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This article discusses the source and extent of China’s productivity slowdown. In other words, to a large extent, China’s slowing economy can be blamed on disappointing growths in productivity. For the past few decades, China’s boom was caused by an increase in labour and capital, as opposed to an increase in efficiency. The measure of where the source of GDP is from is TFP (total factor productivity), which is, according to the article, “subtracting the change in capital and labour deployed from the change in overall output.” I will discuss the problems with this statement later.
Between different people are differing opinions on China’s TFP. Mr. Harry Wu, an economist who has done a lot of research on the shortcomings of Chinese official data, has a pessimistic opinion (which, itself, faces a plethora of problems given the assumptions he made) and cites a negative TFP, while the World Bank’s more hopeful one shows a slowdown in TFP, even if it is positive for the time being.
Exacerbating China’s problem with a showdown of productivity is China’s bad lending and investment decisions. China’s best firms do not have the credit they deserve. With TFP and ICOR (explained later) increasing, China is likely to face large problems.
1. ICOR: Incremental Capital-Output Ratio is the measure of how much investment is needed to increase growth by a percentage point.
2. TFP: Total Factor Productivity, as I said earlier, is stated to be the difference between the change in capital and labour and the change in overall output. Math students will understand the problems with this statement. What does subtraction mean? (The figures in the following tables are not based on actual data).
This is how TFP is actually calculated:
TFP Calculation 2:
The difference between the two methods is that firstly, there is no subtraction in the second calculation, and secondly, it is not the change in GDP per year by the change in input per year as the first table would suggest, but rather, the change in ratio between GDP and input per year.
The difference between 9.09% and 10% from both tables might seem negligible, but on a large scale, this could make a large difference.
This is not to say that the writer did not understand how TFP was calculated; his or her phrasing was merely meant for readers to understand the general concept. I think it is important to notice these small differences, though.