Rethinking China’s Growth Model and a look at different factors in China’s Economic Rise

The South China Morning Post has Zhang Jun,professor of economics and director of the China Centre for Economic Studies at Fudan University, Shanghai, look at the role of efficiency in China’s growth model He identifies as a primary consideration is what drove historical total factor productivity gains, but he does not provide an answer. He lays out the case why it is important.

On the demand side, many economists endorse a shift from investment-led to consumption-driven growth. Even more popular is the supply-side recommendation of a shift from extensive to intensive growth – that is, from a model based on capital accumulation to one propelled by gains in efficiency, measured by total factor productivity.

These recommendations are presumably influenced by Paul Krugman’s criticism in 1994 of Soviet-style extensive growth in East Asian economies. At the time, Jeffery Sachs disagreed, asserting that the East Asian model included far more efficient market-based investment allocation than the Soviet model did; nonetheless, the criticism stuck.

But empirical research reveals a fundamental problem with this argument: China’s total factor productivity has grown at an average annual rate of nearly 4 per cent since Deng’s reforms began. If the US economy, with a total factor productivity growth rate of only 1-2 per cent annually, is seen as efficiency-driven, why is China’s not?

More important, if China’s figure is expected to fall, as major drivers like the convergence effect wane, what does it mean to say that efficiency gains should propel China’s future growth?

Consider the facts. A conservative assessment by Louis Kuijs of the World Bank shows that, from 1978 to 1994, China’s GDP grew by an average of 9.9 per cent annually, labour productivity increased by 6.4 per cent, total factor productivity rose by 3 per cent, and the capital-labour ratio increased by 2.9 per cent. From 1994 to 2009, the increases were 9.6 per cent (GDP), 8.6 per cent (labour productivity), 2.7 per cent (total factor productivity) and 5.5 per cent (capital-labour ratio).

While capital has been the largest contributor to China’s GDP, the economy’s total factor productivity performance has been impressive – something that cannot be explained by an extensive growth pattern. Indeed, even Hong Kong – the East Asian economy with the best such performance – registered an increase of only 2.4 per cent from 1960 to 1990.

China’s total factor productivity has contributed 35-40 per cent to GDP growth, compared to an estimated 20-30 per cent in East Asia’s “four tigers” (Hong Kong, Singapore, South Korea and Taiwan).

Even so, China’s figure remains well below levels in the US economy, where total factor productivity contributes over 80 per cent to growth. But this argument ignores the fact that China has been experiencing double-digit GDP growth, while America’s has averaged only 2-3 per cent.

If transforming China’s growth pattern were simply a matter of increasing total factor productivity’s contribution to GDP to US levels, China’s annual growth would have to drop to below 5 per cent. Given 8 per cent growth, total factor productivity would have to grow 6.4 per cent annually.

This is almost certainly impossible, owing to the gradual diminution of the major drivers of such growth over the past 30 years.

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