Structural Change and Energy Use in China: A SAM-based CGE Analysis

Abstract

This article presents a structuralist computable general equilibrium (CGE) model for China based on a three productive activities—agriculture, energy and industry—social accounting matrix. Four simulation exercises are conducted using this model: industrial investment demand increase, industrial wage increase, exchange rate depreciation, and government spending increase in industry. Our results show that structural change associated with raising industrial labor productivity and employment-share are likely to result in simultaneous intensification of per worker energy-use and a slight reduction of energy productivity in China. Industrial wage increase creates cost-push inflation and output contraction, and exchange rate devaluation is expansionary. Furthermore, when the industrial exports are insensitive to relative price changes, currency devaluation becomes contractionary and wage increase results in a slight contraction in real GDP due to the “forced saving” effect. The model illustrates some policy challenges China faces in its attempt to achieve “green growth” objectives with a high level of employment.