Industrial Transformation

Transcription

1 Industrial Transformation Ping Wang Department of Economics Washington University in St. Louis January 2016

2 1 A. Introduction Industrial transformation is a long process, from agriculture, to manufacture, and then to service. The modern literature can be summarized as follows:! Transition to modern economy and industrial transformation: " Goodfriend-McDermontt (1995) " Laitner (2000) " Hansen-Prescott (2002) " Gollin-Parente-Rogerson (2003) " Atkeson-Kehoe (2007) " Acemoglu-Guerrieri (2008)! Activation of the industrial transformation process: " Wang-Xie (2003); Chang-Wang-Xie (in progress)! Industrial transformation and long-term growth: " Kongsamut-Rebelo-Xie (2002): transformation from agriculture to manufactur and to service " Matsuyama (2002): transformation to a mass-consumption economy " Buera-Kaboski (2009): shift from home to market and service society " Herrendorf-Rogerson-Valentinyi (2013): multi-sector structural transformation to meet various stylized facts

3 2 B. Activation of the Industrial Transformation Process: Wang-Xie (2003)! East Asian NICs: rapid growth + drastic industrial transformation! Some African, South American and South Asian countries: low-growth trap in traditional industries! Examples: " Korea and Taiwan took off successfully in mid-1960 (Balassa 1972, Kuo 1983, Amsden 1989 and Thorbecke and Wan 1999) " The emperor's new clothes were not made in Colombia (Morawetz 1981) " Morogoro Shoe Factory in Tanzania was shut down not too long after opening " Both Akosombo Dam in Ghana and $2 billion US Aid in Zambia were failed (Easterly 2001)! Questions: " What could be the barrier to activation of a modern industry? " Are there any public policies that could overcome this barrier to entry?! Shortcomings of the literature: " Conventional studies lack a formal model to explain the activation process " Big push theory largely ignores the underlying process of creating a modern industry

4 ! Key Features of the paper: " Production in the modern industry requires high-skilled labor in addition to new technologies " modern sector needs industrial coordination (industry-wide networking) => the scale barrier " modern goods are not necessary for survival 1. A Simple Illustration! Two sectors (i=1,2): traditional industry (sector 1) versus modern (sector 2)! Homogeneous labor + perfectly mobile capital! Production technologies:! Preferences: U = ln(c 1 ) + ln(c 2 + θ), where θ > 0 (C 2 is luxury good, though on-going increase in the standard of living implies θ decreases over time)! Factor allocation (FA) constraints: L 1 + L 2 L and K 1 + K 2 F, where L is fixed and F depends on foreign aid/fdi! Material balance conditions: C 1 = Y 1 and C 2 = Y 2! Real GNP: GNP=Y 1 +py 2 (good 1 is numeraire) 3

5 4! Optimization: max U s.t. (FA) " factor allocation: " equalization of VMPK across sectors: " results: - industry 2 will emerge iff - activation of a modern industry requires sufficient funding and labor in addition to the technological factor - modern industry always emerge if θ=0 2. A Complete Framework with External Effect and Heterogenous Labor! Modern industry exhibits social IRS in the Romer (1986) convention and requires skilled labor! Production technologies: and, where α 2 > α 1 and A 2 > A 1! Heterogeneous labor (low-skilled with mass N 1 and high-skilled with mass N 2 ): " L 2 N 2 (modern production requires skills) " L 1 + L 2 N 1 + N 2 (the skilled can downgrade to work as unskilled)

6 5! Funds allocation:, where q > 1 as it is more costly to invest in modern industry) q captures the effects of investment subsidies/tax rebates and tariff reductions 3. Competitive equilibrium:! Equalization of relative price and MRS:! Equalization of MVKs ( ):! Solution for K1:, implying the K 1 /F ratio is " decreasing in F and L 2 " increasing in q and θ! Results: Industry 2 remains non-operative if F-K 1 0, or,, i.e., if " less funding or skilled labor (low F or N 2 ) " imperfect copy of advanced technology (low A 2 ) " too expensive modern capital investment (high q) " too much preference bias (high θ)

7 " In order for the modern industry to be activated, to have sufficient funding (F-K 1 >0) is necessary but not sufficient, as it does not account for skilled labor reallocation, driven by the relative wage (Ω=W 2 /W 1 ): 6 - increasing in F and A 2 - decreasing in q, θ, L 2! Staged development: " I: Ω(N 2 )<0: industry 2 is unprofitable " II: 0 Ω(N 2 )<1: the relative wage is too low for skilled workers to participate in industry 2 " III: when Ω(N 2 ) 1: activation of the modern industry 2, which requires: - sufficient capital funding - sufficient skilled labor - good access to new technologies - appropriate matches between capital and labor

8 7 4. Development Policy Recommendation! Short-term policy prescriptions: " external assistance to raise F (EIB loans/u.s. Aid) " technological transfer from developed countries to advance A 2 " immigration of high skill to increase N 2! Long-term policy prescriptions: " better education/training " greater saving incentives " more R&D investments 5. On dynamic take-off and development: Chang-Wang-Xie (in progress)! Endogenous skill accumulation! Endogenous saving & funds/capital accumulation! Endogenous modern technology advancement (accompanied by exogenous traditional technology evolution)! Model: one-period non-overlapping generations with intergenerational transfers and transmissions

