Growing Like China. Fabrizio. Zilibotti. Jerusalem - June 29, Fabrizio. Zilibotti () Growing Like China Jerusalem - June 29, / 34

Transcription

1 Growing Like China Fabrizio. Zilibotti Jerusalem - June 29, 2011 Fabrizio. Zilibotti () Growing Like China Jerusalem - June 29, / 34

2 Introduction Real GDP p.c. of China as Percentage of the Real GDP p.c. of the US Fabrizio. Zilibotti (UZH) Growing Like China Jerusalem - June 29, / 34

3 Real GDP per capita (log scale) Evolution of per-capita income TURKEY CHINA INDIA 1000 NIGERIA 100 Source: Penn World Tables 7

4 Percentage of population living in extreme poverty (<1.25 $ daily) % % 0

5 Introduction China Fast convergence in GDP pc and TFP Strong reallocation across urban and rural sector, but also within the urban sector Important role of manufacturing sector (export) No tendency for the rate of return to capital to fall in spite of a very high investment rate Wage growth below productivity growth. Growing inequality High saving rates Large foreign surplus! reserves up from 20 billion in 1992 to ca. 3 trillion USD today Fabrizio. Zilibotti (UZH) Growing Like China Jerusalem - June 29, / 34

6 CHINA S FOREIGN RESERVES (PERCENTAGE OF GDP)

7

8 Introduction Foreign Reserves and Di erence between Deposits and Loans Fabrizio. Zilibotti (UZH) Growing Like China Jerusalem - June 29, / 34

9 Introduction The Foreign Surplus Puzzle The observation of a large capital in ow is at odd with the prediction of a neoclassical growth model: Capital should ow into China where it commands a higher return "Capital Allocation Puzzle" (Gourichas and Jeanne 2009) Fabrizio. Zilibotti (UZH) Growing Like China Jerusalem - June 29, / 34

10 Introduction Privatization of manufacturing sector Privatization started in Many SOE were partially or totally privatized Ine cient SOE could be forced to shut down if unpro table Since 1997 the process underwent acceleration. Fast growth of Domestic Provate Enterprises. Formal endorsement of the Communist Party of China Fabrizio. Zilibotti (UZH) Growing Like China Jerusalem - June 29, / 34

11 Introduction Structural Change from State-Owned Enterprises (SOE) to Private Enterprises Fabrizio. Zilibotti (UZH) Growing Like China Jerusalem - June 29, / 34

12 Introduction Reallocation is key for productivity growth Hsieh and Klenow (2009) estimate that reallocation across manufacturing rms with di erent productivity accounted for an annual 2 percentage point increase in aggregate TFP during Brandt, Van Biesebroeck, and Zhang (2009): up to two-thirds of the aggregate TFP growth in Chinese manufacturing was due to productivity di erences between entering and exiting rms during Fabrizio. Zilibotti (UZH) Growing Like China Jerusalem - June 29, / 34

13 Introduction Cross-Province Distribution of the Surplus Timing coincides with the fast build up of foreign surplus. Are the two phenomena connected? The saving gap (S-I) is larger in provinces with larger private employment shares Panel of 31 provinces with observations from 2001 to 2007 Private employment share is DPE share in manufacturing Savings S is provincial GDP minus private and government consumption Run the following regression S I = β Y 0 + β 1 EMPL PRIV rt + ε rt rt Fabrizio. Zilibotti (UZH) Growing Like China Jerusalem - June 29, / 34

14 Introduction Cross-Province Regressions Fabrizio. Zilibotti (UZH) Growing Like China Jerusalem - June 29, / 34

15 Introduction Building Blocks Key Assumptions: 1 Di erent rates of return across rms (e.g., private sector vs. state-owned enterprises "SOE") 2 Asymmetric nancial market imperfections (limited access of private rms to external nancing) 3 Agency problems within rms Main Predictions: 1 Gradual labor and capital reallocation within manufacturing (decline of SOE and expansion of private rms) 2 Non-decreasing returns to investments, low wage growth 3 Accumulation of a foreign surplus 4 Cross-regional correlation between net surplus and DPE employment share 5 Private rms grow mostly in labor-intensive sectors Fabrizio. Zilibotti (UZH) Growing Like China Jerusalem - June 29, / 34

