Structural Transformation in China and India: The Role of - - PowerPoint PPT Presentation

Structural Transformation in China and India: The Role of Macroeconomic Policies

Codrina Rada Department of Economics University of Utah Special IARIW-SAIM Conference on “Measuring the Informal Economy in Developing Countries” Kathmandu, Nepal, September 23-25, 2009

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Summary

• I. The Intuition
• II. Performance of Formal-Informal Sectors in

China and India III.The Model IV.Simulations results

• V. Policy implications

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The Intuition

Output grow th rate

Labor productivity growth rate Productivity growth Output growth B A D C Employment growth contours

Output Growth = Employment Growth + Productivity Growth

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Output grow th rate

Labor productivity growth rate Productivity growth Output growth Employment growth contours

Output Growth = Employment Growth + Productivity Growth Example 1: A labor-shedding equilibrium

The Intuition

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Output grow th rate

Labor productivity growth rate Productivity growth Output growth Employment growth contours

Output Growth = Employment Growth + Productivity Growth Example 2: A job-creation equilibrium

The Intuition

• II. Formal and Informal Sectors in

India and China

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Estimation of the Formal/Informal SAM for China and India

China: Wage shares of regular and irregular employment are applied to official statistics on final and intermediate consumption, value-added and the flow

• f funds table (physical transactions) from the

national accounts published in China Statistical Yearbook for various years. India: Official statistics on the shares of factor incomes by

• rganized and unorganized activities are used as

weights to estimate the economic transactions between the two sectors.

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China: Formal/Informal Wage Shares

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India: Formal/Informal Output Shares

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Economic Performance during 1990s

Where M stands for the formal or modern sector, and S stands for the subsistence of informal sector

• III. The Model

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The Theory

• Smith: division of labor and the role of economies of scale
• Young and Marshall: the role of increasing returns
• Lewis: the role of the surplus labor
• Arrow: the role of learning by doing
• Verdoorn: dynamic relationship between productivity and
• utput growth
• Kaldor: macroeconomic model of growth and the demand

and supply constraints

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Accounting framework of the model

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Total differentiation of the model in level form, and solving simultaneously for rates of growth of output, productivity and employment we obtain:

Formal or Modern Sector Productivity, Output and Employment

(1) (2) (3)

] ˆ ˆ ˆ ) ˆ ( [ 1 1 ˆ

4 3 1 2 2

E e I w X

r M LM M

χ χ χ ε χ χ γ + + + − − =

)] ˆ ˆ ˆ ˆ ( [ 1 1 ˆ

4 2 3 1 2

E w e I

M r LM LM

χ χ χ χ γ ε χ γ ε + − + + − =

] ) 1 ( ) ˆ ˆ ˆ ˆ )( 1 [( 1 1 ˆ

2 4 3 2 1 2 LM r M M

E e I L ε χ χ χ ω χ χ γ χ γ − − + + − − − =

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Virtuous Circle in a Dual Economy

Output growth in T sector Employment growth in T

LN

ξ

KV

N

X ˆ

T

X ˆ

LT

ξ

T

L ˆ

Output growth in N sector

Productivity growth in N sector

Output growth in economy

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• KV-coefficient decreases over time due to

– technological catch-up – weakened economies of scale and – inter-sectoral linkages as well as a diminishing labor surplus.

• TPF “is likely to be convex upwards and flatten
• ut altogether beyond a certain point” (Kaldor

1957, EJ).

Long-run Dynamics based on the Retardation

• f the Kaldor-Verdoorn Coefficient

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Stagnation or Transformation in a Two-Sector Economy

Figure 7: Output, labor productivity, and employment growth in a two- sector economy when retardation is present

T

X ˆ

N

X ˆ

N

X ˆ

T

X ˆ

LN

ξ

LN

ξ

n

LT +

ξ

n

LT +

ξ

2

λ

2

λ

3

λ

3

λ Output growth Output growth KV schedule KV schedule

U U S S

Wage-led Profit-led

• IV. Simulations Results

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Data Sources

• The formal/informal SAMs for China

and India

• National Accounts Statistics
• Other Studies
• Parameterization of the model

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Incoming Variables and Parameters (modern sector only)

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Incoming Variables and Parameters

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Short-run Results

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Long-run Results

..\..\Research\Informal Sector\Structural Transformation\Long-run dynamics.doc