Sustaining Growth of the People’s Republic - Recherche en IA spécialisée au MIT

Sustaining Growth of the People’s Republic
of China
∗
JUSTIN YIFU LIN AND FAN ZHANG

This paper reviews economic growth theory in the framework of economic devel-
opment and explores the possibility of sustained growth in the People’s Republic
of China (RPC) in the long run. We argue that the PRC has the potential to sus-
tain relatively high growth rates. D'abord, since the technological gap with major
developed countries still exists, the PRC can continue to enjoy its “advantage of
backwardness” in the near future. Deuxième, large-scale infrastructure investment,
which began several decades ago, may possibly extend to the future and provide
the country a basis for further growth. Troisième, structural readjustment, which is
needed in many areas, should similarly be able to support the Chinese economy.
This paper argues that to sustain long-term growth in the PRC, a number of gen-
eral preconditions need to be fulﬁlled—these include well-functioning markets,
a minimum amount of investment, continued structural upgrading, and effective
government.

Mots clés: GDP growth rate, technological innovation, infrastructure invest-
ment, structural adjustment
Codes JEL: E6, O43, O47

je. Introduction

Economic development of the People’s Republic of China (RPC) over the past
30 years has been an intriguing phenomenon. The country provides an interesting
case for the study of economic growth, especially the sources of growth and expec-
tations about future performance. With the PRC’s declining growth rate during the
past 4 années, there have been heated debates recently on the potential growth rate
of the country in the medium and long run. Lin (2012un) argues that the Chinese
economy has the potential to grow by 8% annually for another 20 years beginning
dans 2008.

This paper attempts to provide answers to the question of whether or not the
PRC can indeed maintain a relatively high growth rate in the coming decades. Nous
ﬁrst present a review of the history of growth performance over the past 35 années
including the recent slowdown, which had triggered concern about long-run growth

∗Justin Yifu Lin (corresponding author, justinlin@nsd.pku.edu.cn) and Fan Zhang (zhangfan@nsd.pku.edu) are both
professors at the National School of Development of Peking University. The authors thank ADB for organizing the
symposium, the referees for useful comments, and Qingqing Chen for her research assistance.

Revue du développement en Asie, vol. 32, Non. 1, pp. 31–48

C(cid:3) 2015 Banque asiatique de développement
et Institut de la Banque asiatique de développement
Publié sous Creative Commons
Attribution 3.0 IGO (CC PAR 3.0 IGO) Licence

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32 ASIAN DEVELOPMENT REVIEW

potential. We also provide a review of the various theories on sustaining growth in
the long run, which serve as the basis for subsequent analysis of the PRC’s growth
potential. Enfin, we discuss the preconditions for sustained growth.

