The excellent Scholar’s Stage blog reminded me to go through the Asian Productivity Organization’s latest APO Productivity Databook, a feast of growth accounting data that has been sitting in my to-read pile for a while now. While I also like the consumption chart that Greer chose, my own favorite chart from the report is below; it’s pretty striking.
While it’s possible there are some data problems in their estimation (that’s a pretty steep hockey stick), the direction of the trend is quite plausible. There is plenty of anecdotal evidence that the incentive to substitute capital for labor in China has been quite strong recently. And the government is not shy about using subsidies and other industrial policy to push things even further in that direction. Here is a recent piece from the FT:
Across the manufacturing belt that hugs China’s southern coastline, thousands of factories like Chen’s are turning to automation in a government-backed, robot-driven industrial revolution the likes of which the world has never seen. Since 2013, China has bought more industrial robots each year than any other country, including high-tech manufacturing giants such as Germany, Japan and South Korea. By the end of this year, China will overtake Japan to be the world’s biggest operator of industrial robots, according to the International Federation of Robotics (IFR), an industry lobby group. The pace of disruption in China is “unique in the history of robots,” says Gudrun Litzenberger, general secretary of the IFR.
Yet over the exact period during which it became much more compelling for companies to invest in capital rather than labor, overall investment spending in China nonetheless slowed substantially. The chart below is my estimate of real growth in capital formation in the national accounts (a better if less timely indicator than the monthly fixed-asset investment numbers). Gross investment growth was about 5% in 2015, against an average of 15% over the previous decade.
What’s going on here? How can investment growth be so weak when the incentive to substitute capital for labor is so strong? As for almost all macro questions about China, housing is a big part of the answer (a theme I have hammered on before; see this rant and this more sober post). Residential construction drove a big chunk of that 15% annual growth in the past, but housing now looks like it has moved off the steep part of the S-curve and on to the flatter part. With residential construction stalling out, it’s hard for aggregate investment to grow very fast. It will take a while for robots to compensate for that.