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The role of factor substitution and technical progress in China's great expansion

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  • Manu, Ana-Simona
  • McAdam, Peter
  • Willman, Alpo

Abstract

We offer a macroeconomic assessment of China’s Reform Period, highlighting several neglected channels underlining its great expansion. Estimating the supply side of the post-Reform economy reveals the relatively high (above unity) value of the elasticity of factor substitution and the time-varying pattern of factor-saving technical change. The latter we relate to trade, human capital and reallocation factors. We then demonstrate how, in addition to factor accumulation and technical progress, the above-unity elasticity of substitution can be a source of growth (the ‘de La Grandville hypothesis’). We then draw upon our estimated framework to rationalize China’s high and rising savings ratio as well as the dynamic nature of its convergence path. JEL Classification: D24, E13, O11

Suggested Citation

  • Manu, Ana-Simona & McAdam, Peter & Willman, Alpo, 2018. "The role of factor substitution and technical progress in China's great expansion," Working Paper Series 2180, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20182180
    Note: 2663204
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    References listed on IDEAS

    as
    1. Lau, Kam-Tim & Brada, Josef C., 1990. "Technological progress and technical efficiency in Chinese industrial growth: A frontier production function approach," China Economic Review, Elsevier, vol. 1(2), pages 113-124.
    2. Jeannine Bailliu & Mark Kruger & Argyn Toktamyssov & Wheaton Welbourn, 2016. "How Fast Can China Grow? The Middle Kingdom’s Prospects to 2030," Staff Working Papers 16-15, Bank of Canada.
    3. Keting Shen & John Whalley, 2013. "Capital-Labor-Energy Substitution in Nested CES Production Functions for China," NBER Working Papers 19104, National Bureau of Economic Research, Inc.
    4. John Whalley & Chunbing Xing, 2012. "The Sustainability of Chinese Growth and the Aggregate Factor Substitution Elasticity," CESifo Working Paper Series 3736, CESifo.
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    Cited by:

    1. Shaghil Ahmed & Ricardo Correa & Daniel A. Dias & Nils M. Gornemann & Jasper Hoek & Anil K. Jain & Edith X. Liu & Anna Wong, 2019. "Global Spillovers of a China Hard Landing," International Finance Discussion Papers 1260, Board of Governors of the Federal Reserve System (U.S.).
    2. Shaghil Ahmed & Ricardo Correa & Daniel A. Dias & Nils Gornemann & Jasper Hoek & Anil Jain & Edith Liu & Anna Wong, 2022. "Global Spillovers of a Chinese Growth Slowdown," JRFM, MDPI, vol. 15(12), pages 1-23, December.
    3. Michael Knoblach & Fabian Stöckl, 2020. "What Determines The Elasticity Of Substitution Between Capital And Labor? A Literature Review," Journal of Economic Surveys, Wiley Blackwell, vol. 34(4), pages 847-875, September.
    4. Zhang, Xiaobei & Wang, Xiaojun, 2021. "Measures of human capital and the mechanics of economic growth," China Economic Review, Elsevier, vol. 68(C).
    5. Song, Eunbi, 2021. "What drives labor share change? Evidence from Korean industries," Economic Modelling, Elsevier, vol. 94(C), pages 370-385.

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    More about this item

    Keywords

    China; de La Grandville hypothesis; factor substitution; growth; optimal savings; reform period; TFP;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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