II. Historical Review of the PRC’s Growth Performance

The PRC has been experiencing extraordinary growth in the past 3 and a half
decades, with annual gross domestic product (PIB) growth averaging 9.8% over
the 35-year period since 1978. No country has ever grown as fast or for as long
a time as the PRC during the past 35 années. Before the transition from a planned
economy to a market economy in the late 1970s, the country had been trapped in
poverty for centuries. Cependant, it is now an upper-middle-income economy, avec
GDP per capita of over $6,000. Prior to the late 1970s, the PRC failed to achieve dynamic growth, as it applied a strategy that prioritized the development of heavy industries. From the 1950s to the 1970s, the Chinese government subsidized the ﬁrms in priority sec- tors through various price distortions and protections. Such a strategy was clearly inconsistent with the comparative advantage of the country during the period. Par conséquent, resources became misallocated, total factor productivity (TFP) remained low, and growth was driven mainly by input increases. Firms in the priority sectors became unviable in an open and competitive market. Despite annual GDP growth of 6.1% and the establishment of a complex system of advanced industries during 1952–1978, household consumption grew by only 2.3% annually during the period (Lin 2012a). The PRC has achieved rapid growth since the start of economic reform in the late 1970s, with the extraordinary performance partly due to the adoption of a gradual, dual-track transition strategy. On one hand, the government provided protection in the form of transitory subsidies to prioritized heavy industry sectors to maintain stability. On the other hand, it liberalized entry into sectors where the country had comparative advantage based on factor endowments. The PRC recently experienced a decline in economic growth, which had fallen from 10.4% dans 2010 à 7.7% dans 2013. This is the longest period of growth deceleration since the country’s transition to a market economy in 1979 and has naturally raised concern about the sustainability of growth. Cependant, the slowdown had not been due to overinvestment, ﬁnancial repres- sion, the state-led growth model, or other internal structural problems frequently mentioned by observers predicting a crash in the Chinese economy.1 The recent slowdown of the Chinese economy in fact was mainly caused by external and 1These include Paul Krugman in his columns (par exemple., Hitting China’s Wall, New York Times, 18 Juillet 2013) and Nouriel Roubini in his articles (par exemple., China’s Bad Growth Bet, Project Syndicate, 14 Avril 2011). Others who have commented on the issue include John Aziz (Is China’s Economy Headed for a Crash? The Week, 13 Janvier 2014), l Téléchargé à partir du site Web : / / direct . m je t . / e du a d e v / art – pdlf / / / / / 3 2 1 3 1 1 6 4 1 1 0 6 a d e v _ a _ 0 0 0 4 5 pd . f par invité 0 8 Septembre 2 0 2 3 SUSTAINING GROWTH OF THE PEOPLE’S REPUBLIC OF CHINA 33 Chiffre 1. Growth Rates of Exports and Investments of the PRC, 2000–2013 PRC = People’s Republic of China. Source: National Bureau of Statistics. 2014. China Statistical Yearbook 2014. Beijing: China Statistics Press. cyclical factors—speciﬁcally, the slow recovery of advanced economies after the 2008 global ﬁnancial crisis, which has repressed export growth, and the slowdown of the country’s investment growth due to the completion of projects supported by the ﬁscal stimulus in the aftermath of the 2008 crise (Chiffre 1). These same factors triggered growth deceleration in other emerging market economies and in high-income economies. As seen in Figure 2, the slowdown in the PRC had been relatively mild compared to that in other countries. Facing the potential of a “new normal” in high-income countries (c'est à dire., pro- tracted low growth), export growth will likely be subdued in the coming years. The PRC’s growth will therefore have to depend on domestic demand—investment as well as consumption. How high the country’s growth will be in the coming years meanwhile will depend on its potential growth rate. III. Theories on Sustaining Growth in the Long Run The development of theories of economic growth in the long run has been remarkable in the past half century. Dans cette section, we review the basic features of some of the major theories in a framework of economic development. Nathan Bell (How to Prepare for a China Crash, The Age, 24 Septembre 2012), Vitaliy Katsenelson (How China Will Crash and Burn, Forbes, 6 Juillet 2011), and John Mauldin (The Only Question about the China Crash is When, Business Insider, 24 Novembre 2010). Some observers point to the collapse of the PRC as the biggest risk to the world economy, par exemple, as articulated by George Soros in one of his articles (par exemple., The World Economy’s Shifting Challenges, Project Syndicate, 2 Janvier 2014). In these articles, ADB recognizes China as the People’s Republic of China. l Téléchargé à partir du site Web : / / direct . m je t . / e du a d e v / art – pdlf / / / / / 3 2 1 3 1 1 6 4 1 1 0 6 a d e v _ a _ 0 0 0 4 5 pd . f par invité 0 8 Septembre 2 0 2 3 34 ASIAN DEVELOPMENT REVIEW Figure 2. GDP Growth in the PRC and Selected Countries in 2010–2013 GDP = gross domestic product, PRC = People’s Republic of China. Source: World Bank. World Development Indicators database. The neoclassical growth model, developed in the mid-20th century, is an ex- ogenous growth model of long-run growth set within the framework of neoclassical economics. In these models, the long-run growth rate is exogenously determined by either the savings rate (the Harrod–Domar model) or the rate of technical progress (the Solow model). Solow’s model assumes that factors of production are paid ac- cording to the value of their marginal products. The marginal product of capital will fall if capital rises faster than labor, which is normal for a growing economy, leading to a fall in the growth rate of output. Neoclassical growth theory therefore indicates a convergence or catch-up process in which developing countries acquire techniques and learn how to use them efﬁciently. This supports arguments for the PRC’s long-run growth slowdown. In the late 1980s, a number of economists began to analyze the nature and role of the residual element in neoclassical growth theories by making it endogenous (Romer 1986 et 1990, Lucas 1988). In endogenous growth theory, connaissance (technologie) is the instrument of production that is not subject to diminishing returns. The theory tries to explain the lack of convergence by introducing the role of human capital, maintaining that economic growth is primarily the result of endogenous forces—e.g., investment in human capital, innovation, and knowledge—and not external forces. Economic growth and convergence will be faster the more the economy is invested in human capital. Aghion and Howitt (1992) developed a model of growth through creative destruction in which innovations serve as the underlying source l D o w n o a d e d f r o m h t t p : / / direct . m je t . / e du a d e v / art – pdlf / / / / / 3 2 1 3 1 1 6 4 1 1 0 6 a d e v _ a _ 0 0 0 4 5 pd . f par invité 0 8 Septembre 2 0 2 3 SUSTAINING GROWTH OF THE PEOPLE’S REPUBLIC OF CHINA 35 of growth. In their model, the amount of research in any period depends on the expected amount of research next period, which comes from created destruction. The growth rate and the variance of the growth rate are increasing functions of the size of innovation and skilled labor force, and the productivity of research. Development economics uses growth theory to analyze economic growth in developing countries. The theories have come in three waves since the 1950s. The ﬁrst wave involved structuralism (Rosenstein-Rodan 