The agricultural roots of industrial development
Samuel Marden 28 December 2014
It is often argued that for poor countries, increases in agricultural productivity result in higher non-agricultural output, but the theory is ambiguous and the empirical evidence is limited. This column presents evidence from a natural experiment provided by China’s early 1980s agricultural reforms. Higher agricultural output induced by the reforms led to quantitatively important growth in non-agricultural output. This growth appears to be primarily due to rural savings increasing the supply of capital to the non-agricultural sector.
For most countries, development and industrialisation are inextricably linked. A classic literature in development argues that, for the poorest countries, improving the productivity of the agricultural sector may provide the initial spur to industrialisation (e.g. Rosenstein-Rodan 1943, Schultz 1953, Lewis 1954). This view has been influential with policymakers – according to the World Bank (2007), “there are many success stories of agriculture as an engine of growth early in the development process”.
Development Economic history
Agriculture, industrialisation, development, productivity, China, manufacturing, services, saving, capital accumulation, natural experiment
Who matters more for migration decision? Close friends or acquaintances?
Corrado Giulietti, Jackline Wahba, Yves Zenou 21 December 2014
Migration is heavily influenced by social networks. Nonetheless, little is known about the underlying mechanisms. This column uses a new dataset from China to disentangle the effects of strong and weak ties on the migration decision. The findings indicate that strong and weak ties act as complements. Having many weak ties with an urban area amplifies the positive impact of having a strong tie in the same area.
Social interactions, whether regular or occasional, influence individual decisions and behaviours. Although economists might be latecomers to the topic of social networks, their interest in the subject has been high. Several surveys summarise the effects of social networks on economic activity (e.g. Jackson 2008, Jackson and Zenou 2014). In the labour market, in particular, it is now well documented that social networks play an important role in transmitting information about jobs (Topa 2011).
China, migration, social networks, close ties
Measuring the competitiveness of China’s processed exports
Willem Thorbecke 06 November 2014
Foreign reserve accumulation by China and other east Asian countries has been a controversial way to boost exports. This column argues that it is not even in their own national interests. The policy has been ineffective in maintaining China’s ordinary trade surplus, while its processing trade surplus continues to rely on devaluation in countries further up the supply chain. Foreign reserve divestment would increase purchasing power in east Asian countries, free up government revenue, and be innocuous to export competition if properly coordinated.
Before the Global Financial Crisis (GFC) China ran large trade surpluses and faced pressure to let the renminbi (RMB) appreciate. Having abandoned the peg to the U.S. dollar in 2005, the RMB has appreciated by 36% on a real effective basis.
Exchange rates International trade
foreign reserves, China, renminbi, undervaluation
Why China can afford (and benefit from) a generous unfunded pension system
Zheng Song, Kjetil Storesletten, Fabrizio Zilibotti, Yikai Wang 19 October 2014
The design of the pension system is a hot policy issue in China, given its fast-ageing population. This column discusses how different pension systems could allow different generations to share the benefits of high growth. The authors argue that a reform of the current system is necessary to achieve financial sustainability. However, delaying its implementation is advisable on the grounds of its effect on income inequality.
Sharing high growth between generations
China faces a sharp demographic transition. The total dependency ratio has fallen from 75% in 1975 to 37% in 2010. This change is due to the combination of high fertility in the 1960s and the family planning policies introduced in the 1970s. The expansion of the labour force implied by this transition has contributed to economic growth. However, China is now at a turning point – by 2040 the old-age dependency ratio will have increased from the current 13% to 39%.
The cleansing effect of the minimum wage in China
Florian Mayneris, Sandra Poncet 13 October 2014
Minimum wage laws are often shown to have little impact on employment as the labour price rise can be offset by lower turnover, lower markups, and heightened efficiency, or ‘cleansing’ effects. This column shows that in a fast-growing economy like China, there is a ‘cleansing’ effect of labour market standards. Minimum wage growth allows more productive firms to replace the least productive ones and forces incumbent firms to become more competitive. Both mechanisms boost the aggregate efficiency of the economy.
Can higher minimum wages ensure that economic development benefits the poorest without hindering growth? The question is controversial in both academic and policy circles. The recent riots in Bangladesh and Cambodia show that the social demand for a more equal distribution of the benefits of growth is high in developing countries. In China, polls reveal that concerns about inequality have grown as "roughly eight-in-ten have the view that the rich just get richer while the poor get poorer'' (Pewresearch Center 2012). The debate is also heated in developed economies.
