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Modeling China's long term

growth and structural change

Jianwu He, Fan Zhai, Juzhong Zhuang, Yi Jiang,

June 1, 2010, Beijing

The views expressed in this paper are the views of the author(s) and do not necessarily reflect the
views or policies of the Asian Development Bank (ADB), or its Board of Directors or the
governments they represent. ADB does not guarantee the source, originality, accuracy,
completeness or reliability of any statement, information, data, finding, interpretation, advice,
opinion, or view presented, nor does it make any representation concerning the same.
Contents

Growth accountings 1980-2008

Modeling growth and structural change

The CGE Model

 An illustrative baseline scenario

 Policy Scenarios
Growth Accounting: Demand Components

20

16
9.4

4.4
5.3

12 2.2
12.8
4.6 4.8
4.2 2.9
1.6 2.9 5.3
1.3 5.5
3.1
0.6 0.2 5.9 3.5 1.1 2.8
1.9
Percent

8 2.1 2.2 5.6


1.7 1.6 1.5 2.7
2.6 0.8
1.7 2.4
1.6
1.5 1.8 1.4 4.1
0.7 1.8 4.8
2.8 3.0 4.8
1.2 6.7
2.1 1.6 1.6
9.1 9.1 1.2 1.5 5.5 5.8
2.4 8.3 5.1 4.1
4 0.7 7.6 0.6
1.9 6.8 3.2 1.7
1.1 3.3 5.6
1.0 5.5 5.3 5.1 1.3 1.4
4.2 4.6
4.0 4.0 3.7 4.0
3.3 0.9 1.5
2.3 2.4 0.1 2.6 1.1
2.1 1.9 2.0 1.7 2.0
1.1 1.1 1.5
0.7 0.7
0 -0.3 -0.8
0.0
-0.7
-0.1 -0.4 -0.3 -0.9
0.0
-0.2 -0.9
-1.7 -1.8 -2.1 -1.9
-3.8

-6.6
-4

-8
1980 1982 1984 1986 1988 1990
Composition
1992 1994
of GDP
1996
(%)
1998 2000 2002 2004 2006 2008

Consumption Gov't Investment Net Trade


Growth Accounting: Production Sectors

16

14

5.7
12
5.3
5.2
4.8
5.4
10 7.0
4.7
4.4 5.5 4.0
5.6
3.8 4.2
8 3.8 4.0
Percent

2.9
4.6 3.7 4.0 3.9
4.2
4.3 3.7
4.0 4.0
3.2
6 3.5
1.8 7.7
3.3 7.7
7.4
1.9
4 4.6
5.9
6.3
7.2
5.9 5.3
4.9 0.7 5.9 5.3 5.6
0.6 1.9 4.8 4.7
3.4 4.5 4.6
4.9 1.1 4.0 4.3
4.4 4.4 3.7 3.9
2
3.2 1.3
2.6
1.5 2.0
1.1 0.8 1.2 1.1 0.9 1.0 1.0 0.8
0.7 0.7 0.7 0.6 0.6 0.5 0.4 0.4 0.4 0.3 0.6 0.6 0.4 0.5
0 -0.6
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

-2

Agriculture Industry Services


Growth Accounting: Input Factors

16

14

12
6.7
10 5.8 6.0
9.0
4.6
Percent

4.0
3.4 3.8 4.0
8 3.2
4.0
3.4
4.8 1.8 2.9 2.8
2.1
6

4 6.7 6.7 6.3 6.0 6.7 6.8


5.5 5.5 5.0 5.1 5.5 5.9 6.0
4.5 4.9 5.0
3.5
2

0.9 0.7 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.5 0.6 0.5 0.5 0.4
0 0.4 0.3 0.2

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Labor Capital stock TFP


Model characteristics

 Model: A multi-sector global CGE model with special focus


on China
 An variation of the ENVISAGE model developed by the World Bank.

 Recursive Dynamic: 2004 – 2030


 Dimensions:
 Region: 7 countries/regions
 Sector: GTAP-based with supplemental electricity data (coal, oil &
gas, hydro, nuclear, other)
 Household/labor force: urban and rural
Sectors Regions
1 Crops 16 Metals n.e.s. 1 China
2 Livestock 17 Metal products 2 EU27 with EFTA
3 Forestry 18 Transport equipments 3 United States
4 Coal 19 Electronic equipment 4 Japan
5 Crude oil 20 Machinery and equipment n.e.s. 5 Rest of Asia
6 Natural gas 20 Manufactures n.e.s. 6 LAC
7 Other mining 22 Coal based electricity 7 Rest of the world
8 Processed food 23 Gas and oil based electricity
9 Refined oil 24 Hydro electricity
10 Chemicals rubber and plastics 25 Nuclear electricity
11 Textiles & Apparel 26 Other electricity
12 Wood products 27 Gas distribution
13 Paper products, publishing 28 Construction
14 Mineral products n.e.s. 29 Transport services
15 Ferrous metals 30 Other services
Model Inputs

