China's structural change: A new SDA model

Abstract

Based on the Deviation from Proportional Growth (DPG) model developed by H.B. Chenery and his coauthors (e.g., Chenery, 1960; Chenery et al., 1962; Chenery et al., 1986) and Structural Decomposition Analysis (SDA) model proposed by Syrquin (1976), this paper develops a new SDA model that directly interprets the changes of sectoral shares of output. In addition, our decomposition also demonstrates that on top of the three typical factors influencing the structural changes, i.e., the final-goods demand structure, production technology, and import substitution, the ratio of final-goods demand over total output (φ) is one of the key factors in the determination of industrial structures. This ratio is often neglected in the existing literature. Applying this model to study the change of industrial structure in China from 1992 to 2005, we find that since the 1990s, China's industrialization was associated with the rise of machinery and electrical industries, and the decline of chemical industry. The main driving force is the export (foreign) demand, however factors like production technological structure changes, and import substitution contributed negatively. Both production technological structure changes and import substitution are also key factors that hinder the transformation of Chinese economy to the service orientation.