Accounting for Economic Growth in Taiwan and Mainland China: A Comparative Analysis Gregory Chow, Princeton University Anloh Lin, Chunghua Institution for Economic Research Abstract: This paper provides a statistical summary of aggregate economic growth in Taiwan and mainland China using the standard national income accounting framework by decomposing aggregate growth into components due to growths in capital, labor and total factor productivity. For Taiwan, new series of capital stock and of human capital are constructed. The major findings include (a) the stability of input coefficients (under the assumption of constant returns) and of the rate of increase in TFP for the entire period 1951-1999, (b) a labor exponent of about 0.7 and a rate of annual increase in TFP of about 0.03, and (c) a slower exponential rate of growth of real gdp since 1987 to about 0.065 from the 1951-1999 average of 0.081 mainly as a result of the large reduction in the growth rate of labor input to half. For mainland China, a capital stock series of Chow (1993) was extended to 1998. The major findings include (a) the stability of the relative input coefficients for the entire period 1952-1998 but TFP did not increase until 1979, (b) a labor exponent of about 0.35 and a rate of increase in TFP of about 0.027 after 1979, and (c) the absence of equally large reduction in the rate of increase in labor input as in Taiwan and the smaller exponent of labor leading to a prospect of only a moderate reduction in future growth rate. 1. INTRODUCTION In the second half of the 20th century Taiwan and mainland China experienced different economic histories. They started with different initial conditions, adopted different development strategies during the first three decades and yet both succeeded in rapid development. It is the aim of this essay to provide a statistical summary of the growth histories of these two economies in a comparative perspective. The framework adopted is the familiar growth accounting using a Cobb-Douglas production. Institutional details are missing in such a framework, but the major historical trends together with their input components are clearly revealed. Readers interested in institutional changes can observe their consequences in terms of 1 aggregate growth rates. The statistical summary is also useful for prediction if the aggregate relation between output and inputs can be expected to continue. For Taiwan we build on the work of Dessus (1999) and others but we provide new estimates of physical capital stock and of human capital in section 2 which also contains data analysis of growth trends in Taiwan. Section 3 provides estimates of production functions of Taiwan using different measures of physical and human capital and arrives at five major conclusions concerning Taiwan’s growth history at the end. A comparative analysis with mainland China is made in section 4, after a production function is estimated by updating the work of Chow (1993). Major conclusions concerning the mainland’s growth history are presented at the end of section 4 for comparison. Section 5 concludes the paper. 2. DATA FOR TAIWAN Data for real GDP and its components are available in Statistical Yearbook of the Republic of China1999 (English edition, pp. 151-153) and Quarterly National Economic Trends, ROC (February 2000, pp. 22-23). For labor force we use two series, one is H, the number of hours worked during a year, which includes domestic and foreign workers and can be found in Yearbook of Manpower Statistics and Bulletin of Labor Statistics. Foreign workers have been employed since 1991 and their work hours are longer than domestic workers. These have been taken into account in our derivation of H. The second is H* which is the number of hours worked H adjusted for the quality of human capital by using the distribution of schooling weighted by a base-year relative earnings structure of schooling. As in Collins and Bosworth (1996), our measure of the quality of human capital S is given by the sum of the percentage of the jth schooling in the civilian population of age 15 or over multiplied by the relative earnings scale of the jth schooling prevailed in 1991 with the average earnings of primary and below taken as 100, which equals 722.4 per month in U.S. dollars. 1991 is chosen because it is also the base year of real GDP and other national income statistics. The relative scale of earnings is 102.38 for junior high, 105.17 for vocational, 114 for high school, 139.77 for junior college, and 176.94 for college and above. These relative scales are fixed throughout our sample period 1951-1999 while the distribution of schooling varies through time. H* is the product of H and S. An alternative measure of H* is the number of hours worked H adjusted by using the average number of years of schooling of the working population. According to the well-known Mincer equation explaining ln(wage), an important 2 independent variable is the number of years of schooling. For Taiwan, based on a study by Wu (1988, p. 363), we can assume the coefficient of the number of years s to be 0.1 and adjust H(t) in year t to form H*(t) by the equation lnH*(t)= lnH(t)+ 0.1[s(t)-s(1951)] . Such an adjustment may overstate the improvement in the amount of human capital as measured by its marginal product or wage to the extent that education at the primary school level may not have as much effect as 0.1. We therefore choose the first measure rather than the second measure. Estimation of capital stock presents two problems. One is the problem of obtaining a reliable initial stock in 1951 to start with. The second is to determine depreciation in real terms. Depreciation figures which result from dividing official nominal depreciation by the implicit deflator of gross fixed investment would underestimate real depreciation if prices have risen since nominal depreciation is based on historical prices. On the other hand, accounting depreciation tends to overestimate the true depreciation for tax-saving purposes. Although these two factors offset each other to some extent, the real depreciation figures as obtained above tend to be overestimated. Many works, such as Nehru and Dhareshwar (1993), Collins and Bosworth (1996) and Dessus (1999), have chosen a much lower depreciation rate (4 percent per year) than the depreciation rate estimated from deflating official nominal depreciation as above described. We also adopt a depreciation rate of 4 percent. We apply the equation Kt=(1-d)Kt-1+It to estimate capital stock, where I is real gross fixed investment and d is the rate of depreciation assumed to be 4 percent. To estimate initial capital stock in 1951, we have found the following three pieces of key information on the fixed capital stock, the inventory stock and land in early 1950s. The first came from the First Census of Industrial and Commercial Industries in Taiwan for the year 1954. The Census gives a value of NT$18,869.2 million as total gross fixed assets for all industrial and commercial firms. Total gross fixed assets are in nominal book value and consist of land, plant and other construction, machinery and other equipment, transport equipment, and unfinished construction. The book value of gross fixed assets is inclusive of cumulative depreciation, which is an offsetting item in the balance sheet and will be reduced when an asset is disposed of. Thus we must exclude value of land and cumulative depreciation from total gross fixed assets to obtain a net value for non-land fixed assets. The value of land was 5.13 percent of total gross fixed assets in the industries of mining, manufacturing, construction, power, gas, and trade, whose main gross fixed assets was about 46.8 percent of all industrial and commercial gross fixed assets. Since the data for the 3 remaining industries are not available and the 1961 Census indicated that the land ratio of these industries was higher, a 6 percent of total gross fixed assets is assumed for land for all industries. The resulting value of land is thus estimated as 1,132.2 million. This yields an amount of 17,737 million for non-land gross fixed assets in 1954. Gross fixed assets are assumed to be the sum of the book values of all assets acquired and not depreciated until they are scraped after t years. In order to convert gross fixed assets into net fixed assets we take out cumulative depreciation which is the depreciation of all the assets included, namely, 2 t-1 t-1 t-2 t-1 D(t)=Itd+It-1(1-d)d+It-2(1-d) d+…+I1(1-d) d=I1d[(1+g) +(1+g) (1-d)+…+(1-d) ], and the value of gross assets is t-1 t-2 I(t)=It +It-1+…+I1=I1[(1+g) +(1+g) +…+1]. under the assumption that investment grows at an annual rate g. Assuming t=8, d=4 percent and g=27 percent (the rate observed over 1951-54 from National Income for all industries excluding agriculture), the ratio D(t)/I(t) equals 12.3 percent. If we changed t from 8 to 15, the ratio would be 15.3 percent. In view of large increases in new assets during the years after 1945, we apply a 12 percent ratio to the value 17,737 million of gross fixed assets to obtain net fixed assets equal to 15,608.6 million for all non-agriculture industries.