Download The Research of Chinese Investment-led Growth Pattern

M & D FORUM
The Research of Chinese Investment-led Growth Pattern
LI Xin1, NING Yawei2
1. School of Economics, Renmin University of China, 100872
2. Yellow River Engineering Consulting Co., Ltd, Institute of Environmental & Resettlement
Engineering, 450003
[email protected]
Abstract: Economic growth affects the national welfare in every aspect, and has been an important
research field of macroeconomics. Its exponential effect would bring the dramatic change about the
level of a country’s economy. Investment plays an important role for economic growth, so both the
long-term growth theory and the theory of national income in Western economics have studied it deeply.
China’s economic growth has the characteristics of investment-led. While obtaining the fruits of
economic growth, there is also some shortage of this pattern, such as the imbalances regional
investments, the unreasonable investment constitute, little effect on employment increase. And because
of this pattern of growth is increasing the pressure on the environment, no conducive to ownership
reform, increasing the pressure of outlet, and inhibit the spending power, it is not sustainable. To avoid
the “middle income trap”, Chinese economic growth pattern urgently need to change from
investment-led to both investment and consumption led pattern by translate the scale and structure of
investment.
Keywords: Economic Growth Pattern, Investment, Region
1 Introduction
Since the problem of economic growth have affected the welfare and every aspect of people life, which
is of great importance in economics. To design and implement the economic policy which could help to
promote the economic welfare, policy makers must be clearly understand factors which could determine
long-term economic growth and the short-term fluctuations of the economic cycle. The main objective
of modern macroeconomics is as fuller as possible to understand the operation mode of economic
operation and how specific policy changes may cause a variety of needs and respond to the impact of
attacks.
If a country’s economy to the exponential growth at the rate of 1%, then the economy scale will be
doubled in 70 years. The benefits of economic growth will not immediately apparent, however, the
growth of the welfare effect will be very obvious if the growth has been remained in a few years. Even
if only a small difference on economic growth rates between two countries, the great changes will occur
after a few years later. In today’s world, some countries have maintained a long-term growth, so its
national strength has been greatly strengthened, and its people lived a prosperous life; while others,
long-term economic stagnation, or even negative growth, compared with its astonishing poverty. Macro
economic growth is undoubtedly the most fascinating part of economic research.
2 The Economic Growth Theories: Long time and Short-term Analysis
Western economics have expounded investment as the important role of economic growth in both the
long-term growth theory and Keynesian theories.
2.1 Long-term growth theory
In the long-term growth theory, since from the classical theory of economic growth, after HarrodDomar model, neoclassical growth theory, new growth theory and new institutional economics,
investment in various schools are affirmed the important role of economic growth, which lead to capital
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formation, investment, and capital, labor and technological progress and other factors led to a country’s
technological progress.
2.2 National income theory
The Keynesian theory makes the analysis of investment role in economic growth from the perspective of
a short-term economic growth. Keynes had establishment the theory system of national income. In the
theory of national income, from the perspective of the total expenditure, gross national income could be
summed by three parts, which are investment demand, consumption demand and net exports demand.
These three demands constitute a country’s gross demand, and increasing in any of the three demands
will promote the use of idle resources in economy, increase employment opportunities and revenue. In
this analytical framework, Keynes views that when private investment is state on low-level, the
economy’s aggregate demand is too low. Meanwhile, government should come forward to solve the
problem of low gross demand, and the effective way is to use the fiscal policies and monetary policies
appropriately to increase the level of aggregate demand in the economy, and thus lead to the economic
growth.
In short, the long-term growth theory is more emphasis on the supply side of economic growth, while
the Keynesian theory of national income is more focused on the demand side of economic growth. But
both of those two theories affirm the important role of investment in economic growth.
3 The Characteristic of China’s Economic Growth: Investment-led
As a country of gradually establishing a market economy from 1978, China has achieved great
economic success which is praised in the worldwide, and known as the “BRICs” with India, Russia and
Brazil together. And since the worldwide financial crisis in 2008, China’s outstanding performance of
steady growth has brought the confidence of out of the crisis to other countries. The face of long-term
high growth of China’s economy interest Western economists, and has been called “the mystery of
China’s economic growth” by them. They tried to interpretation the reason of China’s high speed
growth from different perspectives or levels. Although dependent on foreign capital, said that rural
reform, the labor cost advantage that the political system that such explanations have been proposed, but
these explanations are simply point the process of China’s economic growth to a driver or a certain
surface features, or even simply do not have the convincing, but did not see the Chinese economy in the
distinctive features of investment-led growth.
