Policy,” NBER Macroeconomics Annual 1994, MIT Press, Cambridge, Mass., 1994.
Razin, Assaf. Efraim Sadka, and Chi-Wa Yuen, “A Pecking
Order of Capital Inflows and International Tax Principles,” Journal of International Emnoniics, forthcoming.
Rodrik, Dani, “Getting Interventions Right: How South
Korea and Taiwan Grew Rich,” Economic Policy,
April 1995, 53-107.
Solow, Robert M., “A Contribution to the Theory of Economic Growth,” Quartercv Journal of Economics,
February 1956, 65-94.
Statistical Bureau of the PRC, Statistical YL’urbook of
Guangdong ( f o r m e r l y Guangdong Sheng Tongii
Nianjian), various issues.
Sung, Yun-Wing, et al., The F i f h Dragon: The Emergence
ofthe Pearl River Delta, Addison-Wesley, Singapore,
1995.
OF GROWTH IN GUANGDONG, 1979-1994
II
Swan, Trevor W., “Economic Growth and Capital Accumulation,” Economic Record, November 1956, 334361.
Tsiang, S. C., “Taiwan’s Growth Miracle: Lessons in Economic Development,” in Arnold C. Harberger. ed.,
World Economic Growth, ICS Press, 1984.
Wan, Guang H., “Technical Change in Chinese State Industry,” Journal of Comparative Economics, December 1995, 308-325.
Wei, Shang-Jin, “The Open Door Policy and China’s Rapid
Growth: Evidence from City-Level Data,” in
Takatoshi Ito and Anne 0. Krueger, ed., Growth Theories in Light of the East Asian Experience, University of Chicago Press, Chicago, Ill., 1995.
World Bank. The East Asian Miracle: Economic Growth
and Public Policy, Oxford University Press, New
York, N.Y., 1994.
Wu, Yanrui, “Productivity Growth, Technological Progress, and Technical Efficiency Change in China: A
Three-Sector Analysis,” Journal of Comparative Economics, October 1995, 207-229.
Young, Alwyn, “A Tale of Two Cities: Factor Accumulation and Technical Change in Hong Kong and Singap o r e , ” NBER Macroeconomics Annual 1992,
Cambridge, Mass., 1992.
“The Tyranny of Numbers: Confronting the
Statistical Realities of the East Asian Growth Experience,” Quarterly Journal of Economics, August
1995, 641-680.
SEIGNIORAGE, DOMESTIC DEBT, AND FINANCIAL
REFORM IN CHINA
KEVIN M. KIME*
This paper describes the institutional features of China’s hybrid economy that
have allowed the government to earn high levels of seigniorage. It quantifies
both the financial benefits and implicit costs to the government of extracting
seigniorage from the economy. The analysis, which is based on the insideloutside
money model of Gurley and Shaw (1960). indicates that seigniorage earnings in
the period 1987-I 994 were large, but were earned at the cost of a rising implicit
government debt and potential future inflation. The paper also outlines how the
Chinese government’s ability to earn seigniorage in the future may decline as
the economy becomes fully monetized and as reform alters the economy ’s unique
institutional structure. (JEL 124, 3 10, 320)
I. INTRODUCTION
financial resources. Second, this seigniorage
“gift” comes to the Chinese government with
a significant cost attached in the form of a high
level of implied domestic indebtedness and latent future inflation potential. Third, on-going
and proposed financial sector liberalization
measures-while
desirable on efficiency
grounds-will likely have a negative impact
on the Chinese government’s ability to earn
seigniorage in the future.
Seigniorage has been an important revenue
source for China since the start of the country’s
economic reform program in the late 1970s.
As progressive decentralization and reform
have eroded the government’s traditional revenue bas-tate
enterprise profits-efforts to
tax the rapidly growing non-state sector have
been largely unsuccessful (World Bank, 1996).
However, the Chinese government has kept official fiscal deficits small by shifting a significant portion of its fiscal expenditures related
to support of the state enterprise sector to the
state banking system. The banking system, in
turn, has been supported largely through significant flows of seemingly cost-free credit
creation, i.e. seigniorage. As the analysis will
show, however, seigniorage earned through
credit creation across the banking system’s
books carries significant costs.
Three key conclusions emerge from the
analysis here. First, China has been able to extract large amounts of seigniorage from its
economy since at least the mid-1980s because
of both rapid monetization and the state
sector’s monopoly over the non-state sector’s
II. DEFINING SEIGNIORAGE AND GAUGING
ITS TYPICAL MAGNITUDE
A. Defining Seigniorage
Seigniorage is fiscal revenue that arises
from a government’s statutory monopoly over
the provision of credit and currency. This
money production monopoly enables governments to extract seigniorage both voluntarily
and involuntarily. Voluntary seigniorage is
earned when the public willingly surrenders
real resources in return for the government’s
fiat currency. A necessary condition for such
an exchange to be voluntary is that the money
created by the government be matched by a
proportional increase in the public’s demand
for real money balances.
Involuntary seigniorage, however, is essentially an inflation tax earned when credit creation exceeds the public’s desired real level of
holdings. This excess supply of credit leads to
a reduction in real purchasing power, causing
an increase in the general price level and a
decline in the real financial wealth of those
*This is a revised version of a paper presented at the Western Economic Association InternationaI 71st Annual Conference in San Francisco, Calif., on June 29, 1996, in a session
organized b Frank Packer, Economist, Federal Reserve Bank
of New Yorz. The views expressed are those of the author and
do not necessarily reflect the opinion or position of CapMAC.
Kimet Vice President and Economist, Capital Markets
Assurance Corporation (CapMAC), New York
Phone 1-212-891-1447, Fax 1-212-755-5487
E-mail [email protected]
12
Contemporary Economic Policy
(ISSN 1074-3529)
Vol. XVI, January 1998, 12-21
OWestern Economic Association International