Understanding-Chinas-Growth-Past--Present--and-Fut

AmericanEconomicAssociationUnderstandingChina'sGrowth:Past,Present,andFutureAuthor(s):XiaodongZhuSource:TheJournalofEconomicPerspectives,Vol.26,No.4(Fall2012),pp.103-124Publishedby:AmericanEconomicAssociationStableURL::25/05/201301:43YouruseoftheJSTORarchiveindicatesyouracceptanceoftheTerms&ConditionsofUse,[e-mail]..AmericanEconomicAssociationiscollaboratingwithJSTORtodigitize,preserveandextendaccesstoTheJournalofEconomicPerspectives.:43:25AMAllusesubjecttoJSTORTermsandConditionsJournalofEconomicPerspectives—Volume26,Number4—Fall2012—Pages103-124UnderstandingChina'sGrowth:Past,Present,andFutureXiaodongZhuThepaceandscaleofChina'seconomictransformationhavenohistoricalprecedent.In1978,Chinawasoneofthepoorestcountriesintheworld.TherealpercapitaGDPinChinawasonlyone-fortiethoftheU.S.levelandone-tenththeBrazilianlevel.Sincethen,China'srealpercapitaGDPhasgrownatanaveragerateexceeding8percentperyear.Asaresult,China'srealpercapitaGDPisnowalmostone-fifththeU.S.levelandatthesamelevelasBrazil.Thisrapidandsustainedimprovementinaveragelivingstandardhasoccurredinacountrywithmorethan20percentoftheworld'spopulationsothatChinaisnowthesecond-largesteconomyintheworld.Tosetthestageinthispaper,IwillbeginbydiscussingbrieflyChina'shistoricalgrowthperformance:thatis,howChinawentfromtheworld'sleadingeconomicpowerabout900yearsagotoasituationinwhichitessentiallymissedtheIndustrialRevolutionandhadclose-to-zerogrowthinpercapitaGDPfrom1800to1950.Ithenpresentgrowthaccountingresultsfortheperiodfrom1952to1978andtheperiodsince1978,usingasmystartingpointastandardgrowthaccountingexercisethatdecomposesthesourcesofgrowthintocapitaldeepening,labordeepening,andproductivitygrowth.Fortheperiodfrom1952to1978,China'spercapitaGDPdidrisebyabout3percentperyear,butallofthegrowthwasduetoforcedincreasesingovernmentinvestmentaswellasariseineducationlevels.Productivityactuallyregressedduringthisperiod,asChina'seconomywentthroughtheenormousdisruptionsofthefamineinthelate1950sandtheCulturalRevolutionstartinginthelate1960s.Butthemainfocusofthispaperwillbetoexaminethesourcesofgrowthsince1978,theyearwhenChinastartedeconomicreform.PerhapsmXiaodongZhuisProfessorofEconomics,UniversityofToronto,Toronto,Ontario,[e-mail].=10.1257/jep.26.4.103Thiscontentdownloadedfrom115.156.64.243onSat,25May201301:43:25AMAllusesubjecttoJSTORTermsandConditions104JournalofEconomicPerspectivessurprisingly,givenChina'swell-documentedsky-highratesofsavingandinvestment,IwillarguethatChina'srapidgrowthoverthelastthreedecadeshasbeendrivenbyproductivitygrowthratherthanbycapitalinvestment.Thegrowthcontributionsmadebyhumancapitalaccumulationandanincreaseinlaborparticipationarepositivebutmodest.Iwillalsoexaminethecontributionsofsector-levelproductivitygrowth,andofresourcereallocationacrosssectorsandacrossfirmswithinasector,toaggregateproductivitygrowth.Overall,gradualandpersistentinstitutionalchangeandpolicyreformsthathavereduceddistortionsandimprovedeconomicincentivesarethemainreasonsfortheproductivitygrowth.Despitetherapidgrowthofthelastthreedecades,China'sproductivityisstillonly13percentoftheU.S.level,whichsuggeststhatChinastillhasplentyofroomforproductivitygrowththroughfurthereconomicreforms.EvenifChinacanreplicateitsextraordinarygrowthperformanceforanothertwodecades,itsproductivitywouldstillbeonlyaround40percentofthefrontierproductivitylevel.Beforedelvingintotheanalysis,letmefirstmentionthethreemaindatasourcesthatIuseforthispaper.ForexaminingChina'shistoricalperformance,IusethedataconstructedbyMadison(2007);forcomparingChinawithothercountries,IusethepurchasingpowerparitydatafromPennWorldTable(PWT7.0);andfordetailedgrowthaccountingexercises,ImainlyusethedataseriesmycoauthorandIconstructedforBrandtandZhu(2010),inwhichwemadeadjustmentstoChina'sofficialstatisticsbyusingalternativedeflatorsandinformationfromhouseholdsurveys.China'sHistoricalEconomicPerformanceChinawasaworldeconomicandtechnologicalleaderinthepremodernera.ManyhistoriansthinkthatChina'spremoderneconomicperformancereachedapeakintheSongDynasty(circa1200)whenChinaisthoughtohavehadthemostadvancedtechnologies(NeedhamandRonan1978),thehighestironoutput(Hartwell1962),thehighesturbanizationrate(Chao1986),andthelargestnationaleconomy(Madison2007)intheworld.However,sometimebetween1500and1800,ChinalostitsleadershippositiontoWesternEurope.Figure1plotsAngusMadison'sestimatesofpercapitaGDPforChinaandWesternEurope.Accordingtohisestimates,China'spercapitaGDPstagnatedbetween1500and1800whileWesternEurope'spercapita