3.1 China’s investment-led economic growth pattern: characteristics and mechanism
China’s economic growth has a feature of strong government-led investment-led.
From view of microeconomics statistics data, China’s investment is remarkable rising along with
China’s rapid economic growth. Different from other countries, whose investment is led mainly by
private owners, China’s investment-led economic growth is a long, large-scale investment progress
which is mainly dominated by the government and state-owned enterprises. This kind of investment
took a major share in the share of total investment than, and a large number of flows went to
infrastructure construction, those bringing the final consumption rate of national income in the
long-term is decline.
From the view of growth mechanism, the long, large-scale investment on economic growth can indeed
play a stimulating role. On the one hand, in the short term, investment performance is a need to improve
the economy and employment levels of various resources, thereby increasing the national income. On
the other hand, in the long term, the increasing in investment in fixed assets to increase capital stock
means that, when the capital stock increased faster than population growth rate, not only to meet the
capital widening, but also realize the deepening of capital, thereby improving a country’s labor
productivity, and leading to economic growth.
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China’s investment-led economic growth is not only coincidence the discipline of economic growth
theory, but has also been confirmed by empirical testing. It can be found by measuring that China’s
fixed asset investment are the Granger reasons for China’s economic growth both in the short and long
term. This shows that Chinese continuing large-scale investments is indeed to pull the country’s
economic growth in both short and long term.
3.2 The current problems
It must be pointed out that China’s investment-led economic growth model has achieved a rapid and
sustained economic growth, but also exposed many problems, which is embodied in the following
aspects.
3.2.1 Investments have large regional differences. China’s investment is mainly in the eastern region,
and the proportion of the total amount of investment of central and western regions is low. Sustained
high proportion of investment in the eastern part has made its capital stock much higher than the central
and western regions, and also made the labor productivity to be improved significantly in eastern region.
3.2.2 The Constitute of investment is unreasonable. The investment in fixed assets is during a long time
and at large scale. And the investment structure has the features that the construction and installation
works is at a high level in long-term, and equipment purchase of tools is at a lower proportion than
others. Furthermore, most of China’s investment funds have flowed to the construction sector, which is
accounted for the high proportion of real estate investment. This situation of investment structure leads
to that the role of investment in the promotion of production and technological progress is deficiencies.
3.2.3 The promotion effect of regional investment on employment is not obvious. In addition, empirical
tests show that China’s fixed asset investment on economic growth has a strong promoting role, but not
obvious role in promoting employment. As the industrial upgrading and industrial transfer of eastern
region, a large number of labor-intensive enterprises have settled down in central and western regions,
which contributed to the increase in local employment. However, on the whole, the investment has not
obvious employment promotion.
3.2.4 Investment has inhibited the ability of consumption. Both investment and consumption are
elements of aggregate demand. In the case of a weak contribution of net exports, from the consumption
accounting point of view, the continue growth of the proportion of investment means that the declining
share of final consumption. In the final consumption, the share of government consumption is remained
unchanged, but the share of consumer in GDP is declined. There are three main reasons for the
decline of consumption proportion. Firstly, the total income of the residents in the proportion of gross
national income continued to decline, reducing the people’s consumption capacity. Secondly, significant
income gap within the residents, the growing gap between rich and poor. In generally, the rich’s
propensity of consumption is lower than the poor people’s. So when too much wealth has concentrated
in the hands of a few members of society, the society propensity of consumption will be lower than the
propensity of consumption in the situation which is more evenly distribution of wealth. Big gap between
rich class and poor class has none conducive to promote consumption. Thirdly, the residents themselves
have to burden much social security and housing pressure, which has limited numerous low-level
income people’s consumption ability and inhibited the people’s consumption needs. To realize the
consumer role in promoting the economy, the task is still arduous.
