Nov 5, 2019 in Economics
China’s Economic Growth

Few nations worldwide have been capable of matching the speed of sustained growth witnessed by China. Since the onset of economic reform in 1978, China has upheld an extraordinary rate of economic growth. The Chinese official statistics show that China’s average Gross Domestic Product (GDP) from 1979 and 2000 was about 9.2 percent. The GDP increased to 10.1 percent in the period from 2000 to 2006. Regardless of the disagreement over the dependability of the statistics of real output growth, the notion that China has grown faster is undisputable. Being the global largest developing nation, with approximately one-fifth of the global population, the country has significantly contributed to the decrease of universal income poverty and inequality by lifting more than 200 million below the poverty line with the past three decades. In the economic literature, different models including the Solow Growth Model and the endogenous model have been used in explaining China’s economic situation. These models attempt to reveal the causes of speedy and sustainable economic growth being witnessed by China. With regard to this, this paper discusses the factors underlying China’s fast and sustainable economic.

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Factors Contributing to Economic Growth

Governance is the first determinant of economic growth. Governance essentially refers to the process and institutions through which decisions are reached and authority in a nation is exercised. A nation’s governance is responsible for offering the required social environment and infrastructure for the economic development of the entire society. Pritchett and Summers (2013) pointed out that there are six indicators of measuring the quality of governance, and they comprise government efficacy, governing framework, responsibility, political volatility, peacefulness and level of corruption. Currently, in several developing nations and developed nations, the primary purpose of governance has frequently been to stimulate economic development. Accountability implies that government authorities should be responsible for social policies and actions. According to Luckstead, Choi, Devadoss, and Mittelhammer (2011), administrative stability and peacefulness are also required for supportable economic growth. With regard, to government efficiency, it is closely linked to the quality of bureaucracy, public regulation, performance of civil servants, and independence and justice. It is not possible hard for a country to achieve all these aggregate indicators of governance. For instance, with regard to China, the one-party system has been sited to be a source of the political system. However, government authorities have also been accused of little transparency. Because of high political stability over time, irrespective of the ‘little transparency’ many global companies became increasingly perceptive to operate in China. In addition, the demise of Mao, Chinese communist leader, in 1976 led to the reorganization of the Chinese economy under modernization in late 1978, facilitated the growth of the Chinese economy.

The determinant of economic growth is technological progress. Technology is at the core of economic growth. With fast technological advancement, it is easier to formulate new jobs, construct and maintain large industries, and enhance living standards. In addition, technology is also a powerful tool for improving the efficiency of governance, offering a basis for economic development. Luckstead, Choi, Devadoss, and Mittelhammer (2011) provided three different classifications of technological progress: neutral, laborsaving, and capital saving. The various paces of adopting advanced technology and transferring it into real productivity will ultimately affect the rates of economic growth. In relation to China, it can be summarized that technological progress has achieved a considerable role in fostering rapid economic growth in the form of scientific innovations and inventions.

The human population is a factor driving the economic development of a country. The economic development of contemporary societies is epitomized by a relatively low death rate and high birth rate. From a personal standpoint, the rapid growth of China’s population is an objective indication of economic growth. China accounts for about one-fifth of the world’s entire population. However, the modern growth of the population has both negative and positive effects on contemporary economic growth. The Malthusian Population Trap offered a theory of the association between economic development and population growth. The theory pointed out a global tendency for the population to increase at a geometric rate, doubling every 30 to 40 years. China has employed the one-child dogma for about two decades while India has not. Consequently, China’s per capita GDP is increasing whereas India exhibits no similar increase. Several authors have agreed that an increase in population is not a constant indication of economic growth as referred to in the case of both China and India, two of Asia’s highly populated countries.

Endogenous Growth Model

According to endogenous growth theory, economic growth is majorly the outcome of endogenous factors and not external forces. This theory maintains that investment in innovation, human capital, and knowledge are crucial determinants of economic growth. Luckstead, Choi, Devadoss, and Mittelhammer (2011) found out that labor, capital, and TFP each accounted for about 48%, 16%, 11%, and 25% respectively of the China’s GDP growth between 1978 and 1978.

