Structural Transformation and Its Implications for the Chinese Economy

HKIMR Working Paper No. 08/2017

49 Pages Posted: 9 May 2017

See all articles by Gaofeng Han

Gaofeng Han

Hong Kong Monetary Authority; University of California, Santa Cruz - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: April 28, 2017

Abstract

This study applies a two-sector model to examine the conditions under which the excess labour force can be reallocated from the tradable to the nontradable sector during structural transformation. We find that to maintain employment stability, output in the nontradable sector should be 1.9-to-3.5 percentage points higher than in the tradable sector, if labour shares in the two sectors approach the level of major developed economies in the next one and a half decades. Such output differentials mean the productivity increment in the nontradable sector should reach as high as 1.5 percentage points at the start, if job loss in the tradable sector is associated with negative investment shocks, or 1 percentage point if job loss is associated with an improvement in efficiency. In the absence of technological progress in the nontradable sector, the government could increase its consumption of nontradables by as much as 4 percentage points to help maintain employment. While the pure labour reallocation has a small effect on aggregate output, the shrinking working population and an improvement in efficiency in the tradable sector have larger effects on aggregate output. Price falls only slightly and the real exchange rate change is small during structural transformation. Although the structural transformation goal seems achievable, it is important to revive high-end tradable industries through product innovations to reduce employment pressure on the nontradable sector.

Keywords: Structural transformation, Tradable, Nontradable, Real Exchange Rate, Employment, Fiscal Policy, Switching cost

JEL Classification: F31, F32, J11, O11, O14, O23

Suggested Citation

Han, Gaofeng, Structural Transformation and Its Implications for the Chinese Economy (April 28, 2017). HKIMR Working Paper No. 08/2017, Available at SSRN: https://ssrn.com/abstract=2964723 or http://dx.doi.org/10.2139/ssrn.2964723

Gaofeng Han (Contact Author)

Hong Kong Monetary Authority ( email )

3 Garden Road, 30th Floor
Hong Kong
Hong Kong

University of California, Santa Cruz - Department of Economics ( email )

Santa Cruz, CA 95064
United States

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