Why is China Growing So Fast?

WP/96/75-EA


Why Is China Growing So Fast?
by Zuliu Hu and Mohsin S. Khan



China's extraordinary performance in recent years has received
widespread attention. Real GNP has grown at an average annual rate of
nearly 10 percent since the late 1970s, an achievement unmatched by any
other country for that period. This paper explains China's rapid growth by
identifying the sources of economic growth during 1953-94.

Based on a new comprehensive data set constructed from official
Chinese language sources, the contributions of capital and labor inputs, and
particularly productivity, to economic growth in China are compared within
the standard neoclassical growth framework. The results of the
decomposition of growth highlight the relative importance of each factor in
explaining the growth of output and thus provide important insights about
the underlying causes of economic growth in China.

The central finding of this study is that, while physical investment
has continued to play a dominant role in China's economic growth, its
importance has diminished over time, particularly during the reform period,
1979-94. Since economic reforms were initiated, productivity growth has
become more significant in driving the economy. Capital formation
contributed over 65 percent to output growth during the central planning
era, 1952-78, while productivity growth contributed only 18 percent.
However, during 1979-94, productivity accounted for more than 42 percent of
China's aggregate growth. By the early 1990s, productivity growth had
already overtaken capital as the predominant factor in China's economic
growth, contributing more than half to output growth in 1990-94, compared
with less than one-third for capital formation.

The productivity differential, estimated to be about 2.8 percent,
almost fully explains the difference in China's growth rates before and
after the reforms. The evidence, which is fairly robust even when possible
measurement errors in the data are taken into account, indicates that China
has gained handsomely from its market-oriented economic reforms in the past
two decades. The total factor productivity rate in the Chinese economy was
fairly low in 1953-78 because central planning stifled economic incentives
and distorted resource allocation. By contrast, China's productivity
performance over the past fifteen years or so stands out in comparison with
other countries, including the dynamic newly industrialized economies of
East Asia. The observed productivity gains for 1979-94 can be mainly
attributed to improved allocative efficiency under market-oriented reforms,
such as the emergence of family farming, the rise of rural industry, the
reallocation of labor from traditional agriculture to industry and the
services sector, as well as to China's open door policy that brought
about a dramatic expansion in foreign trade and foreign direct investment.