Besides, the endogenous theory also emphasizes positive externalities and spillover impacts of the knowledge-based economy that results in economic development. The technological factor of production (TFP) has a positive relationship between research and development. Consequently, this results in the assumption of scale impacts in ideas production; that is, new ideas are proportional to the knowledge stock. Nevertheless, endogenous models are not consistent with the evidence. To be specific, the considerably increasing number of scientists in the US engaged in research and development since the 1950s has not led to an affiliated improvement in innovation. According to proponents of endogenous growth theory, an active role of public policy fosters economic development via indirect and direct investment. Therefore, economic development will foster governance improvement, which makes it more efficient and effective for policy implementation and more suitable and applicable for economic development.

The Chinese human capital played plays a crucial role in explaining the rapid economic growth. The education-oriented Chinese human capital considerably accounts for China's global economic position. According to Pettis (2014), the better educated the labor force, the more productive the laborers and the faster the knowledge stock grows. During the control of Mao, the Chinese system of education was similar to one of the soviet-style systems and aimed at bringing education to the rural masses. Nevertheless, since education was considered inferior, rural laborers were diffident. After the end of Mao’s death, the country’s education system was reorganized to include certain aspects of education in western countries. Since the reorganization, China’s rate of education has doubled; therefore, the rate of innovation also increased. The figure below shows an increase in the number of Chinese joining higher education enrollment, which can be attributed to the increasing number of innovation in China, and a highly educated labor force driving the economy.

China’s Economic Growth

Figure 1. Ration of Higher Education Enrolment to Total population; source (Luckstead, Choi, Devadoss, & Mittelhammer, 2011).

Luckstead, Choi, Devadoss, and Mittelhammer (2011) also echoed the same findings as a decomposition study. They calibrated data for the period between 1952 and 2009. They collected data for real GDP per worker, purchasing power parity (PPP), savings, and price of investment data for the Penn World Tables. They concluded that labor augmentation, which is an intervention aimed at increasing labor intensity, played has increased over time. The figure below shows that labor augmenting productivity began increasing after 1976, the year that marked the death of Communist leader Mao. This is because of the reorganization of the education system.

Labor Augmenting Productivity

Figure 2. Labor Augmenting Productivity; source (Luckstead, Choi, Devadoss, & Mittelhammer, 2011)

Solow Economic Growth Model

The Solow model is an exogenous model of long-run economic development recognized within the framework of neoclassical economics. It aims at elucidating the long-run economic development by measuring capital accrual, population progression, and increases in production. The model makes four key assumptions. The first one is that fixed stock labor, the effect of the output of the last capital unit accumulated will always be less than the one before. The second postulation is that diminishing returns imply that at a certain point the amount of capital produced is only just adequate to make up for the amount of existing capital lost. Thirdly, the model assumes that the growth rate slows as diminishing returns take effect and the economy converges. Lastly, it assumes that a new steady state is achieved with constant output per work hour.

In relation to this model, it is widely believed that China’s remarkable growth is essentially a reflection of the high investment rates that have typified the economy. As shown in the figure below, real gross capital formation over the whole reform period averaged a steady 38.3% of the GDP. This is very high by international standards. The rate of gross fixed capital accumulation has considerably increased in recent years, increasing from an average of 29.3% from 1978 to 1993 to an average of 36% thereafter. Inventory accumulation amounted to an averagely 5.5% of the GDP. It peaked at the end of the 1980s, which reflected a severe economic recession and declined thereafter because of the new economic reforms. Consequently, it plausible to hypothesize that China’s success is mainly through capital accumulation as depicted by the Solow economic growth model.

Capital accumulation

Figure 3. Capital accumulation.

Middle Income Trap

Pettis (2014) defined the middle-income trap as an economic development scenario where a country that achieves a certain income because of given advantages will get stuck at that level. There are claims that Chinese economic growth has for the first time gone into reverse since the Cultural Revolution in the 1970s. According to Pritchett and Summers (2013), the over-capacity and over-building of the less effective state into private markets have increasingly slowed down China’s economic growth. The figure below shows that China’s GDP is slowing down. This shows that the country is on the verge of getting stuck at its present level.

The Slowdown of China's GDP

Figure 4. The Slowdown of China's GDP.

Conclusion

China has experienced extraordinary economic growth since the adoption of economic policies in the late 1960s. Some of the contributing factors to China’s economic growth included human capital, governance, and technological progress. According to the Solow economic growth model, China has grown economic because of capital accumulation, whereas according to endogenous economic theory China has grown economically because of the human capital and technological innovations. Based on these two models, the paper concluded that China’s economic growth derived from human capital and innovation. The changes in education reforms after the death of Communist leader Mao empowered Chinese human capital to embrace innovativeness.

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