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Deregulation as a Source of China’s Economic Growth


  • Shiyuan Pan

    (Zhejiang University)

  • Kai Xu

    (Zhejiang University)

  • Kai Zhao

    (University of Connecticut)

  • Tianxu Chen

    (University of Connecticut)


We develop a simple two-sector neoclassical growth model in which the upstream sector produces intermediate goods, and the downstream sector produces final goods with outputs from the upstream. While the downstream sector features perfect competition, firms in the upstream sector engage in Cournot competition and charges a markup. We show that the deregulation and the introduction of competition in the upstream goods sector does not only increases the productivity in the sector, but also has a substantial spill-over effect on the productivity of the downstream sector and factor prices. We calibrate the model to the Chinese economy and use the calibrated model to quantitatively evaluate the extent to which the deregulation in the upstream market in China from 1998 to 2006 can account for the rapid economic growth and the high and rising returns to capital in China over the same period. Our quantitative experiments show that the deregulation in the upstream sector can account for a significant share of economic growth in China during the study period. In addition, our model delivers implications that are consistent with several other relevant observations in China during the same period.

Suggested Citation

  • Shiyuan Pan & Kai Xu & Kai Zhao & Tianxu Chen, 2020. "Deregulation as a Source of China’s Economic Growth," Working papers 2020-01, University of Connecticut, Department of Economics, revised May 2023.
  • Handle: RePEc:uct:uconnp:2020-01

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    References listed on IDEAS

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    4. Julio J. Rotemberg & Michael Woodford, 1991. "Markups and the Business Cycle," NBER Chapters, in: NBER Macroeconomics Annual 1991, Volume 6, pages 63-140, National Bureau of Economic Research, Inc.
    5. Chong-En Bai & Chang-Tai Hsieh & Yingyi Qian, 2006. "The Return to Capital in China," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 37(2), pages 61-102.
    6. İmrohoroğlu, Ayşe & Zhao, Kai, 2018. "The chinese saving rate: Long-term care risks, family insurance, and demographics," Journal of Monetary Economics, Elsevier, vol. 96(C), pages 33-52.
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    8. Thomas J. Holmes & James A. Schmitz, 2010. "Competition and Productivity: A Review of Evidence," Annual Review of Economics, Annual Reviews, vol. 2(1), pages 619-642, September.
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    Blog mentions

    As found by, the blog aggregator for Economics research:
    1. Two papers on Chinese Growth
      by Christian Zimmermann in NEP-DGE blog on 2020-01-20 20:44:55

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    More about this item


    Deregulation; TFP Growth; Chinese Economy;
    All these keywords.

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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