 Demographics: Population and labor force (15-64) by


country
 Economic: Substitution, price and income elasticities,
savings elasticity wrt to dependency ratios, labor productivity
 Resources: Depletable resources for oil and gas, logistic
supply functions for land and hydro
 Technology: Calibrated nested CES functions with AEEI
Key features

 Consumption: AIDADS - An Implicitly Direct Additive


Demand System
 allows the marginal budget shares to vary as a function of
total expenditure.
 good for long term projection involving wide range of
countries in projecting food demand
• Dynamics driven by population/labor force growth,
demographic sensitive savings function and sector-specific
productivity growth.
 Rigidities: Putty/semi-putty technology (vintage capital)
Key features (cont’d)

• Natural resources are limited. Depletion modules for oil


and gas. Logistic supply functions for land and hydro
• Flexible energy demand system.
• Carbon emission and flexible emissions control—carbon
taxes, cap and trade.
Energy demand nest
Energy bundle

Electric bundle Non-electric bundle

Existing and alternative


technologies Oil and gas bundle
Coal bundle

Coal and alternative Oil bundle Gas bundle


technologies

Oil and alternative Gas and alternative


technologies technologies
Key baseline assumptions
Factors
 Labor force growth equated to growth of working age population - UN
population forecast
 Capital stock driven by savings/investment
 Savings rate driven by growth and youth and elderly dependency rates.
 Land in limited supply (FAO estimates, logistic function)

Productivity
 Agricultural productivity is exogenous and neutral wrt inputs (2.5% per
annum)
 Manufacturing & services productivity is labor augmenting and
calibrated in baseline to target per capita GDP growth
 Manufacturing productivity is 2% higher than services
• Autonomous energy efficiency improvement (AEEI) increases by 1% per
annum

Other
 Agricultural/food IO coefficients calibrated to achieve FAO
supply/demand trends
Baseline-Population & GDP

1600
8000 12
GDP per capita (2004 price)
1400 GDP growth rate (%)
Age: >65 7000
10
1200
6000

1000 8
5000
Age:15 ~65
800
4000 6

600
3000
4
400
2000

200
2
Age:<15 1000

0
0 0
2004 2010 2015 2020 2025 2030
2004 2010 2015 2020 2025 2030
Baseline- Industrial Structure
100% 100%

90% 90%

80% 80%

70% 70%

60% 60%

50% 50%

40% 40%

30% 30%

20% 20%

10% 10%

0% 0%
2004 2010 2015 2020 2025 2030 2004 2010 2015 2020 2025 2030

Service Other industries Energy-intensive Manu. Energy Agriculture Service Other industries Energy-intensive Manu. Energy Agriculture

Composition of Value-added by sector (%) Composition of employment by sector (%)


Note: excl. production tax
Baseline-Composition of GDP
160
140
120
100
80
60
40
20
0
-20
-40
-60
2004 2010 2015 2020 2025 2030

Consumption Import Investment Export

Composition of GDP (%)


Baseline-Energy and emission
5000 7.0
4500 Primary Energy (Mtoe)
6.0
4000 CO2 Emission (GtC)

3500 5.0

3000
4.0
2500
3.0
2000
1500 2.0
1000
1.0
500
0 0.0
2004 2010 2015 2020 2025 2030
Alternative scenarios

• Urbanization

• Population Aging

• Global Carbon Mitigation

• Development of Service Sector

• Rise of Middle Class


Scenario-1: Urbanization

• Accelerating urbanization

– Urban-rural labor mobility

• To be modeled based on pervious work by Hertel and Zhai (2005)

– Impact the economy through

• Shifting consumption/saving pattern

• Higher economy-wide labor productivity


Scenario-2 Aging society

• Capturing two impact channels


– Labor supply

– Saving rate
Scenario-3 Global Mitigation

• A 30% reduction in global carbon emission


in 2030 relative to baseline via a country-
specific carbon tax
Sceanrio-4 Promoting service

• Enhance service productivity through


deregulation and other reforms
– Investigate its implications for growth, industrial
structure, employment and economic
rebalancing
Sceanrio-5 Rise of middle class

• What is the dynamic of income distribution


along with China’s growth toward 2030?
• What is role of middle class in China’s
structural transition?
• This requires a micro-macro linkage
framework which links CGE model with
household survey-based microsimulation
model – may not be feasible for this project.
Thank You!
Rural-urban migration
• Off-farm labor supply
– A function of the average return of agricultural activities,
inclusive of the return to land
– Reflecting the absence of land market in rural China
– Calibrated to econometric estimates by Sicular and Zhao(2002)
• Rural-urban labor market is equilibrated through
costly temporary migration
• This transaction cost is modeled as an ad valorem tax
on wage of rural migrants
• According to the survey-based econometric studies,
the tax rate is assumed to be 81% of rural wage in
base year.

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