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Accounting for China's Growth

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  • Brandt, Loren

    ()
    (University of Toronto)

  • Zhu, Xiaodong

    ()
    (University of Toronto)

Abstract

China has achieved impressive growth over the last three decades. However, there has been debate over the sources of the growth, and the role of the intensive versus extensive margin. Growth accounting exercises at the aggregate level (Rawski and Perkins, 2008; Bosworth and Collins, 2008) suggest an equal role for both. For the non-agricultural sector, there have been doubts about the contribution of TFP improvements to growth. For the period between 1978 and 1998, Young (2003) stresses the role of labor deepening, including the reallocation from agriculture, while more recent analysis points to the role of rising rates of investment. Because labor reallocation across sectors, TFP growth at the sector level and investment are all inter-related, simple growth decompositions that are often used in the literature are not appropriate for quantifying their contributions to growth. In this paper, we develop a three-sector dynamic model to quantify the sources of China's growth. The sectors include agriculture, and within non-agriculture, the state and non-state components. We find only a modest role for labor reallocation from agriculture and capital deepening, and identify rising TFP in the non-state non-agricultural sector as the key driver of growth. We also find significant misallocation of capital: The less efficient state sector continues to absorb more than half of all fixed investment. If capital had been allocated efficiently, China could have achieved the same growth performance without any increase in the rate of aggregate investment. This has important implications for China as it tries to re-balance its growth. Finally, in light of important concerns over data, we examine the robustness of our key results to alternative data sets.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4764.

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Length: 59 pages
Date of creation: Feb 2010
Date of revision:
Handle: RePEc:iza:izadps:dp4764

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Keywords: China; investment; growth; productivity; capital market distortions;

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Cited by:
  1. Yikai Wang, 2014. "Will China Escape the Middle-income Trap? A Politico-economic Theory of Growth and State Capitalism," 2014 Meeting Papers, Society for Economic Dynamics 202, Society for Economic Dynamics.
  2. Trevor Tombe, 2010. "The Missing Food Problem: How Low Agricultural Imports Contribute to International Income and Productivity Differences," Working Papers, University of Toronto, Department of Economics tecipa-416, University of Toronto, Department of Economics.
  3. Khandelwal, Amit & Schott, Peter K. & Wei, Shang-Jin, 2012. "Trade liberalization and Embedded Institutional Reform: Evidence from Chinese Exporters," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9246, C.E.P.R. Discussion Papers.
  4. Timothy J. Kehoe & Kim J. Ruhl, 2010. "Why Have Economic Reforms in Mexico Not Generated Growth?," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 48(4), pages 1005-27, December.
  5. John Whalley & Chunbing Xing, 2012. "The Sustainability of Chinese Growth and the Aggregate Factor Substitution Elasticity," CESifo Working Paper Series 3736, CESifo Group Munich.
  6. Loren Brandt & Johannes Van Biesebroeck & Yifan Zhang, 2009. "Creative Accounting or Creative Destruction? Firm-level Productivity Growth in Chinese Manufacturing," NBER Working Papers 15152, National Bureau of Economic Research, Inc.
  7. Lei, Chaochao & Zhang, Rengui & Wu, Baocheng, 2013. "Labor reallocation in China: 1978–2011," Economic Modelling, Elsevier, Elsevier, vol. 35(C), pages 668-673.
  8. Cao, Kang Hua & Birchenall, Javier A., 2013. "Agricultural productivity, structural change, and economic growth in post-reform China," Journal of Development Economics, Elsevier, Elsevier, vol. 104(C), pages 165-180.
  9. Giovanni Dosi & Jiasu Lei & Xiaodan Yu, 2013. "Institutional Change and Productivity Growth in China's Manufacturing 1998-2007: the Microeconomics of Creative Restructuring," LEM Papers Series, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy 2013/07, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  10. Jiang, Yanqing, 2011. "Understanding openness and productivity growth in China: An empirical study of the Chinese provinces," China Economic Review, Elsevier, Elsevier, vol. 22(3), pages 290-298, September.
  11. Ding Lu, 2011. "Transition of China’s growth pattern," Frontiers of Economics in China, Springer, Springer, vol. 6(4), pages 535-555, December.
  12. Holz, Carsten A., 2011. "The unbalanced growth hypothesis and the role of the state: The case of China's state-owned enterprises," Journal of Development Economics, Elsevier, Elsevier, vol. 96(2), pages 220-238, November.
  13. Liu, Jing & Cao, Shutao, 2011. "Productivity Growth and Ownership Change in China: 1998-2007," MPRA Paper 30571, University Library of Munich, Germany.
  14. Lee, Soohyung & Malin, Benjamin A., 2013. "Education's role in China's structural transformation," Journal of Development Economics, Elsevier, Elsevier, vol. 101(C), pages 148-166.

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