1943, Prebisch 1950, Chanteur 1950). Based on this thinking, governments were advised to develop industries that were too far advanced compared to their corresponding countries’ level of devel- opment and that went against comparative advantage. Firms were thus nonviable in competitive markets and needed government policy support for initial investment and continuous operation (Lin 2009). The second wave of development thinking, neoliberalism, was encapsulated in the Washington Consensus. The term originally referred to the reform package put together by ﬁnancial institutions based in Washington, DC and recommended to developing countries mired in crisis in the late 1990s. It has since been used to refer to a more general orientation toward a strongly market-based approach. The Washington Consensus set up a standard for developing countries based on the successful practices of developed economies. It opposed governments playing a proactive role in facilitating entry of ﬁrms into sectors even if consistent with a country’s comparative advantage. It also failed to recognize that distortions in developing countries may be endogenous and advised governments to immediately eliminate them, causing the collapse of previously prioritized sectors. The third wave involved what is known as the new structural economics. This development theory argues that each country needs to adjust its economic structure in the process of development according to its comparative advantage as determined by factor endowments (Lin 2012b). It applies a neoclassical economics approach to understand the determinants of economic structure and its evolution. Industrial structure is assumed to be endogenous to the endowment structure, which is given at any speciﬁc time and changes over time. New structural economics argues that, following comparative advantage, which is determined by the endowment structure, developing industries is the best way to upgrade the endowment structure and sustain industrial upgrading, income growth, and poverty reduction. If economic structure upgrading lags behind changes in endowments, the economy will be less competitive, and growth will be lower than the potential growth rate. Improvement of the economic structure provides new sources of growth by reducing the inefﬁciency within and between sectors. Struc- tural upgrading needs a competitive market system and a facilitating state. New structural economics also postulates that industrial policy is desirable, and that target industries should be in line with an economy’s latent comparative advantage. The theory points out that as long as its government chooses the right set of policies, a developing country has the potential to grow continuously at 8% l Téléchargé à partir du site Web : / / direct . m je t . / e du a d e v / art – pdlf / / / / / 3 2 1 3 1 1 6 4 1 1 0 6 a d e v _ a _ 0 0 0 4 5 pd . f par invité 0 8 Septembre 2 0 2 3 36 ASIAN DEVELOPMENT REVIEW or more for several decades and to become a middle-income (or even high-income) country in one or two generations. A review of growth theory in the framework of development tells us that sustaining growth depends on many factors, not just the productivity of physical capital. It is inﬂuenced as well by human capital, technologie, and structural change in the economy. All these factors help to determine growth at the dynamic path. IV. The PRC’s Potential for Sustained Growth in the Long Run By adopting correct policies, the PRC has the potential to sustain dynamic growth in the coming decades. This section presents possible reasons for the coun- try’s sustained long-run performance. These are the “advantage of backwardness,” the effect of capital investment, and structural readjustment. UN. The Advantage of Backwardness A backward country has an advantage in economic development because it can borrow from a large backlog of technological innovations from advanced countries and adopt the latest technology without facing resistance from users of old technologies (Gerschenkron 1962). It can thus reduce the costs and risks of technological innovation, allowing it to grow faster than advanced countries. Since the late 1970s, the PRC has achieved high growth by tapping into this advantage of backwardness. After 35 years of dynamic growth, does the PRC still have the potential to grow dynamically? The answer depends partly on whether or not the advantage of backwardness still exists. One way to measure this is by the gap between per capita GDP of the PRC and of the United States (NOUS). Per capita GDP represents a country’s average labor productivity, which in turn reﬂects the country’s average technological level. The PRC’s per capita GDP measured in purchasing power parity (PPP) dans 2008 as a percentage of that of the US was similar to that of Japan in 1951, the Republic of Korea in 1977, and Taipei,China in 1975 (Tableau 1). Annual GDP growth reached 9.2% in Japan during 1951–1971, 7.6% in the Republic of Korea during 1977–1997, et 8.3% in Taipei,China during 1975–1995. After 20 years of growth, Japan’s per capita income measured in PPP was 66% that of the US in 1971. The corresponding percentage for the Republic of Korea was 50% dans 1997, while that for Taipei,China was 54% dans 1995. Chiffre 3 shows the per capita GDP of Asian economies relative to the US per capita GDP from the year these economies started to take off—1951, 1975, 1977, et 1980, respectivement, for Japan; Taipei,Chine; la République de Corée; and the PRC. Tableau 2 meanwhile indicates the degree of the advantage of backwardness l D o w n o a d e d f r o m h t t p : / / direct . m je t . / e du a d e v / art – pdlf / / / / / 3 2 1 3 1 1 6 4 1 1 0 6 a d e v _ a _ 0 0 0 4 5 pd . f par invité 0 8 Septembre 2 0 2 3 SUSTAINING GROWTH OF THE PEOPLE’S REPUBLIC OF CHINA 37 Tableau 1. Asian Economies’ Per Capita GDP as a Percentage of the US Per Capita GDP (%) 1951 1967 1971 1975 1977 1987 1995 1997 2008 21 8 9 5 50 11 14 5 Japan Republic of Korea Taipei,China PRC GDP = gross domestic product, PRC = People’s Republic of China, US = United States. Note: GDP per capita is measured in 1990 international Geary-Khamis dollars. Sources: Authors’ calculations; Maddison, Angus. 2011. Historical Statistics of the World Economy: 1–2008 A.D. Tables 2c and 5c. Available online at: www.ggdc.net/maddison/Historical_Statistics/horizontal-ﬁle_02-2010.xls. 69 21 24 5 66 15 18 5 70 19 22 5 75 32 39 8 80 50 57 12 81 48 54 12 73 63 67 22 Chiffre 3. Asian Economies’ Per Capita GDP as a Percentage of the US Per Capita GDP—Since Takeoff l D o w n o a d e d f r o m h t t p : / / direct . m je t . / e du a d e v / art – pdlf / / / / / 3 2 1 3 1 1 6 4 1 1 0 6 a d e v _ a _ 0 0 0 4 5 pd . f par invité 0 8 Septembre 2 0 2 3 GDP = gross domestic product, US = United States. Note: Per capita GDP is based on purchasing power parity valuation of the GDP of an economy. Sources: Authors’ calculations; Maddison, Angus. 2011. Historical Statistics of the World Economy: 1–2008 A.D. Available online at: www.ggdc.net/maddison/Historical_Statistics/horizontal-ﬁle_02-2010.xls. in terms of stocks of capital and human capital per person (c'est, by disentangling the extent that output per worker might be driven by differences in these stocks or other features). We extend growth accounting analysis for the PRC using the Penn World Table (PWT), which decomposes growth in GDP per worker according to various sources—namely, growth of physical capital per worker k, human capital per worker hc, and TFP A. This can be represented by the following equation: (cid:2) ln yit = αit (cid:2) ln kit + (1 − αit ) (cid:2) ln hcit + (cid:2) ln Ait . (1) 38 ASIAN DEVELOPMENT REVIEW Table 2. Comparison of the PRC and the US—Capital Stock and Human Capital Per Capita in 2011 GDP Per Capita (2005 $)

