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Accounting for China's Growth

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  • Loren Brandt
  • Xiaodong Zhu

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. But 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 point to the role of rising rates of investment. Because labor reallocations 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 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 and capital deepening, and identify rising TFP in the non-state nonagricultural sector as the key driver of growth. We also find significant misallocation of capital: The much 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 rebalance its growth. Finally, in light of important concerns over data, we examine the robustness of our key results to alternative data

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Bibliographic Info

Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-394.

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Length: 59 pages
Date of creation: 16 Feb 2010
Date of revision:
Handle: RePEc:tor:tecipa:tecipa-394

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Keywords: China; Growth; TFP; Investment; intensive vs extensive margins;

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Cited by:
  1. Amit K. Khandelwal & Peter K. Schott & Shang-Jin Wei, 2011. "Trade Liberalization and Embedded Institutional Reform: Evidence from Chinese Exporters," NBER Working Papers 17524, National Bureau of Economic Research, Inc.
  2. 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 2013/07, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  3. Liu, Jing & Cao, Shutao, 2011. "Productivity Growth and Ownership Change in China: 1998-2007," MPRA Paper 30571, University Library of Munich, Germany.
  4. 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.
  5. Timothy J. Kehoe & Kim J. Ruhl, 2010. "Why Have Economic Reforms in Mexico Not Generated Growth?," NBER Working Papers 16580, National Bureau of Economic Research, Inc.
  6. 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, vol. 96(2), pages 220-238, November.
  7. Lei, Chaochao & Zhang, Rengui & Wu, Baocheng, 2013. "Labor reallocation in China: 1978–2011," Economic Modelling, Elsevier, vol. 35(C), pages 668-673.
  8. Trevor Tombe, 2010. "The Missing Food Problem: How Low Agricultural Imports Contribute to International Income and Productivity Differences," Working Papers tecipa-416, University of Toronto, Department of Economics.
  9. Cao, Kang Hua & Birchenall, Javier A., 2013. "Agricultural productivity, structural change, and economic growth in post-reform China," Journal of Development Economics, Elsevier, vol. 104(C), pages 165-180.
  10. Jiang, Yanqing, 2011. "Understanding openness and productivity growth in China: An empirical study of the Chinese provinces," China Economic Review, Elsevier, vol. 22(3), pages 290-298, September.
  11. John Whalley & Chunbing Xing, 2012. "The Sustainability of Chinese Growth and the Aggregate Factor Substitution Elasticity," CESifo Working Paper Series 3736, CESifo Group Munich.
  12. Lee, Soohyung & Malin, Benjamin A., 2013. "Education's role in China's structural transformation," Journal of Development Economics, Elsevier, vol. 101(C), pages 148-166.
  13. Ding Lu, 2011. "Transition of China’s growth pattern," Frontiers of Economics in China, Springer, vol. 6(4), pages 535-555, December.

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