Productivity and Growth in India and China

Aninda sent me a link to this article by Sunil Jain:

Is the Left right on China?

Reading through the first paragraph of Jain's piece again, I cannot help but be stopped in my tracks by the first paragraph:

"It is true, some of the charm has worn off the Chinese miracle as it has become obvious the real miracle is not so much the economy's productivity as it is the large amounts of capital virtually being thrown in to get growth."

So the real question isn't really why is China getting comparatively little in the way of productivity return from investments, but rather why is so much capital being 'virtually' thrown into China in the first place? Unfortunately Jain doesn't return to this topic in the article.

The same goes for the Thai Baht issue, why do so many people want to throw money at Thailand?

If we could begin to answer this, then my feeling is that everything would fall much better into place.

Ajay Shah had a short piece on this last week, but like almost everyone else he only really thinks about the issue in terms of the ineffectiveness of capital controls, and doesn't get into the problem of why in 1998 capital was trying to move in one direction, and now it is trying to move in another.


I think at the end of the day Lardy's analysis is pretty superficial, but I guess one day I am going to need to justify having said this.

But if you look at this:

"Lardy's talk at the NCAER was about the progress, or the lack of it, that China was making in its attempt to change its growth model enough to be driven more by domestic consumption than by investment growth, despite the fact that the central leadership favours this."

What I'd like to know is why there are so many 'fair-weather' market economists in the US? I mean according to Milton Friedman, I thought the best thing was just to let the market get on with it, and for government to get out of the way as much as possible (I don't really go too far down the road with Friedman, but his instincts are sound enough here I think). So where the hell does all this 'growth model' and central leadership favoritism come in? I mean growth is just to big an issue to be handled by government, especially a switch from investment driven to consumption driven processes. Governments can't simply manipulate this IMHO, they can add a little here, subtract a little there, but in the end the market mechanisms are the best way to regulate this.

Of course there are issues about the currency peg, but my guess is that even without the peg China would still be pretty investment driven at this stage.

On the other hand there are just so many things in China that don't look anything like a market economy, so maybe all I am suggesting is that the critics might do better to argue that the Chinese administration continue deregulating rather than suggest they actively promote some sort of new growth model.

At the end of the day we always seem to come back to the issue of why the international financial markets want to send so much money to invest in China, this is the big question.


Looking at Jain's argument in more detail, one of my guesses in the Chinese context is that you really need to separate out the state-owned enterprises, or the all Chinese ones with state participation from the joint ventures with foreign capital. In the latter it is quite probable that productivity can be rising much more rapidly.In fact it is probably the case that the whole export sector is much more productive than the rest of the economy.

"total factor productivity in China grew 3.8 per cent per annum in the 1978-93 period"

I'm a bit nervous about numbers from this era, especially looking at what we now know about Eastern Europe.

"and this then fell to 2.7 per cent per annum in the 1994-2004 period."

Again this seems to aggregate over just the wrong period. What would be nice would be to see the data for 1994-1999 (up to when China really started to take off) with the 2000-2004 data. That would really be interesting.

Obviously the other interesting thing is what happens next. China has grown by leveraging a large increase in labour inputs, indeed a very large increase in very cheap labour inputs. This labour may now well migrate through the sectors.


And one final quibble, why does everyone seem to want to forget what happened in the Tigers so quickly? China may be much bigger, but structurally the process may not be *that* different.

Basically I would forget what was supposed to have been happening before 1994, and I would also be remembering the findings of Alwyn Young that growth in the Tigers in the first instance had very little in the way of a productivity component, growth was largely about accumulating factor inputs as we are seeing in China now. The rapid improvements in TFP readings came a little later as they shifted economic activity up through the sectors, which I guess is what we may now be about to see in China.

India is still way back down the line when thought of in these terms.

I think the inequality points are Jain makes are interesting, but I'm just not sure the current situation in India is sustainable. I fear things may well get worse for many before they get better. If in doubt about this just look at the fiscal deficit situation. More on this in posts to come.