Capital
Stock Per
Capita (2005 $)

Human
Capital Per
Persona

Non. of Persons
Engaged
(millions)

TFP at Constant
National Prices
(2005 = 1)

3.619
2.579

42,446
9,324
22.0%

131,347
33,134
25.2%

NOUS
RPC
PRC/US
PRC = People’s Republic of China, TFP = total factor productivity, US = United States.
aIndex based on the number of years of schooling and returns to education.
Sources: Center for International Comparisons at the University of Pennsylvania. Penn World Table 8.0. 2014.
Available online at: http://www.rug.nl/research/ggdc/data/penn-world-table (accessed January 2015). National Bureau
of Statistics. 2012. China Statistical Yearbook 2012. Beijing: China Statistics Press.

141.8
784.4

1.020
1.193

Tableau 3. Forecasts of the PRC’s GDP Growth and Growth Components

Real GDP
(constant
2005
national
prices, %)

7.8

10.4

Capital
Stock
(constant
2005
national
prices, %)

8.1

11.8

Human
Capital
Per
Persona (%)

Nombre
of Persons
Engaged
(%)

TFP at
Constant
National
Prices (%)

1.2

0.9

2.3

0.8

2.0

3.0

Average
1952–2011
Average
2001–2011

High

Low
8.1
7.6
7.3
6.1
5.4

Low
9.1
8.8
8.3
6.8
5.5

Forecasts
2012
2013
2014
2015–2020
8.8
2021–2028
7.5
GDP = gross domestic product, PRC = People’s Republic of China, TFP = total factor productivity.
aIndex based on the number of years of schooling and returns to education.
Note: We use a capital coefﬁcient of 0.59 for 2015–2028.
Source: Authors’ computations.

Low
0.3
0.0
0.0
0.0
0.0

Low
1.1
1.1
1.1
1.0
1.0

1.2
1.2

8.0
7.6

0.0
0.0

Low
2.0
2.0
2.0
1.7
1.7

High

2.3
2.3

We use the average of the capital coefﬁcient in the past 5 years estimated
by the PWT for the period 2015–2028 and calculate the growth of GDP and its
components from 2012 à 2028 assuming zero growth rate in the number of workers
during the forecasting period (see Table 3).

We assume the following in our economic analysis: a zero growth rate for the
number of workers during 2015–2028, which is consistent with the population trend
and age structure of the PRC, and a 1%–1.2% increase in human capital per person
during 2015–2028, or slightly lower than the actual annual growth of human capital
de 1.2% during 1952–2011.

