According to Andy Xie, chief economist for Morgan Stanley's Asia Pacific, the redistribution of rural labor to non-rural activities contributes about 1.2 percentage points in annual increase in labor productivity. Total labor productivity growth has been 8.9 percent annually.

In his recent interview with Xinhua, Xie said China's agricultural sector could be more profitable than the modern sectors in the coming years. Its productivity is now rising at the same speed as the modern sectors. Its labor force is shrinking but output is expanding. The commercial potential of the agricultural sector should be huge, he added.

"It comes as a shock to find that productivity in the agricultural sector has been growing as fast as in the modern sectors," Xie said, adding that since China is mainly a technology user rather than producer, the declining price of technology improves China's terms of trade and, hence, its total factor productivity.

A good explanation is that the technology for agriculture has been highly effective in generating high value-added output, he said. Greenhouse technology and new seeds have been instrumental in improving agricultural productivity. The declining cost of technology may have contributed to the high total factor productivity rate.

China's growth follows the typical pattern of a developing country. The agriculture sector's share in GDP declined to 16 percent from 27 percent between 1990 and 2000, declining by 0.6 percentage point per annum. Analysts here also believed that by 2010, China's agricultural sector's share in the economy could dip below 10 percent.

China's non-agricultural economy experienced an 8.1 percent annual growth rate in labor productivity between 1990 and 2000, while the agricultural sector experienced 4.8 percent expansion during the same period. The whole economy had a higher growth rate of 8.9 percent due to steady redistribution of labor from the low productivity rural sector to industry and service sectors, Xie explained.

Because the output of a worker in industry and service is 4.6 times that of a worker in agriculture, every 1 percentage point of labor redistributed from agriculture to industry and service improves labor productivity by 1.2 percentage points, he noted.

The structural shift from industry to service in China hasn't begun, because Chinese households have low wealth levels and tend to minimize consumption in favor of wealth accumulation. But we are optimistic that the service sector's share in the economy will rise significantly.

"As China restructures to improve capital efficiency, partly in compliance with the terms and conditions for joining the WTO, the total factor productivity could improve by about one percentage point," the economist said.

China is in an early stage of capital accumulation and, therefore, is experiencing rapid labor productivity growth. As the technology embodied in capital is much more productive than just one decade ago, China is experiencing faster labor productivity growth than perhaps any other country.

Another factor in China's productivity story is network economies of scale. China is a large country and is being connected through construction of networks such as transportation, communication, energy and water supply. The externalities from such investments are potentially large.

Xie said that China must grow much faster than 4 percent of total factor productivity to have employment growth at all. The current implicit target of 7 percent for its GDP growth rate may not be sufficient. "Indeed, the 8.9 percent labor productivity growth rate implies the potential GDP growth rate for China is 10 percent, as the labor force is growing at about 1 percent," Xie added.

However, the economist said with 4 percent total factor productivity, China's economy should be able to handle quite a bit of deflation without distress. "We observe this in export, telecom, IT and property sectors. However, there is considerable stress in the state sector," Xie said.

(China Daily February 25, 2002)