Academic journal article National Institute Economic Review

What Drives China's Growth?

Academic journal article National Institute Economic Review

What Drives China's Growth?

Article excerpt

This paper analyses the drivers and components of China's economic growth, showing that the structure of the economy is just as important as standard growth factors in determining its growth. The structural reforms that dismantled state- owned enterprises and shifted factors from agriculture to urban areas are key, as are technology transfers and know- how. Taking these factors into account, the paper shows that total factor productivity (TFP) not derived from chose one-off reforms accounted for less than one-eighth of China's GDP growth during the first thirty years of the reform period. There are signs that efficiency is improving in the 2000s and productivity must continue to increase for the country to sustain its development.

Keywords: Economic growth; China; economic reform; productivity JEL Classifications: OI; P2

1. Introduction

China has accomplished a remarkable feat in transforming itself from one of the poorest countries in the world into the second largest economy in just thirty years. Market-oriented reforms began in 1979, transforming the previously centrally planned economy. Since then it has grown at an impressive 9.6 per cent per annum, on average. China has not only doubled its GDP and income every 7-8 years, it has also lifted 660 million people (or one-tenth of the world's population) out of abject poverty. With its 1.3 billion people accounting for one-fifth of the global population, China's economic growth has begun to shape the world and yet the determinants of its successful development are far from established or well understood.

China, like other large countries, has unique aspects of its economy. It is a transition economy that has dismantled most, but not all, of its state-owned enterprises and banks. But it is also a developing country where half of its population is rural and in large parts agrarian. Although agriculture is declining as a share of GDP, it accounted for 40 per cent of rural employment in 2010. China is also an open economy whose trade-to-GDP ratio was about 70 per cent in the 2000s, making it substantially more globally integrated than other comparably-sized open economies such as the UK (37 per cent). It also does not fit well into the studies of institutions and growth, as China remains a Communist state dominated by the Chinese Communist Party. It is therefore unsurprising that the rule of law and other market-supporting institutions, such as private property protection, are weak, as there is no independent judiciary, giving rise to the so-called 'China paradox' where the country has grown well despite not having a well-developed set of institutions (Yao and Yueh, 2009). China's economic growth is therefore in many respects both impressive and puzzling. It is also, like any other fast growing economy, not assured of sustaining such economic growth.

The paper examines the drivers of China's impressive development. A key theme is that the structure of the economy is as important as the standard growth factors in understanding Chinese development and its sustainability. Thus, this article will review the main models and evidence of China's growth and identify the main drivers of Chinese growth within its particular context. The conclusion is that about half of China's growth has been generated by capital accumulation, about a quarter by labour and human capital, and a quarter by productivity gains. But, within each of these categories, the institutional context is important in order to determine the sustainability of such growth. An example is the productivity gains from one-off movements of labour from state-owned to private enterprises. Moving from a less efficient to a more efficient sector can inflate the contribution of total factor productivity (TFP) which captures that reallocation, as well as true innovation that increases efficiency permanently.

The next section sets out the standard models of economic growth. …

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