We also assume that the country’s capital stock will keep growing albeit
at a moderate rate based on the assumptions of continued structural upgrading

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SUSTAINING GROWTH OF THE PEOPLE’S REPUBLIC OF CHINA 39

Tableau 4. A Comparison of Growth Rates in Different Economies in Similar Growth Stages

Real GDP
(constant 2005
national
prices, %)

Capital Stock
(constant 2005
national
prices, %)

Human
Capital
Per
Persona (%)

Nombre
of Persons
Engaged
(%)

TFP at
Constant
National
Prices (%)

0.8

3.6

8.3

3.8

1.3

11.8

Japan
1951–1971
Republic of Korea
1977–1997
Taipei,Chine
1975–1995
GDP = gross domestic product, TFP = total factor productivity.
aIndex based on the number of years of schooling and returns to education.
Sources: Authors’ computations; Center for International Comparisons at the University of Pennsylvania. Penn
World Table 8.0. 2014. Available online at: http://www.rug.nl/research/ggdc/data/penn-world-table (accessed
Janvier 2015).

10.7

2.6

8.3

2.5

1.1

1.3

1.1

1.4

0.9

and discovery of new investment areas. The increase will be 6.8%–8.8% during
2015–2020 and 5.5%–7.5% during 2021–2028, lower than the actual growth rate of
capital stock during 2001–2011 (11.8%) et 2013 (8.8%).

TFP growth will similarly decline slightly during the forecast period, comme
the PRC approaches the world technological frontier. We assume a growth rate
of 1.7%–2.3% during 2015–2028, lower than the actual growth rate of 3% pendant
2001–2011.

Our growth accounting analysis shows that the GDP growth rate of the PRC
will be in the range of 6.1%–8.0% before 2020 and 5.4%–7.6% during 2021–2018
if capital stock increases by 6.8% à 8.8% during 2015–2020 and by 5.5% à
7.5% during 2021–2028, human capital per person increases by 1% à 1.2% pendant
2015–2028, and TFP increases by 1.7% à 2.3% during 2015–2028. The assumptions
are reasonable and conservative compared to growth rates in previous periods, lequel
are also shown in Table 3.

To support our forecasts, we calculate using PWT data the average annual
growth rates of physical capital, human capital, and TFP in Japan; the Republic
of Korea; and Taipei,China during the same development stage that the PRC ﬁnds
itself in currently. The results are shown in Table 4. Since the PRC is in a similar
development stage as the Republic of Korea during 1977–1997 and Taipei,Chine
during 1975–1995, it is likely that the country’s capital stock and TFP will grow at
similar rates in the near future.

To prevent mistakes in forecasting, our assumptions about the growth rates of
the PRC’s capital stock are tailored to be more conservative than the actual growth
rates of capital stock in the Republic of Korea during 1977–1997 (11.8%) et
Taipei,China during 1975–1995 (10.7%).

If the PRC maintains an 8% growth in the next 2 decades, par 2030, the PRC’s
per capita income measured in PPP may reach about 50% of that of the US. Le

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40 ASIAN DEVELOPMENT REVIEW

exploitation of the advantage of backwardness has and will allow the PRC to achieve
extraordinary economic growth by reducing the costs of innovation, industrial up-
grading, and social and economic transformation.

Large-Scale Infrastructure Investment

Public investments, say in infrastructure, may have a positive inﬂuence on
long-run growth if it raises the marginal productivity of private capital. Barro (1990)
develops a closed-economy endogenous growth model where government service is
viewed as an input in private producers’ production function. The effects of public
investment on private producers have also been analyzed in many empirical studies.
Aschauer (1989), par exemple, studied the US economy during 1949–1985 and
found that public investment in infrastructure had maximum explanatory power for
the productivity of private capital.

Continued large-scale infrastructure investment, which began when the Chi-
nese economy started to reform and open up, could be another possible factor behind
sustained growth in the near future. The PRC has made large-scale infrastructure
investments over the past several decades, which updated the country’s infrastruc-
ture in all sectors and raised productivity, with continued positive effects on future
growth. Tableau 5 shows the gross capital formation in the PRC from 1991 à 2013.

A rough comparison with the US shows that the PRC’s gross investment
during 2010–2013 measured in US dollars and using ofﬁcial annual average
exchange rates was greater than the US gross domestic investment during the
period. Although the share of physical investment in GDP declined slightly in
recent years, it will remain relatively high in the near future. The quality of physical
investment also remains quite high in terms of operating proﬁt, although it declined
slightly in recent years.

Real estate investment has been an important part of investment in the PRC
in the past 20 années. Tableau 6 shows the operating statistics of real estate ﬁrms in the
country. The share of taxes and proﬁts increased dramatically beginning in 2005 et
continued to be relatively high until 2012. This suggests that investments in real estate
and physical capital will keep growing at a comparatively high rate in the near future.
From the most recent data, we expect that returns on investment will gradually
fall but will stay at a level high enough to attract investment. Basé sur ceci, nous
forecast that investment in physical capital will continue to grow at a rapid pace in
the near term.