16 Introduction Evidence for the Key Assumptions 1 SOEs have signi cantly lower returns than private rms see: Islam, Dai, and Sakamoto (2006), Brandt, Hsieh, and Zhu (2008), Brandt and Zhu (2009), Hsieh and Klenow (2009) 2 Private rms face signi cantly tighter nancial constraints see: Allen, Qian, and Qian (2005), Boyreau-Debray and Wei (2005), Dollar and Wei (2007), Riedel, Jin and Gao (2007) Fabrizio. Zilibotti (UZH) Growing Like China Jerusalem - June 29, / 34

17 Introduction Share of Investments Financed by Bank Loans Fabrizio. Zilibotti (UZH) Growing Like China Jerusalem - June 29, / 34

18 Introduction Capital-Labor Ratios: within Industry by Ownership Manufacture of Artwork and Other Manufacturing Communicati on Equi pment, Computers and Other Electr oni c Equipment Manufacture of Transport Equipment Manufact ure of General Purpose Machinery Smelting and Pressing of Non ferrous Metals Manufact ure of Non metal lic Mineral Products Manufacture of Rubber Manufacture of Medi cines Processing of Petroleum, Coking, Processing of Nuclear Fuel Printi ng,repr oduct ion of Recording Media FIE DPE SOE Manufactur e of Fur ni ture Manufacture of Leather, Fur, Feather and Related Products Manufacture of Textile Manufacture of Beverages Processing of Food from Agricul tural Products Fabrizio. Zilibotti (UZH) Growing Like China Jerusalem - June 29, / 34

19 1997 WORKERS ENTREPRENEURS CONSUMPTION SAVINGS SAVINGS CONSUMPTION Investment Investments Private Enerprises SOE $ FOREIGN RISERVES DPE Rest of the World

20 2004 WORKERS ENTREPRENEURS CONSUMPTION SAVINGS SAVINGS CONSUMPTION Investments SOE $ FOREIGN RISERVES Investments Private Enerprises PRIVATE Rest of the World

21 2011 WORKERS ENTREPRENEURS CONSUMPTION SAVINGS SAVINGS RISPARMI CONSUMPTION Investments Investments SOE $ FOREIGN RISERVES PRIVATE Rest of the World

22 Environment Production Sectors Two type of rms, E- rms (entrepreneurial) and F- rms ( nancially integrated) E- rms and F- rms produce identical goods, but di er in technology and access to capital markets E- rms have higher TFP but are at disadvantage in nancial markets Extreme scenario: entrepreneurs cannot borrow and must nance investments out of their personal savings In the paper: entrepreneurs can borrow from banks but only up to a fraction of their pro t cash- ow Fabrizio. Zilibotti (UZH) Growing Like China Jerusalem - June 29, / 34

23 Environment Technology More formally y Et = (k Et ) α (χa t n Et ) 1 α y Ft = (k Ft ) α (A t n Ft ) 1 α where A t+1 = (1 + z) A t (exogenous technical progress) Why di erent technologies? Microfoundations in the paper E- rms adopt a more productive technology with high managerial autonomy F- rms adopt a less productive technology with low managerial autonomy (larger more bureaucratized organizations) Fabrizio. Zilibotti (UZH) Growing Like China Jerusalem - June 29, / 34

24 Environment Households OLG of two-period lived agents, who work in the rst period and live o savings in the second period Preferences U t = log (c 1t ) + β log (c 2t+1 ) Saving rate is ζ β/ (1 + β) Young workers earn a wage (w) and invest their savings in bank deposits paying gross returns R Young entrepreneurs earn a managerial compensation (m) and can invest savings in deposits, but also in their own business (Urban) population grows at the exogenous rate n Fabrizio. Zilibotti (UZH) Growing Like China Jerusalem - June 29, / 34

