China's Growth In the Past Decade: A Natural 'Catch Up'?

1. China’s Growth In The
Past Decade:
A Natural ‘Catch Up’?
Arthur Kong, Nadimah Mohammed, Marshiella Pandji,
Samira Noronha and Jessie Levine
Monday 5 May 2015

2. Outline
● What is a “natural catch-up”: the Solow Model
● What has China’s growth been over the past decade?
● Decomposing China’s growth: Is it a ‘catch up’?
● Conclusion

3. What is a ‘Catch Up’: The Solow Model
Definition:
A country is catching up when it is in its stage prior (in transition to) to the steady state.
We understand that it is conditional convergence where each country is heading
towards its own steady state, rather than one steady state for all countries.
If China’s growth is due to a ‘catch up’, we expect:
Growth should be primarily driven by capital accumulation

4. What is a ‘Catch Up’: The Solow Model
k1 k2

5. China’s Growth in the Last Decade
Source: World Bank Data Bank
China’s average
growth rate
between 2000 to
2013 was 9.9%
compared to 7%
in India, 3.5% in
Brazil and 1.7%
in the OECD

6. Contextualising Growth in the Last Decade
Source: Zhu (2012)
Capital accumulation
is unlikely to produce
such high growth for
for so long based on
the Solow Model
Current decade is a
continuation of more
than 3 decades of
high growth

7. Decomposing China’s Growth
Source: Zhu (2012)
China’s growth in the
last 3 decades
primarily driven by
growth in total factor
productivity
TFP growth
=
Reallocation to
efficient firms (70%)
+
Technological
improvement
(Song, Storesletten and
Zilibotti, 2011)

8. Policy Context
● Pre-1978: Great Leap Forward - state direct all factors of
production toward capital accumulation
● Post-1978: Economic reform (post-Mao)
○ Agriculture Reforms: Reallocation of factors of production
○ Decentralization (to townships and collectives)
○ One Child Policy
● Post-1998: Era of Privatization & Trade Liberalization
○ Opening up of the Chinese economy
○ FDI inflows, China joins WTO (2001)
○ Increased competition has forced manufacturing companies to
become more competitive

9. Where do capital investment & population
growth fit in China’s growth story?
Zhu (2012)

10. How does this fit with the Solow Model?

11. Conclusion
● China’s growth in the past decade does not fit the
“expected natural catch-up of a developing country”.
● Growth primarily driven by gains in total factor
productivity.
● Reduced population growth and capital accumulation
continue to play a role but are not main drivers.

12. Sources
Chow, Gregory C. 1993. “Capital Formation and Economic Growth in China”. The Quarterly Journal of Economics 108(3):
809-842.
Cowen, Tyler and Alex Tabarrok. “Modern Principles of Economics”. 2010 Worth Publishers. Chapter 7: Growth, Capital
Accumulation, and the Economics of Ideas.
Ding, Sai, and John Knight. 2008. “Can the Augmented Solow Model Explains China’s Economic Growth? A Cross-Country Panel
Data Analysis”. Discussion Paper Series Number 380, Department of Economics, University of Oxford.
Hou, Jack W. 2011. “Economic reform of China: Cause and effects.” The Social Science Journal 48: 419-434.
Song, Michael Zheng, Kjetil Storesletten, and Fabrizio Zilibotti. 2011. “Growing Like China.” American Economy Review 101(1):
202–241.
Zhu, Xiaodong. 2012. “Understanding China’s Growth: Past, Present, Future.” The Journal of Economic Perspectives 26(4):
103-124.