China's Agriculture More Profitable Than Modern Sectors in Coming Years: Morgan Stanley

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Last updated at: (Beijing Time) Saturday, February 23, 2002

China's Agriculture More Profitable Than Modern Sectors in Coming Years: Morgan Stanley

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A recent study released Friday by Morgan Stanley showed that the total factor productivityof agricultural sector in China has been growing at about 4 percent per annum, about the same as that of the non-rural sector,indicating a new surge in rural development and investment in the coming years.

According to Andy Xie, chief economist for Morgan Stanley's Asia Pacific, the redistribution of rural labor to non-rural activities contributes about 1.2 percentage points in annual increase in labor productivity. Total labor productivity growth has been 8.9 percent annually.

In his recent interview with Xinhua, Xie said China's agricultural sector could be more profitable than the modern sector in the coming years. Its productivity is now rising at the same speed as the modern sector. Its labor force is shrinking but output is expanding. The commercial potential of the agricultural sector should be huge, he added.

"It comes as a shock to find that productivity in the agricultural sector has been growing as fast as in the modern sector," Xie said, adding that since China is mainly a technology user rather than producer, the declining price of technology improves China's terms of trade and, hence, its total factor productivity.

A good explanation is that the technology for agriculture has been highly effective in generating high value-added output, he said. Greenhouse technology and new seeds have been instrumental in improving agricultural productivity. The declining cost of technology may have contributed to the high total factor productivity rate.

China's growth follows the typical pattern of a developing country. The agriculture sector's share in GDP declined to 16 percent from 27 percent between 1990 and 2000, declining by 0.6 percentage point per annum. Analysts here also believed that by 2010, China's agricultural sector's share in the economy could dipbelow 10 percent.

China's non-agricultural economy experienced an 8.1 percent annual growth rate in labor productivity between 1990 and 2000, while the agricultural sector experienced 4.8 percent expansion during the same period. The whole economy had a higher growth rateof 8.9 percent due to steady redistribution of labor from the low productivity rural sector to industry and service sectors, Xie explained.

Because the output of a worker in industry and service is 4.6 times that of a worker in agriculture, every 1 percentage point oflabor redistributed from agriculture to industry and service improves labor productivity by 1.2 percentage points, he noted.

The structural shift from industry to service in China hasn't begun, because Chinese households have low wealth levels and tend to minimize consumption in favor of wealth accumulation. But we are optimistic that the service sector's share in the economy willrise significantly.

"As China restructures to improve capital efficiency, partly incompliance with the terms and conditions for joining the WTO, the total factor productivity could improve by about one percentage point," the economist said.

China is in an early stage of capital accumulation and, therefore, is experiencing rapid labor productivity growth. As thetechnology embodied in capital is much more productive than just one decade ago, China is experiencing faster labor productivity growth than perhaps any other country.

Another factor in China's productivity story is network economies of scale. China is a large country and is being connected through construction of networks such as transportation,communication, energy and water supply. The externalities from such investments are potentially large.

Xie said that China must grow much faster than 4 percent of total factor productivity to have employment growth at all. The current implicit target of 7 percent for its GDP growth rate may not be sufficient. "Indeed, the 8.9 percent labor productivity growth rate implies the potential GDP growth rate for China is 10 percent, as the labor force is growing at about 1 percent," Xie added.

However, the economist said with 4 percent total factor productivity, China's economy should be able to handle quite a bitof deflation without distress. "We observe this in export, telecom,IT and property sectors. However, there is considerable stress in the state sector," Xie said.

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