This document outlines China's historical economic growth and challenges to its current growth model. It discusses China shifting from increases in physical and human capital between 1952-1978 to participation of total factor productivity growth after 1978. Key reforms in the 1980s expanded the non-state sector and increased agricultural incentives. China has become the world's second largest economy and largest exporter but faces potential slowing growth as it reaches middle income levels and must transition its growth model to become more sustainable and consumption driven.

1. Discussing paper
Transformation of China,
Xiaodong Zhu
Ada Alipaj
Understanding China’s Growth Model

2. Outline
 China’s historical growth performance
 Deficiencies of China’s growth model and challenges
 Institutional reform to transform the development mode
 China’s rise and the importance in world economy
 Critical thinking over China’s growth
 Conclusions

3. China’s historical growth performance

4. China’s historical growth performance
China’s growth: ‘52-’78 from increases in both physical and human capital rather
than increases in productive efficiency.

5. China’s historical growth performance
After 1978, total factor productivity participated in growth.
1/(1 – α) and α is 0.5=>the growth contribution of total factor
productivity growth is
2 × 3.16 = 6.32 percentage points, or 78 percent of the growth
in GDP per capita.
Capital deepening was not the source of China’s growth.

6. Government-led Industrialization
between 1952 and 1978
 Heavy industries investment driven- model of growth after ’48
 The resources for investment by limiting household consumption and setting low
prices for agricultural goods so that forced savings and surpluses extracted from the
agricultural sector could be used for investment in such industries.
 Not sustainable and had grave welfare consequences.
 The Great Leap Forward years (1958–1960) not only failed to raise the GDP growth
rate, it also had such disruptive effects on agricultural production that a severe
famine occurred when China was hit by adverse weather shocks in 1959.
 Heavy taxes on farmers. the agricultural sector included more than 70 % of China’s
labor force Emergency grain imports were frequently needed to meet food deficits.

7. Sectoral Shifts and Productivity
Growth since 1978
 A general policy of Gaige Kaifang or “reform and opening up.” ’76
 The “state sector”(state-owned enterprises and shareholding
companies)
 the “non-state sector”(domestic private firms, foreign-invested firms)
 Two reforms: -collective farminf system to householdresponsibility
system.
-increase of agricultural goods
These=>incietives of farmers=>productivity growth=>China’s agricultural
output increased by 47%. Workers reallocated in nonagricultural sector

8. Reforms that changed the history of
growth
 Two reforms in ‘80s:
-dual track system(state owned enterprises were given quotas, but also
allowed to buy and sell inputs&output in market prices)
-townships enterprises(decision-making powers to lower-level governments
and provided them with fiscal incentives )
Between 1978 and 1988, the share of total employment in non-state enterprises
increased from 15% to 39%
The expansion of employment in the non-state sector =>TFP growth averaging
5.87% a year

9. 1988 –2007: From Reform without Losers to
Inevitable Tradeoffs To impressive Growth
State-owned Non-state owned
Average annual growth Average annual growth
rate of tot prod 2.96% rate of tot prod 3.66%
Townships a failure: lack of technological innovation
lack of competition
lack of effectivity
non performing loans
trapped to government
China after joining WTO: -cut tariffs,
-broadened trade rights, and
-liberalized its regime for foreign direct investment

10. Number changes since reforms

11. Rise of China
 The world’s second largest economy after the U.S. at market
exchange rates since 2010.
 The largest exporter after overtaking Germany in 2009.
 The largest manufacturer followed by the U.S. in value added
measured in current prices.
 The second largest recipient of FDI after the U.S. with about $100
billion in 2010.
 The world's largest holder of foreign-exchange reserves. (about
USD 3 trillion till 2011Q1)

12. China's Share of World GDP (%)
Source: World Development Indicators

13. China's Share of World Exports of Goods
and Services (%)
Source: World Development Indicators

14. Global impacts of China’s growth
Source: Arora and Vamvakidis (2010)
(cumulative effects of a 1 percentage point rise in China’s growth on growth in other countries, in
percentage points)

15. China factor
 China’s price
 China’s market
 China’s role in global governance

16. Potential growth will slow down
 The study shows: In the past three decades, China’s potential growth
rate is 9.5%, about 1.3 percentage point is the cost of environment,
entering the new century, the contribution of environment is 2
percentage point to GDP growth.
 Taking account of the demographic change (i.e., the reduction of
working age population) and low carbon constraint, the potential
growth rate will be below 8% in the next decade.

17.  Economic catching-up with distorted factor prices wastes resources and
damages the environment.
 Over-dependence on investment and heavy chemical industries are
especially unsustainable with the depletion of natural resources.
 Unbalanced growth momentum
 Demand side: rely heavily on investment and export, not private
consumption
 Supply side: rely heavily on secondary industry, not tertiary industry
 Factor input side: rely heavily on capital and labor, not TFP
 A narrow-minded focus on growth without fair distribution leads to a mismatch
between economic and welfare progress.
 Mid-income trap
Unbalanced growth Challenges China’s future
development

18. Middle income transition

19. Government role
 Transformation of government role
 Government should play down its role in promoting economic growth and
gradually evolve into a service-oriented organ.
 Adjust the evaluation system of local governments’ performance
 Local governments' passionate involvement in economic activities is
rooted in the evaluation system of civil servants. Only when more social
indicators, such as the growth rate of residents' incomes, employment,
social security and environmental indices, are made a decisive part of the
evaluation system can local governments start seriously thinking of
changing their roles.

20. Conclusions
 Transformation of growth model cannot just rely on government directives.
More importance should be attached to market mechanism such as price signals
and tax incentives.
 Only when the prices of energy resources are reasonable and taxes on
resources and the environment are in place, can the ambitious energy
saving and emission reduction goals be met.
 Only when direct taxes are increased by a large margin, can local
governments be prompted to build better local industrial structures rather
than just blindly expanding the scale of industry.
 Only when relations between central and local finances are properly
managed can the over-dependence on land transfer and lopsided
malformation of the real estate market be corrected.

21. THANKS