Many economists worry that the PRC’s economic growth relies too heavily
on saving and investment. They posit that a large contribution of capital means a
small contribution to technological progress, a condition that may not be sustain-
capable. Cependant, none of the existing methods measuring technological progress has
successfully accounted for the technological progress embedded in capital. Capital
investment brings about new approaches of production as well as new teams of

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SUSTAINING GROWTH OF THE PEOPLE’S REPUBLIC OF CHINA 41

Tableau 5. Investment in the PRC during 1991–2013

Gross Capital Formation
(CNY billion)

% of GDP
(expenditure approach)

786.80
1,008.63
1,571.77
2,034.11
2,547.01
2,878.49
2,996.80
3,131.42
3,295.15
3,484.28
3,976.94
4,556.50
5,596.30
6,916.84
7,785.68
9,295.41
11,094.32
13,832.53
16,446.32
19,360.39
22,834.43
25,277.32
28,035.61

1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
GDP = gross domestic product, PRC = People’s Republic of China.
Source: National Bureau of Statistics. 2014. China Statistical Yearbook
2014. Beijing: China Statistics Press. Tables 2–18.

34.8
36.6
42.6
40.5
40.3
38.8
36.7
36.2
36.2
35.3
36.5
37.8
41.0
43.0
41.5
41.7
41.6
43.8
47.2
48.1
48.3
47.8
47.8

workers, which together increase productivity and bolster growth. There may also
be a time lag between capital investment and the functioning of capital stock.

The potential role of physical capital in development depends on the rela-
tionship between investment and technical progress. Scholars working on growth,
especially those focusing on technology diffusion and TFP, have been studying this
potential role. Caselli and Wilson (2004) found strikingly large differences in in-
vestment composition across countries, with the composition of capital accounting
for large observed differences in TFP across countries. They also found that the
differences were based on each equipment type’s degree of complementarity with
other factors whose abundance differs across countries (Caselli and Coleman 2001).
Comin and Hobijin (2004) observed a trickle-down mechanism in the dif-
fusion of technologies across countries, which meant that although most of the
technologies originating from advanced economies were adopted there ﬁrst, other
countries that lag economically could still beneﬁt subsequently. The determinants
of the speed at which a country adopts technologies include the country’s human
capital endowment, type of government, degree of openness to trade, and adoption
of predecessor technologies.

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42 ASIAN DEVELOPMENT REVIEW

Tableau 6. Operating Statistics of Real Estate Firms

Revenue from Principal Business
(CNY100 million)

Share of Taxes and Proﬁts
(%)

1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012

528.56
1,135.91
1,288.19
1,731.66
1,968.79
2,218.46
2,951.21
3,026.01
4,515.71
5,471.66
7,077.85
9,137.27
13,314.46
14,769.35
18,046.76
23,397.13
26,696.84
34,606.23
42,996.48
44,491.28
51,028.41

19.9
22.2
20.4
13.5
5.6
4.2
4.3
3.6
6.4
7.3
8.8
10.1
9.5
13.2
15.5
17.5
19.7
21.1
22.3
21.6
20.8

Source: National Bureau of Statistics. 2014. China Statistical Yearbook 2014. Beijing:
China Statistics Press. Tables 5–38.

Jorgenson and Vu (2010) introduced a new framework for projecting the
potential growth of the world economy, emphasizing the contribution of information
technologie. Investment in information and communications technology (ICT) raises
the amount of capital available for labor, thus increasing labor productivity, likely
increasing economic growth. It also introduces new technologies into the production
processus.

Inklaar and Timmer (2013) discuss new measures of capital stocks in PWT
version 8.0, while Aghion (2014) notes the positive relation between ICT share (dans
value-added) and economic growth, using panel data. The contribution of investment
in ICT has increased in all regions of the world, but especially in industrialized
economies and developing Asia.

To explore the sustainability of the PRC’s future growth in physical capital
investment based on the composition of capital, we collected data on the growth of
ICT capital services. Data show that ICT capital services grew at a more rapid pace
in the country than in Japan, la République de Corée, and the US during 2000–2013
(Tableau 7).

