Academic journal article Review - Federal Reserve Bank of St. Louis

Potential Output in a Rapidly Developing Economy: The Case of China and a Comparison with the United States and the European Union/Commentary

Academic journal article Review - Federal Reserve Bank of St. Louis

Potential Output in a Rapidly Developing Economy: The Case of China and a Comparison with the United States and the European Union/Commentary

Article excerpt

(ProQuest... denotes formulae omitted.)

Jinghai Zheng, Angang Hu, and Arne Bigsten

The authors use a growth accounting framework to examine growth of the rapidly developing Chinese economy. Their findings support the view that, although feasible in the intermediate term, China's recent pattern of extensive growth is not sustainable in the long run. The authors believe that China will be able to sustain a growth rate of 8 to 9 percent for an extended period if it moves from extensive to intensive growth. They next compare potential growth in China with historical developments in the United States and the European Union. They discuss the differences in production structure and level of development across the three economies that may explain the countries' varied intermediate-term growth prospects. Finally, the authors provide an analysis of "green" gross domestic product and the role of natural resources in China's growth. (JEL L10, L96, O30)

Federal Reserve Bank of St. Louis Review, July/August 2009, 91(4), pp. 317-42.

The rapid development of emerging markets is changing the landscape of the world economy and may have profound implications for international relations. China has often been regarded as the most influential emerging market economy. Projections indicate that the absolute size of the Chinese economy may be larger than that of the United States within two to three decades. While China's growth performance since reform has been hailed as an economic miracle (Lin, Cai, and Li, 1996), concerns over the sustainability of its growth pattern have emerged in recent years when measured total factor productivity (TFP) growth has slowed.

In recent years, economists have increasingly referred to China's growth pattern as "extensive." Extensive growth is intrinsically unsustainable because growth is generated mainly through an increase in the quantity of inputs rather than increased productivity. In a previous paper (Zheng, Bigsten, and Hu, 2009), we focused on China's capital deepening versus TFP growth and private versus government initiatives. In this article, we first compare China's growth performance with what would otherwise have been feasible, taking into account the main factors commonly employed to generate growth in rapidly developing economies. In other words, we compare official statistics with estimates of "potential" output growth to shed further light on China's recent growth patterns.

Second, we provide projections of the future potential of the Chinese economy and discuss China's impact on the world economy. Specifically, we compare potential growth in China with that for the United States and European Union (EU). We note that structural characteristics, rapid accumulation in capital stock, and improvement in labor quality are the major factors behind China's phenomenal economic growth. China's future TFP growth is likely to be faster than that of the United States and EU because of the stock of world knowledge it may easily access at affordable prices to enhance its production possibilities (Prescott, 2002).

Nobel laureate Ed Prescott (1998) asked why "growth miracles" are a recent phenomenon. We suspect that the main reasons are differences in production structure and in the level of development. Examples include the East Asian newly industrialized countries (NICs), to some extent post- WWII Japan and Germany, and the Soviet Union between the first and second World Wars and in the early years of the Cold War. Now, due to rapid industrialization, China will soon join the ranks of the high-performing East Asian nations. Understanding the causes and conditions of economic miracles may prove useful for developing countries. Understanding differences in production structure and the level of development may also help explain why productivity slowed in the United States and EU in the early 1970s, then started to surge in the United States but stagnated in Europe in the mid-1990s. …

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