25 Environment Banks Competitive banks collect deposits and hold portfolios of loans to domestic F- rms (I F t ) and foreign bonds (B t ) Domestic loans yield a gross a return R Foreign bonds yield a gross a return R W No-arbitrage: R W = R Fabrizio. Zilibotti (UZH) Growing Like China Jerusalem - June 29, / 34

26 Analysis F- rms (neoclassical) Investments entirely nanced by bank loans: K Ft+1 = I Ft Notation: ρ MPK, and κ K/ (AN) No-arbitrage implies R = ρ F = ακf α 1, hence, κ F = α R 1 1 α Wages equal the marginal product of labor: w t = (1 α) κ α F A t Fabrizio. Zilibotti (UZH) Growing Like China Jerusalem - June 29, / 34

27 Analysis E- rms (i) Recall: E- rms are owned by old entrepreneurs and run by young managers moral hazard problem: managers can steal share ψ of the output without being caught Manager s incentive constraint requires m ψy E The optimal contract implies Ξ t (k Et ) = n max (k Et ) α (χa t n Et ) 1 n Et,m t α w t n Et o m t s.t. m t ψ (k Et ) α (χa t n Et ) 1 α (IC) m t w t. (PC) Fabrizio. Zilibotti (UZH) Growing Like China Jerusalem - June 29, / 34

28 Analysis E- rms (ii) The solution yields n Et = k Et χa t (1 ψ) (1 α) χat = (1 ψ) 1 α χ 1 α α y Et = ((1 ψ) χ) 1 α α Thus, the value of the rm is w t R α R α k Et, 1 α 1 1 α k Et A t m t = ψ y Et Ξ t (k Et ) = α (1 ψ) y Et = (1 ψ) 1 α (χ) 1 α α R {z } ρ E Note: the entrepreneurial rate of return, ρ E, is constant Fabrizio. Zilibotti (UZH) Growing Like China Jerusalem - June 29, / 34 k Et

29 Analysis RESULT 1: Capital-labor (and capital-output) ratios are constant Standard analysis yields κ F = α R 1 1 α κ E = ((1 ψ) χ) 1 α α R 1 1 α < κ F Note: κ E < κ F Fabrizio. Zilibotti (UZH) Growing Like China Jerusalem - June 29, / 34

30 Analysis RESULT 2: Growth Rate of Entrepreneurial Capital is constant (i) Entrepreneurial savings are the driving force of the transition K Et+1 K Et = ζ M t K Et = ζ ψ Y Et K Et = ζ ψ 1 ψ ρ E α K Et K Et = ζ ψ ((1 ψ) χ) 1 α α R α Due to the "labor reserve" in the F sector, wages per e ciencey units are constant Thus, the E sector features AK equilibrium dynamics Y Et = κ α 1 E K Et Fabrizio. Zilibotti (UZH) Growing Like China Jerusalem - June 29, / 34

31 Analysis E- rms Output and Employment Growth Conditional on K Et and A t (predetermined at t) where, recall, N Et = K Et χa t κ E N Ft = N t K Et χa t κ E Y Et = κe α 1 K Et Y Ft = κf α (A tn Ft ) K ρ t = Et κ ρ K Et + κ F A t N E + F A t N Ft ρ Ft K Et + κ F A t N F Ft κ F = α R 1 1 α and κ E = ((1 ψ) χ) 1 α α R 1 1 α Fabrizio. Zilibotti (UZH) Growing Like China Jerusalem - June 29, / 34

32 Wage rate per efficiency unit Output Private em ploym ent Rho Analysis Equilibrium Dynamics During the Transition E sector share of employment T Time Annualized return on capital Return E firms Average return ρ t Return F firms T Time Wage Output per efficiency unit Time T 0.04 Time T Fabrizio. Zilibotti (UZH) Growing Like China Jerusalem - June 29, / 34

