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THE SOURCES AND SUSTAINABILITY OF CHINA’S ECONOMIC GROWTH1
Summarized by Yeo Mee Yoong & Loh Chin Wei
Introduction
In 1978, China was the world’s tenth largest economy, with a GDP of $150 billion. By
2005, China became the fourth largest economy in the world with GDP of $2.2 trillion,
behind the United States at $12.5 trillion, Japan at $4.5 trillion and Germany at $2.8 trillion.
These figures are based on exchange rates and do not take into account of differences in
purchasing power of currencies. When measured at purchasing power parity (PPP), China
is already the world’s second largest economy and is estimated could exceed that of the
United States as early as 2010.
A) Reasons Why China’s GDP Cannot Match or Surpass that of the United
States:
1) International Productivity Gap
a) China’s coastal industry versus world technology frontier
2) Internal Productivity Gap
a) China’s coastal industrial sector versus country’s lagging agricultural and
services sector
b) Coastal industry versus industrial sector of other region
B) Effect of International and Internal productivity gaps
1) Advantage
a) These gaps continue to provide multiple channels through which catch-up can
proceed
2) Disadvantages
a) Large differences in income threaten social stability
b) Large internal productivity differences causes the burden of China’s catch-up
with the United States fall on coastal industry
C) Chinese Productivity and the International Frontier
(Refer to Figure 3 on page 25 of the article)
When we compare the Chinese productivity growth rate to the gap with the international
frontier, we found that the coastal region’s growth rate is higher than the other regions’
growth rate. The factors that may explain this disparity between the coastal and other
regions include the concentration of FDI and R&D spending in the coastal region and the
better development of institutional arrangements, including the legal system and human
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Based on Jefferson, G.H, Hu, Albert G.Z. & Su, J. 2006 (Brookings Papers on Economic
Activities)
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capital development in the coastal region. These factors may enable coastal industry to take
greater advantage of international technology than industry in other regions.
D) Sources of Internal Productivity Gap
This section investigates the processes through which Chinese firms may or may not
respond to productivity differentials within Chinese industry by closing the internal
productivity gap.
1) The Contribution of Labor Reallocation
- Found large differences in labor productivity among sectors and regions within
China
- Reallocation of labor from low-to-high productivity sectors has effects on
aggregate output and productivity
- They found that labor reallocation causes diminishing contribution to GDP
growth. Two factors lead to diminishing contribution to GDP growth from
labor reallocation: (i) Diminishing number of surplus workers as a share of
total workforce in agriculture (ii) Migration of workers from agriculture to
industrial sector increases GDP and larger gaps causes productivity gains
from labor reallocations to make smaller proportionate contributions to
overall growth.
2) The contribution of exit and entry
- found that the large numbers of both exiting and entering firms, together with
the significant differences between their average productivity and that of
surviving firms, suggest that they are an important source of China’s
industrial productivity growth.
E) How Sustainable is China’s International Catch-Up?
Whether China can continue to close the gap with the advanced economies depends
broadly on two factors:
1) China’s ability to sustain and expand its capacity to create and absorb new
domestic and international technology through China’s science and technology
takeoff and patenting
2) China’s ability through its political economy in which the functioning of the
political system is to determine the nation’s capacity to assign and clarify
property rights. This clearly defined property rights are needed to strengthen
incentives to accumulate and efficiently utilize economic resources.
F) How Sustainable Is China’s Institutional Reform?
Three reasons why the momentum of institutional reform is likely to continue:
1) Political leadership: needed to sustain economic growth
2) The set of prior commitments that frame Chinese law and the nation’s political
choices: participates in the World Bank, IMF, WTO and TRIPS which require
minimum standards with respects to openness, financial system reform and
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enforcement of intellectual property rights.
3) China’s fast emerging middle class and its growing force of entrepreneurs
G) Conclusion
- According to the journal, the authors view China's economic advances as a
process of reducing several key productivity gaps.
- They found that there is a large difference in productivity between coastal
industry and agriculture industry across China region
- Productivity differences between coastal industry and the services sector in the
four regions are not as great as those between industry and agriculture, but the
gaps are significant and expanding.
- The other key of this paper is that the main productivity gap was international
gaps, the gaps across regions within industrial economy and the
industry-agriculture and industry-services gaps in which all exhibit diminishing
contributions to productivity growth as gaps narrow.
- When China is compared with South Korea and Taiwan, they found that China
was too depending or rely on its coastal industry and this will lead to a very large
productivity gaps and unrealized productivity.
- Therefore, China's government should emphasize more on the economic
integration internal region and backward sector.
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