This suggests that the potential exists for further increases in productivity and
capital investment in the PRC in the near future. The average annual contribution
of ICT capital services to overall growth in capital services in the country was 1.06

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SUSTAINING GROWTH OF THE PEOPLE’S REPUBLIC OF CHINA 43

Tableau 7. Growth in ICT Capital Services
(in difference, %)

RPC

Japan

Republic
of Korea

NOUS

6.62
7.24
6.74
5.27
5.64
4.76
3.30
3.69
5.62
7.84
8.66
8.94
9.89
10.73

28.73
26.44
24.90
24.48
25.78
26.46
25.17
22.06
20.92
19.71
17.18
15.52
15.82
17.39

20.07
17.30
10.75
6.13
3.39
4.62
7.27
8.93
8.32
6.39
6.05
7.87
9.42
10.50

2000
18.44
2001
13.86
2002
8.12
2003
5.94
2004
6.59
2005
7.31
2006
8.06
2007
9.19
2008
9.00
2009
6.59
2010
5.10
2011
5.58
2012
6.87
2013
8.21
ICT = information and communications technology, PRC =
People’s Republic of China, US = United States.
Source: The Conference Board Total Economy Database. Available
online at: http://www.conference-board.org/data/economydatabase/
(accessed January 2014).

percentage points from 2004 à 2013, compared with 5.57 percentage points for
non-ICT capital services during the same period.

In addition to rapid physical capital accumulation, the PRC has seen large-
scale human capital accumulation. The country has been improving its stock of
human capital over the past 30 années, owing to government commitment and in-
creasing returns to education. Education spending by the Chinese government in
terms of the share of total government spending is lower than that in the US but
higher than in the United Kingdom and Japan (Bai, Wang, and Qian 2010).

Higher education in the PRC has grown at a faster pace than both primary
and secondary education. College admission and enrollment has increased tenfold,
avec 6.4 million bachelor’s and 514,000 master’s and PhD degree holders produced
by Chinese universities in 2013 (Tableau 8). The quality of human capital investment
in the country has also improved through the years. The number of college students
graduating as a percentage of the total has risen in the 2010s compared to the 1990s.
Tableau 9 similarly shows that the number of graduates from college and senior
secondary schools in the PRC has increased dramatically in recent years. Ce
trend, which has greatly improved the country’s quality of education, is expected to
continue in the near future. As Aghion (2014) and other authors have pointed out,
education is important in bolstering economic growth.

Structural Readjustment

The PRC has been experiencing structural changes in the past 3 decades.
Structural readjustment, which allows a transfer of resources from sectors with

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44 ASIAN DEVELOPMENT REVIEW

Tableau 8. Graduates in the PRC
(thousands)

Collège

MA and PhD

MA and PhD/
Undergraduates (%)

32.5
31.9
58.8
189.7
514.0

614.0
805.0
949.8
3068.0
6,387.2

1991
1995
2000
2005
2013
MA = Master of Arts, PhD = Doctor of Philosophy.
PRC = People’s Republic of China.
Sources: National Bureau of Statistics of China. 2010. Sixty Years of New
Chine. Beijing: China Statistics Press; National Bureau of Statistics of China.
2014. China Statistical Yearbook 2014. Beijing: China Statistics Press.

5.0
3.8
5.8
5.8
7.4

Tableau 9. Number of Graduates by Level and Type of School
(millions)

Regular
Collège

Regular Senior
Secondary
Schools

Secondary
Vocational
Éducation

Junior
Secondary
École

Regular
Primary
École

1978
1990
2000
2010
2012
2013

0.165
0.614
0.950
5.754
6.247
6.387

6.827
2.330
3.015
7.944
7.915
7.990

11.230
16.335
17.504
16.608

6.653
6.749

22.879
18.631
24.192
17.396
16.416
15.811

Source: National Bureau of Statistics. 2014. China Statistical Yearbook 2014. Beijing: Chine
Statistics Press. Tables 20–9.

Tableau 10. Annual Growth Rate of Patents Granted

Period

1985–1989
1990–1994
1995–1999
2000–2004
2005–2009
1985–2009

Source: Xie and Zhang 2014.

(%)

27
17
15
20
19
19

lower productivity to sectors with higher productivity, serves as another source of
economic growth.

Brandt, Hsieh, and Zhu (2008) decomposed the PRC’s growth according to
agriculture and non-agriculture sources during 1978–2004 and found that labor
reallocation from agriculture to non-agriculture contributed 24.6% to the country’s
overall growth. They attribute this to the large productivity gap between agriculture
and non-agriculture sectors during the period.

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SUSTAINING GROWTH OF THE PEOPLE’S REPUBLIC OF CHINA 45

Theoretically, GDP growth in a multisector model can be divided into four
components—the contributions of capital, labor, pure technical progress (weighted
average of technical progress in all sectors), and structural change.

The current Chinese economy is still far from its long-term steady state. Large
productivity gaps still exist between sectors of the economy, while endowments
continue to change as income rises. The production structure clearly needs to change
to follow the changes in endowments. These structural readjustments should be able
to provide new sources of economic growth and raise the potential for a relatively
high growth rate in the medium to long run.

Heterogeneity at the ﬁrm level is a source of productivity growth. Aghion
(2014) points out that the heterogeneity between ﬁrms is much larger than that be-
tween sector averages. In the US, the productivity of the top 10% most productive
ﬁrms is twice that of the bottom 10%. Hsieh and Klenow (2009) ﬁnd the corre-
sponding multiple to be as high as 5 times in the PRC. This huge difference shows
the country’s potential for structural improvements in the future.