9 ! Effects of better initial modern technology 8

10 ! Effects of higher initial skills 9

11 ! Effects of reduction in capital allocation barriers 10

12 11 C. Industrial Transformation and Unbalanced Growth: Kongsamut-Rebelo-Xie (2002)! Stylized fact: " declining agriculture employment share " inverted-u manufacture employment share " rising service employment share

13 12 1. The Model! Three sectors: A = agriculture, M = manufacture (numeraire), S = service! Production technologies and factor allocation constraints:! Preference:, implying: " A is necessity with a minimum subsistence level of consumption " S is luxury

14 13! Resource constraint:! Production/consumption efficiency and competitive profit conditions: " labor allocation: " capital efficiency: " optimal consumption allocation: and " competitive profit: P A = B M /B A and P S = B M /B S! Results: " constant manufacture output growth: = g (Keynes-Ramsey) " declining agriculture and rising service output growth: " negative agriculture, zero manufature and positive service employment growth:! Problem: fail to explain the inverted-u manufacture employment share

15 14 D. Transformation to a Mass-Consumption Economy: Matsuyama (2002)! Main idea: activation of industries driven by demands! Key Features: " content of luxuries changes over time " increased productivity reduces prices of goods and enlarges customer-base (scale economies) " trickle-down: scale effect from the high-income demand makes luxuries more affordable to the low-income " trickle-up: scale effect from the low-income demand reduces the highincome cost and enables the latter to move up to consume better goods " such processes require suitable level of inequality 1. The Basic Setup! Sectors: " 0 = food (homogeneous, divisible) " 1-J = manufacturing (heterogenous, indivisible)

16 15! Preferences: " good 0 (captured by c) is necessary up to a subsistence level (= 1) " good i < j is needed for consuming j " leisure is the numeraire that takes care of the jumps due to indivisibility of manufacturing goods (ηp i < 1)! Budget Constraint (BC): 2. Consumer Optimization and Aggregate Demand:! Optimization problem: max k {1,..., J} s.t.

17 16! Consumption Pattern " low-income: " middle-income: " high-income: where = minimum income required for consuming good k! Income Distribution F(I): " only those with I > can purchase j " such mass gives a measure of the aggregate demand (AD) for good j: - aggregate demand depends on distribution - only mass (not income) matters - Hicks-Allen demand complementarity from i j to j - mass C j is decreasing in j (as the degree of necessity becomes lower)

18 17 3. Production:! Food is CRS; manufacture is IRS " unit labor requirements a 0 (t) = a 0 and, where A j < 0 and the value of production is: with δ j captures both the speed of learning and the rate of depreciation of learning experience " this implies the following learning dynamics (LD): 4. Equilibrium! Competitive Profit (CP) Conditions:! (CP) + (AD) =>, which together with (LD) yields, (DY):, with Ψ ij 0 (complementarity)

19 ! Main findings: " trickle-down: demand C j => p j => those initially with I < I j can now afford to consume j " trickle-up: demand C i => p i => those initially with I j > I i can now save expenses on i and move up to purchase h > j E. The Rise of a Service Society: Buera-Kaboski (2009)! What is the role of human capital played in transformation into a service society?! As the service share in the U.S. rose from 60% to 80% over , college premium jumped up from 1.25 to 2 whereas the fraction of high skill intensive industries increased by 25% over the same period 18

20 ! High skill intensive service industries outgrew low skill intensive ones: 19

21 20 1. The Model! Two type of workers: high (h) and low (l), differentiated by skills! Two type of outputs: service (s) and manufactured intermediate good (m)! Production of service of type z (complexity) requires labor and manufactured intermediate goods: " high-low skilled workers are perfect substitutes " labor and intermediate good are perfect complements " A h and A l are both decreasing in z, with A h (z,t) > A l (z,t) " [A h (z,t)/a l (z,t)]/ z 0 (high skilled have comparative advantage in producing more complex good/service! Production of manufactured intermediate good: " output: " can only be done in the market! In addition to the provision by the market, service can be done via home production. Since home production is fully customized, it yields higher utility.! Preference:, with indicator functions (C,H) " C = 1 => want satisfied " H = 1 => via home production

22 21! Schooling e {h, l}: " becoming low skilled is free " becoming high skilled incurs a cost of θ fraction of endowment: - θ = θ(f), depending on the fraction of workers acquiring education - θ >0, θ(0) = 0, θ(1) < 1 2. Optimization! Firm competitive profit conditions (low skilled wage = 1, high skilled = w): " m: " s:! Consumer optimization: s.t.

