Abstract
PurposeEconomic theories on structural change focus on factors such as fluctuations in relative prices and income growth. In addition, China’s reform and opening up has also been accompanied by increasing openness, significant fluctuations in investment rates, and frictions in the labor market. Existing literature lacks a unified theoretical framework to assess the relative importance of all these determinants. The paper aims to discuss these issues.Design/methodology/approachTo incorporate all of the potential determinants of China’s structural change, the authors build a two-country four-sector neoclassical growth model that embeds the multi-sector Eaton and Kortum (2002) model of international trade, complete input-output structure, non-homothetic preference and labor market frictions. The authors decompose the sectoral employment shares into six effects: the Baumol, Engel, investment, international trade, factor intensity and labor market friction effects. Using the data of Chinese economy from 1978 to 2011, the authors perform a quantitative investigation of the six determinants’ effects through the decomposition approach and counterfactual exercises.FindingsLow-income elasticity of demand, high labor intensity, and the existence of the switching costs are the reasons for the high employment share in the agricultural sector. Technological progress, investment and international trade have comparatively less influence on the proportion difference of employment in the three sectors.Originality/valueTherefore, to examine the impact on China’s structural change, in addition to Baumol effect and the Engel effect, it is also necessary to consider the impact of three more factors: international trade, investment and switching costs. Therefore, the authors decompose the factors that may influence China’s structural change into the Baumol, Engel, investment, international trade, factor intensity effect and switching cost effects. The authors evaluate these six effects using the decomposition approach and counterfactual exercises.
Highlights
Structural change, that is, the reallocation of economic activities across different sectors, is a common feature among most countries that have embarked on the road to industrialization
To examine the impact on China’s structural change, in addition to Baumol effect and the Engel effect, it is necessary to consider the impact of three more factors: international trade, investment, and switching costs
Since the output of each department must become the intermediate good of other departments, the Baumol effect, Engel effect, investment effect, and international trade effect that affect the employment share in the industry are measured by Λik,Baumol, Λik,Engel, Λik,inv and Λik, trade, each of which is a sum of three sectors, and its weightiness is determined by the parameters λk, μk and γkn
Summary
Structural change, that is, the reallocation of economic activities across different sectors, is a common feature among most countries that have embarked on the road to industrialization. We decompose the factors that may influence China’s structural change into the Baumol, Engel, investment, international trade, factor intensity effect and switching cost effects We evaluate these six effects using the decomposition approach and counterfactual exercises. In addition to market frictions, Dekle and Vandenbroucke (2012) studied the role of government scale They pointed out that the Chinese government promotes capital accumulation by lowering tax rates, while investment products are all produced by non-agricultural sectors, which affects the structural change.
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