4 Investment-led Growth Pattern is Non-sustainable
Strong long-term investment-led growth has made great achievements, but it is also accumulated a lot of
hidden dangers for the further development of Chinese economy.
China’s investment-led economic growth pattern has caused tremendous pressure on resources and
environment. As the consumption of large quantities of resources, many of the resources cities those had
boomed because of the resources have suffered a failure of resources, and is facing the challenges of city
development transition. The resource consumption although improved the people’s income on a certain
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extent, but also deteriorated living environment. For instance, a large number of trees were cut down, a
large number of inland waters are polluted by industrial waste water, dust particles over the city
increased carbon dioxide emissions of greenhouse effect, and so on. We couldn’t treat Chinese
environmental problem just by a small glimpse, but should make sure the investment on ecology
environment as well as investing the economic.
The Second problem is the present growth pattern is not conducive to ownership structure. The
maintaining of China's economic vitality has an important reason that ownership reform in China has
conformed to the development of productive forces. The existence of non-public economy has brought a
great activity to market economy, and promoted the flow of resources and utilization. The
government-led investment has crowding-out effect on private investment, which improved the
threshold of access to investment funds for non-public economic.
Thirdly, the present pattern has inhibited the improvement of people’s living standards. The irrational
investment structure has caused national income could not effectively improved. It is showed by the data
that the rate of national income growth is lower than the economic growth rate. People have to reduce
their common consumption because of the low-level of income and the heavy burden of life. Coupled
with the investment funds is flowing to real estate and manufacturing production tools, the production of
consumer goods industry has also be inhibited. Residents can not access to cheap high-quality consumer
goods, and their life quality is not so high.
Fourthly, the present growth pattern has resulted in a huge export pressure. As the capability of domestic
demand for products has been limited, the excess production capacity has to turn to external demand for
release. However, the international situation is changing, the trade friction is intensifying, and the
pressure of RMB appreciation, all those reasons reduced the level of external demand and the price
competitiveness of “Made in China”. The dependence on external demand outlook is not optimistic.
5 The Acceleration of Economic Growth Mode Transformation
The analysis above shows that the current investment characteristics are not sustainable, China’s current
investment-led economic growth can not be sustained, and economic growth mode transformation is
imminent urgency.
We should first change the lacks of current investment pattern, and adjust the investment scale and
investment structure, focus on the coordination of the investment level among different regions, and
promote the eastern investment supports to the central and western region. Through increased
investment levels of central and western regions, we could make up their capital widening issues and to
further the realization of capital deepening, and increase the per capita level of capital stock of central
and western regions and raise their labor productivity.
Then, we should focus on improving household income and promote consumption, so that China’s
economic growth could gradually shift from investment-led pattern to the both consumption and
investment-led growth pattern. China is a very broad area, the development level of eastern central and
western regions constitute a Goose structure which is headed by eastern area. As the industrial
upgrading and transfer of industries from the eastern region, central and western regions have into their
take-off stage. Investment should take into account the industrial structure and development focus, to
improve the social security system, to promote the employment of residents, to improve people’s
income, people’s consumption capacity and consumer willingness, to promote China’s economic growth
mode transformation.
6 Prospects
Although Chinese economy is facing heavy pressure, but the Nobel laureate Fogel still has made
optimistic predictions of China’s economic growth. He predicts that China’s GDP will account for 40%
of the world by 2040, which means China will become one of super-rich countries in the world, and the
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level of per capita GDP will be the second one which is only lower than the United States’. Although
Fogel forecast China’s economic prospects are very optimistic, but the road of China growth ahead is
not smooth. Chinese still face many challenges, and the realization of Fogel’s forecast depends on
increasing the intensity of Chinese economic growth mode transformation.
Chinese still have to face many challenges. China has entered the middle-income stage, has need to
adjust the various contradictions and problems which is accumulated in the past economic growth
process, to explore the potential energy of economic growth, to realize the endogenous economic growth,
and across the “middle-income trap” successfully. To achieve the transformation of economic growth
mode, we should focus on human capital development, pay attention to improve scientific and
technological progress and innovation, to promote the employment structure and increase income, and
to ensure the resident consumption could play the active role in Chinese economic growth.
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