23 22! Optimized consumption/home production decisions: " C = 1 iff - market consume: - home produce: " H = 1 iff (cheaper utility cost) " These imply: and, with - high complexity => want never satisfied - intermediate complexity => want satisfied with market - low complexity => want satisfied with home production " maximized utility: " high-low skilled decisions compared: - : high skilled consume more market service than low skilled - : high skilled home produce less than low skilled

24 23 3. Equilibrium! Assumption:, with (high skilled has a comparative advantage in more complex goods/services)! Sorting: critical " below which firms hire low skilled " above which firms hire high skilled " the cutoff is - decreasing in productivity gap - increasing in skill premium w 4. Staged Development into a Service Society! Phase 1: rise in skill premium => more of less-complex goods/services produced by low skilled " quantity and price of skills remain constant " shares of service and manufacturing are also constant

25 ! Phase 2: rise in productivity => consume more complex goods/services " high skilled advantage signified " low skilled become affordable to market consume " market consumption outgrows home production " service output share is growing! Phase 3: rise in demand for high skilled => quantity and price of skills increase " service output share is growing further " skill intensity rises " share of skill intensive sectors increases 5. Open Issues! Inequality and trickle-down/up (Buera-Kaboski meet Matsuyama)! Physical capital deepening interacting with skills (Buera-Kaboski meet Acemoglu-Guerrieri)! Job relocation in the service sector and within-the-skilled-group inequality (Tang-Wang & Liao-Shin-Wang meet Buera-Kaboski)! Trade with South (lowering less-complex goods prices)! Migration of skilled (reducing skill acquisition costs) 24

26 25 F. Structural Transformation in Multi-Sector Dynamic General Equilibrium: Herrendorf-Rogerson-Valentinyi (2013)! Multi-sector DGE model of structural transformation to meet various stylized facts concerning economic development, regional income convergence, aggregate productivity trends, hours worked, business cycles, and wage inequality! Key indicators: " performance measure: real GDP per capita (not per worker) " structural transformation measure: - employment shares - value-added or consumption shares # benchmark: nominal shares local currency for production or consumption # alternative: real shares international goods/services flows 1. Stylized Facts! Sectoral shifts: agriculture down, manufacture hump-shaped, service up

27 ! Developed countries:

28 ! 5 Non-EU and aggregate of 15 EU:

29 ! 15 EU:

30 ! Real vs. Nominal: 5 Non-EU and aggregate of 15 EU ( ) 29

31 30! World Bank vs. UN-PWT 6.3 World Bank UN-PWT 6.3

32 ! Consumption measures: US/UK ICP-PWT

33 OECD:

34 33 2. The Basic Model! Extending the two-sector growth model of Uzawa (1963) and Greenwood- Hurcowitz-Krussell (1997)! Production " Production of consumption and investment goods: " Capital evolution: " Factor allocation: " Relative factor demand: = K t i = c, x " Relative price and factor prices: ;

35 34 " Aggregate output:! Households " maximization: " Euler:! Technological progress: i = c, x! Economic growth: (no common growth)! BGP rental rate:! Unique initial factor proportion: 3. The General Model! Nonhomothetic consumption aggregator:

36 35! 4 sectors:! Factor allocation:! Relative factor demand:! Relative price:! Aggregate output:! Household maximization: " " atemporal condition: " price aggregator: " budget allocation:

37 36! Trick: dividing optimization into two separate steps " intertemporal: " atemporal: " optimizing conditions: - atemporal tradeoff: - relative expenditure:! Special cases: " Kongsamut-Rebelo-Xie (2001): and " Ngai-Prescott (2007):

38 37 4. Quantitative Analysis! Cross country differences: TFPs, capital shares, elasticities of substitution, degrees of necessity/luxury, relative incomes, relative prices! Sectoral TFP

39 38! Key relationship: declines in agricultural employment shares captured by, " 1 - s a (c at ) = 1 - captures the income effect " captures the relative price/productivity effect " captures the capital deepening effect " captures the saving/investment effect a la Laitner! Key parametrization: follow Dennis-Iscan (2009) and Buera-Kaboski (2009)! Results: " overall good fitness with data especially with a uptrend in " income effect matters most prior to 1950, but afterward relative price/productivity and capital deepening effects become important! Question: insufficient analysis on the transition to service society with accelerated shares in many advanced economies during the post-wwii period

40 39 5. Extensions! International trade: Matsuyama (2009) 2-country iceberg model of structural transformation, but abstracting from capital! Labor mobility: " labor composition: - skill vs. unskilled (Acemoglu, Laing-Palivos-Wang & others) - manual vs. nonmanual (Autor & others) " occupational mobility vs. sectoral mobility: changing sectors could incur a cost as large as 75% of annual wage income (Lee-Wolpin 2006), but within sector occupational switch is much less costly " migration frictions: Lucas (2004), Bond-Riezman-Wang (2013), Michaels- Rauch-Redding (2014), Liao-Wang-Y. Wang-Yip (in progress)! Labor intensity: " labor hours: Prescott-McGrattan-Rogerson (2004), Rogerson (2008) EU 5% higher than US in 1956, but 30% lower in 2003 due to higher taxes " leisure preferences: Aguiar-Hurst (2007), Yurdagul (2015)! Goods mobility: " transport costs: Collin-Rogerson (2010), Adamopoulos (2011) " tariff: Adamopoulos-Restuccia (2014), Riezman-Lai-Wang (in progress).