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Growing like China

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  • Kjetil Storesletten

    (University of Oslo)

  • Fabrizio Zilibotti

    (University of Zurich)

  • Zheng Song

    (Fudan University)

Abstract

China has been growing at a high rate and has at the same time accumulated a staggering foreign surplus. We construct a theory that explains these seemingly puzzling observations, while being consistent with salient features of the Chinese growth experience since 1992: high output growth, sustained returns on capital investments, extensive reallocation within the manufacturing sector, falling labor share and accumulation of a large foreign surplus. The theory makes only minimal deviations from a neoclassical growth model. Its building blocks are financial imperfections and reallocation among firms with heterogeneous productivity. Some firms use more productive technologies than others, but low-productivity firms survive because of better access to credit markets. Due to the financial imperfections, high-productivity firms - which are run by entrepreneurs -–must be financed out of internal savings. If these savings are sufficiently large, the high-productivity sector outgrows the low-productivity sector, and attracts an increasing employment share. During the transition, low wage growth sustains the return to capital. The downsizing of the financially integrated sector forces a growing share of domestic savings to be invested in foreign assets, generating a foreign surplus. We test some auxiliary implications of the theory and find robust empirical support.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2009 Meeting Papers with number 912.

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Date of creation: 2009
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Handle: RePEc:red:sed009:912

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  1. Imagine Chinese growth rates without misallocations
    by Economic Logician in Economic Logic on 2013-03-11 14:22:00
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