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China’s Growth In The Past Decade:
A Natural ‘Catch Up’?
Arthur Kong, Nadimah Mohammed, Marshiella Pandji, Samira Noronha and Jessie Levine
Monday 5 May 2015
Outline● What is a “natural catch-up”: the Solow Model
● What has China’s growth been over the past decade?
● Decomposing China’s growth: Is it a ‘catch up’?
● Conclusion
What is a ‘Catch Up’: The Solow Model
Definition:A country is catching up when it is in its stage prior (in transition to) to the steady state. We understand that it is conditional convergence where each country is heading towards its own steady state, rather than one steady state for all countries.
If China’s growth is due to a ‘catch up’, we expect:Growth should be primarily driven by capital accumulation
What is a ‘Catch Up’: The Solow ModelOutput, Y/L, y
k*
y*y =A F(k)
Investment = s F(k)
MPKk
“Catch Up” Growth
K1 K2
y1
y2
k
Capital per capita, K/L, k
Depreciation = (δ +n+…)k
China’s Growth in the Last Decade
Source: World Bank Data Bank
China’s average growth rate
between 2000 to 2013 was 9.9% compared to 7% in India, 3.5% in Brazil and 1.7%
in the OECD
Contextualising Growth in the Last Decade
Source: Zhu (2012)
Capital accumulation is unlikely to produce such high growth for for so long based on
the Solow Model
Current decade is a continuation of more than 3 decades of
high growth
Decomposing China’s Growth
Source: Zhu (2012)
China’s growth in the last 3 decades
primarily driven by growth in total factor
productivity
TFP growth=
Reallocation to efficient firms (70%)
+Technological improvement
(Song, Storesletten and Zilibotti, 2011)
Policy Context● Pre-1978: Great Leap Forward - state direct all factors of
production toward capital accumulation● Post-1978: Economic reform (post-Mao)
o Agriculture Reforms: Reallocation of factors of productiono Decentralization (to townships and collectives) o One Child Policy
● Post-1998: Era of Privatization & Trade Liberalizationo Opening up of the Chinese economy o FDI inflows, China joins WTO (2001)o Increased competition has forced manufacturing companies to
become more competitive
Where do capital investment & population growth fit in China’s growth story?
Capital (Invesment =Savings)
Post 1978 reversed roles with TFP. Contributed to overall 15% of overall per capita growth. Capital accumlation includes physical capital and human capital.
China's capital investment since 1978 has been keeping up with its rapid rate of output growth but not leading it. Examining the data between 1978 and 1998, Young (2003) also comes to the conclusion that capital deepening was not the source of China's growth
Population growth (n)
From 1978 to 2007, due to “one child” policy, the labour force growth rate was a modest 0.57% in those years. Only 7% of overall GDP/capita growth (vs. TFP makes up 78%) (Zhu, 2012)
Zhu (2012)
How does this fit with the Solow Model?Output, Y/L, y
k1*
y2=2 F(k)
y1 = F(k)y1*
Capital per capita, K/L, k
Example: A=2
k2*
y2*
Depreciation = (δ +n+…)k
Investment2 = 2sF(k)
Investment1 = 2F(k)
Conclusion● China’s growth in the past decade does not fit the
“expected natural catch-up of a developing country”.● Growth primarily driven by gains in total factor
productivity.● Reduced population growth and capital accumulation
continue to play a role but are not main drivers.
SourcesChow, Gregory C. 1993. “Capital Formation and Economic Growth in China”. The Quarterly Journal of Economics 108(3): 809-842.
Cowen, Tyler and Alex Tabarrok. “Modern Principles of Economics”. 2010 Worth Publishers. Chapter 7: Growth, Capital Accumulation, and the Economics of Ideas.
Ding, Sai, and John Knight. 2008. “Can the Augmented Solow Model Explains China’s Economic Growth? A Cross-Country Panel Data Analysis”. Discussion Paper Series Number 380, Department of Economics, University of Oxford.
Hou, Jack W. 2011. “Economic reform of China: Cause and effects.” The Social Science Journal 48: 419-434.
Song, Michael Zheng, Kjetil Storesletten, and Fabrizio Zilibotti. 2011. “Growing Like China.” American Economy Review 101(1): 202–241.
Zhu, Xiaodong. 2012. “Understanding China’s Growth: Past, Present, Future.” The Journal of Economic Perspectives 26(4): 103-124.