The enormous size of the Chinese economy beneﬁts structural readjustment,
as a wide enough industrial spectrum makes an update of the industrial structure and
a widening of product variety possible. The huge product space makes it possible
for the country to upgrade its industrial structure at a wide scale. This feature
differentiates the PRC from mid-sized countries such as Japan and the Republic of
Korea.

Aside from well-functioning markets and continued structural upgrading,
there are other factors that contribute to the structural improvement of the Chinese
economy and that help drive future growth. These include private sector development
and privatization of state-owned enterprises to spur greater competition, greater pro-
tection of intellectual property rights and other legal support to encourage R&D and
innovation in the manufacturing sector, bilateral investment treaties and free trade
zones to foster greater openness of the economy, and deregulation and introduction
of greater competition to improve productivity in the services sector.

Innovation is a key driver of long-run growth, one that is particularly important
for middle-income countries such as the PRC. Xie and Zhang (2014) ﬁnd that
domestic Chinese ﬁrms have become increasingly more innovative in terms of
patent applications, and that private ﬁrms, rather than state-owned ﬁrms, have been
the engine of innovation. Facing increasing wages, the ﬁrms have had to invest more
in technologies to substitute the more expensive labor. The annual growth rate of
patents granted during 1985–2012 averaged at 19%, almost twice the annual growth
rate of GDP during the same period (Xie and Zhang 2014).

Dans l'ensemble, on one hand, the PRC is still far behind the world technology frontier
and will continue to enjoy the advantage of backwardness. On the other hand, it is
closer to the world technology frontier than at any time previously and possesses
greater capital and skilled labor than it did 30 years ago. This provides a basis for
updating industries and further economic development.

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46 ASIAN DEVELOPMENT REVIEW

V. Preconditions for the PRC’s Sustained Growth and Policy Suggestions

The PRC has the potential to sustain a relatively high growth rate in the long
run provided government adopts the right policies. There are a number of general
preconditions or prerequisites that must be met in order to achieve this goal.

The PRC needs to narrow income disparities and ﬁght corruption to main-
tain social stability. Greater income disparity and corruption are the results of the
dual-track transition strategy where the government continues to provide subsidies
and protection to nonviable ﬁrms in prioritized capital-intensive sectors, creating
distortions in factor markets and monopolies in certain service sectors while allow-
ing or facilitating the entry of new ﬁrms to the labor-intensive sector that had been
previously repressed. Such an approach allows the country to achieve stability and
dynamic growth simultaneously.

Cependant, distortions in factor markets and monopolies in telecommunications
and ﬁnancial sectors create rents and encourage rent-seeking, leading to greater
income disparity and corruption. Many capital-intensive ﬁrms in the old prioritized
sectors have become viable because of the change in the endowment structure, lequel
was a consequence of rapid growth and capital accumulation over the past 35 années.
It is time for the country to eliminate these distortions and complete the transition
to a well-functioning market economy, allowing prices to play a decisive role in
resource allocation to improve efﬁciency and eliminate the root of income disparity
and corruption (Lin 2012a).

The PRC needs to continue investing in physical and human capital in order
to change its endowment structure. It also needs to continue upgrading technologies,
transforming its industrial structure, and tapping latecomer advantages. As devel-
opments continue, factor endowments and industrial structure will keep changing,
and the country will need to update its infrastructure accordingly. The inconsistency
between the two means leaving the equilibrium path and lowering trend growth.

Enfin, the Chinese government also needs to play an enabling role in future
développement économique. It needs to help ﬁrms reduce transaction costs by improving
both soft and hard infrastructure. A sound ﬁscal position, at both central and local
government levels, will be beneﬁcial to economic growth. An enabling government
is also essential to overcome inherent externalities of technological innovation and
industrial upgrading. State effort is also needed to improve the country’s environ-
mental quality and achieve environmental sustainability.

VI. Concluding Remarks

In sum, the PRC can sustain a relatively high growth path over a long period
based on three basic arguments. D'abord, since a substantial technological gap still
exists between the PRC and major developed countries, it can continue to enjoy the

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SUSTAINING GROWTH OF THE PEOPLE’S REPUBLIC OF CHINA 47

advantage of backwardness. Deuxième, the long period of large-scale infrastructure
investment that began several decades ago can still continue and provide the country
a basis for further growth. Troisième, structural readjustment, which is needed in many
ﬁelds, should be able to bolster economic growth in the long run. These arguments
are supported by growth accounting analysis.

We argue that to realize the potential for sustained growth, a number of general
preconditions or prerequisites need to be fulﬁlled. These include well-functioning
marchés, an appropriate rate of investment, continued structural upgrading, and an
enabling government that can facilitate the appropriate structural transformation.
If the economic adjustments are done correctly and in a timely manner, sustained
growth should be possible in the medium- and long-term.

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