33 Analysis Foreign Asset Position The di erence between worker s savings and the investments of F sector determines the foreign balance From the balance sheets of the bank sector, K Ft+1 + B {z } t = ζ w t N {z } t ASSETS DEPOSITS As the F sector shrinks, the economy accumulates a surplus Using the equilibrium expression of K Ft+1 B t = ζw t N t κ F A t+1 N t+1 N {z Et+1 } N Ft+1 {z } = ζ 1 α 1 + z κα F κ F K Ft+1 + κ F N E,t N t A t N t Fabrizio. Zilibotti (UZH) Growing Like China Jerusalem - June 29, / 34

34 F oreign assets Savings rate Analysis Equilibrium Dynamics: Saving Rate and Foreign Assets Aggregate savings rate: S/Y T Time Ratio of net foreign assets to GDP (annualized) Time T Fabrizio. Zilibotti (UZH) Growing Like China Jerusalem - June 29, / 34

35 Calibrated Economy A T-period Auerbach-Kotliko Version of the OLG Model Can a calibrated version of the model account for the macro facts of China ? Consider a T-period model. Capital depreciates at rate δ: K t+1 = (1 δ) K t + I t Preferences: T U t = β t (c t ) 1 1 θ 1 1 t=1 1 θ Workers retire at age J. Their budget constraint is: T R t J c t = R t w t t=1 t=1 Fabrizio. Zilibotti (UZH) Growing Like China Jerusalem - June 29, / 34

36 Calibrated Economy Entrepreneurs in the Auerbach-Kotliko version Young entrepreneurs work as managers for half life Managers deposit savings in banks and accumulated wealth that is invested in the own business when they become entrepreneurs Entrepreneurs can now borrow from banks. But loan repayment cannot exceed a fraction η of capital income This borrowing constraint implies a return on equity of R l t Rtρ l Et > ρ ηρ Et Et Fabrizio. Zilibotti (UZH) Growing Like China Jerusalem - June 29, / 34

37 Calibrated Economy Parameters Set Exogenously Agents live for 50 years. Workers retire after 30 years Capital share α = 0.5 Depreciation rate δ = 10% Bank deposit rate R = % (Urban) population growth rate ν = 3% Intertemporal elasticity of substitution θ = 2 Fabrizio. Zilibotti (UZH) Growing Like China Jerusalem - June 29, / 34

38 Calibrated Economy Parameters Set Endogenously β = 0.996! match average total savings rate χ = 4.8 and ψ = 0.45! match the gap ρ E ρ F = 9% and the ratio K F Y F = 2.65 K E Y E z = 3.8%! match urban GDP growth of 11.2% ξ = 7%! match average return on capital Set fξ t g 2020 t=2000 to t aggregate investment dynamics η = 0.86! entrepreneurs debt-to-equity ratio is 100% Initial conditions for K E,0!: match the average DPE employment share during Fabrizio. Zilibotti (UZH) Growing Like China Jerusalem - June 29, / 34

39 Calibrated Economy Numerical Results: Benchmark Calibration Fabrizio. Zilibotti (UZH) Growing Like China Jerusalem - June 29, / 34

40 Calibrated Economy Summary of Findings Model is broadly in line with Chinese quantitative facts Average wage growth is 5%, in line with empirical wage growth for low-skilled workers Average TFP growth is 5.9%. Empirical estimates for manufacturing is 6.1% 7.7% 70% of TFP growth is due to reallocation High end of empirical estimates: 42-67% (Brandt, Van Biesebroeck, and Zhang, 2009) Fabrizio. Zilibotti (UZH) Growing Like China Jerusalem - June 29, / 34

41 Conclusions A simple model of economic transition Theory consistent with a number of stylized facts of the Chinese transition Accumulation of foreign reserves may not be due to undervalued Yuan Fabrizio. Zilibotti (UZH) Growing Like China Jerusalem - June 29, / 34