Total Factor Productivity: The Achilles' Heel of the Chinese Economy
Abstract: Motivated by a rethinking of the institutional nature of total factor productivity (TFP), this study applies an extended neoclassical growth accounting model, a la Jorgenson and his associates (1967, 1987, 2001 and 2015), to the revised and updated CIP/China KLEMS Database to estimate and interpret China’s growth and productivity performance from the beginning of the reform in 1978 to the post-COVID period 2023.
Our initiatives to bring methodology, measurement, and data in line with the productivity theory in accounting for China’s sources of growth have solved the lingering inconsistency problems that have led to biased estimates. More specifically, with the CIP input-output matrices in time series, constructed based on the official input-output tables every five years, we can follow the double-deflation procedures as required by the value-added theory; with the CIP labor quantity and compensation matrices constructed using various censuses, surveys, labor statistics, and national income accounts we can convert natural numbers employed by different types of labor into homogenous hours worked; and with the CIP estimated user cost of capital in line with the capital theory we can convert different types of productive assets into a homogenous measure of capital input. Although such measures of primary inputs and output may result in a zero-TFP growth in a hypothetical neoclassical economy (without distortions and productivity loss) as proposed by Jorgenson and Griliches (1967), it can facilitate TFP analysis for developing economies with government interventions and institutional deficiencies, as well as their changes responding to social, economic, and political conditions.
My growth accounting results are consistent with a high growth and low efficiency expectation, or my “growth-efficiency paradox” theorem, caused by excessive reliance on capital investment due to inter-governmental growth competitions. I show that during the entire period in question, China's GDP growth rate is 7.7% per annum, rather than 9% as officially claimed. The contribution of capital input, labor input, and TFP is 5.8, 1.2 and 0.7 percentage points, sharing 75, 16 and 9 percent of such an annual growth, respectively. Not only did the average TFP from industries grow slowly, but the factor reallocation effect on TFP growth between industries also showed a long-term capital misallocation that reduced TFP. It is the institutional problems behind the TFP decline that are responsible for the substantial slowdown of the Chinese economy.