Industrial organisation Labour markets
China, wages, firms, productivity
The rise of China and the future of US manufacturing
Daron Acemoglu, David Autor, David Dorn, Gordon H. Hanson, Brendan Price 28 September 2014
Manufacturing in the US has rebounded after the Great Recession, but employment levels have not recovered from their steep decline in the decade before the recession. This column examines to what extent the sector’s fall is a result of the rise of China. The authors estimate direct effects of import competition from China, as well as labour market and buyer-seller indirect effects that operate at the local level. China’s impact has been strong, and employment in US manufacturing is unlikely to recover.
The end of the Great Recession has rekindled optimism about the future of US manufacturing. In the second quarter of 2010 the number of US workers employed in manufacturing registered positive growth – its first increase since 2006 – and subsequently recorded ten consecutive quarters of job gains, the longest expansion since the 1970s.
manufacturing, US, China, value added
The dragon soars: Micro evidence on Chinese outward direct investment
Heiwai Tang, Wenjie Chen 22 September 2014
Using a new, unique, and comprehensive data set that covers close to 19,000 Chinese ODI deals from 1998 to 2011, we find that in contrast to the common perception, over half of the ODI deals are in service sectors, with many of them appearing to be related to export promotion. Ex ante larger, more productive, and more export-intensive firms are more likely to start investing abroad. Ex post, ODI appears to enhance firm performance (i.e., total factor productivity, employment, export intensity, and product innovation). Empirical analysis based on firms’ trade transaction data shows a significantly positive effect of ODI on firms’ trade performance, but little technology transfer.
China’s active acquisition of foreign assets has raised anxiety and tension across the world. In 2010, it was the world’s fifth largest source of foreign direct investment after the United States, France, Germany, and Japan.1 He et al. (2012) predict that China’s cumulative outward direct investment (ODI) will exceed $5 trillion USD in 2020, compared to a mere $3 billion in 2010. Given the sheer size of China, the volume of its ODI may be expected; but considering its relatively early stage of development, its recent surge in ODI surprised many.
China, FDI, outward FDI
Trade liberalisation, quality upgrading, and export prices
Haichao Fan, Yao Amber Li, Stephen Yeaple 06 September 2014
Trade liberalisation has transformed the economies of many developing countries. This column presents evidence from China’s accession to the WTO. The authors find that high tariffs on imported inputs prevented Chinese firms from producing high-quality goods. When these tariffs were reduced, firms upgraded the quality of their products, entering more competitive foreign markets.
Rapid trade liberalisation has transformed the economies of many developing countries. As these countries have scaled back tariffs, their firms have gained access to cheaper and higher quality intermediate inputs from abroad. A growing literature shows that trade liberalisation has led to a surge in imports of intermediate inputs and that the improved access to foreign-made inputs has had a large impact on firm productivity and product scope (e.g. Amiti and Konings 2007; Goldberg et al. 2010).
International trade Productivity and Innovation
tariff reduction, Export prices, China, goods quality
Will Chinese household savings plummet with the end of the one-child policy? Maybe, maybe not….
Abhijit Banerjee, Xin Meng, Tommaso Porzio, Nancy Qian 04 September 2014
The loosening of the one-child policy will transform China’s demographic development in coming years, but it also runs the risk of lowering China’s high rate of personal savings. This column argues that high estimates of the magnitude of this response may be overstated. There are multiple channels at play, and predictions of a large response in savings do not account for general equilibrium effects.
As China relaxes its draconian fertility laws, a key question for policymakers is how the resulting increase in fertility will affect economic performance – in particular, whether it will lower household savings. This concern is motivated by the observation that China’s rapid rise in household savings rates coincided with a drastic reduction in fertility that began in the mid 1970s as a result of what came to be known as the one-child policy. During the 1990s, household savings rates reached highs of 34%.
Development Financial markets
China, personal saving, one-child policy, fertility
Conflict between US-led and China-led economic architecture
Pradumna B. Rana 05 August 2014
China’s frustration with the slow progress of IMF governance reform has contributed to the evolution of a China-led architecture that locks out the West – the latest examples being the New Development Bank and the Credit Reserve Arrangement established by the BRICS. This column argues that these institutions are not a threat to the IMF and the World Bank, but they complicate global economic governance. It is unlikely that Europe’s ‘troika’ model – where the IMF works jointly with regional financing facilities – will be possible in Asia. We perhaps need a New Bretton Woods.
The Bretton Woods agreement – which is 70 years old this month – established three institutions to promote law and order in international economic relations:
- The IMF to promote macroeconomic stability,
- The GATT (and its successor, the WTO) to ensure an open trading environment, and
- The World Bank to provide development finance for poverty reduction.
The smooth operation of this rules-based, US-led global economic architecture contributed to the unprecedented economic growth and worldwide prosperity of the post-WWII period.
US, China, IMF, global governance, World Bank, multilateralisation, troika