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China’s great expansion: The role of factor substitution and technical progress

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  • Manu, Ana S.
  • McAdam, Peter
  • Willman, Alpo

Abstract

We offer an assessment of China’s macro-economy over 1978–2017, highlighting several neglected channels underlining its great expansion. On the basis of rigorous data work, we estimate the supply side of the post-Reform economy. This reveals an above unity value of the elasticity of capital-labor substitution and a time varying pattern of factor augmenting technical change. Consistent with some strands of the literature, our results suggest three waves of economic development reflecting state-to-private transitions: (I) 1978–1991 (II) 1992–2007, (III) after 2008. The middle wave is associated with improving efficiency of capital, which sharply reverses after the financial crisis consistent with renewed state control of the economy. We then demonstrate how, in addition to factor accumulation and technical progress, the above-unity substitution elasticity has itself been a source of growth. As an illustration, we draw upon our estimated framework to rationalize China’s high and rising savings rate.

Suggested Citation

  • Manu, Ana S. & McAdam, Peter & Willman, Alpo, 2022. "China’s great expansion: The role of factor substitution and technical progress," European Economic Review, Elsevier, vol. 141(C).
    • Handle: RePEc:eee:eecrev:v:141:y:2022:i:c:s0014292121002191
    DOI: 10.1016/j.euroecorev.2021.103911
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    References listed on IDEAS

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    Cited by:

    1. Manu, Ana-Simona, 2022. "How sectoral technical progress and factor substitution shaped Japan’s structural transformation?," Working Paper Series 2641, European Central Bank.

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    More about this item

    Keywords

    Reform period; Extensive/intensive growth; Political economy; De La Grandville hypothesis; Optimal Savings;
    All these keywords.

    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • 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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