Why Is China Growing So Fast?

Author(s): Zuliu F. Hu and Mohsin S. Khan

Source: Staff Papers (International Monetary Fund), Vol. 44, No. 1 (Mar., 1997), pp. 103-131
Published by: Palgrave Macmillan Journals on behalf of the International Monetary Fund
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IMF StaffPapers
Vol.44,No. 1 (March1997)
? 1997International
Fund
Monetary

So Fast?
WhyIs ChinaGrowing
ZULIUF. HU andMOHSINS. KHAN*
Chinahas beengrowingat a spectacularratein recentyears,enablingper
capita incomesto almostquadruplein onlythelastdecade and a half.This
thesourcesofeconomicgrowthin Chinafrom1952 to 1994.
paper identifies
role in China's economic
Whilecapitalaccumulation
playedan important
it
the
the
is
growth
throughout period, basically sharpand sustainedincrease
economic
in totalfactorproductivity
thataccountsfor theunprecedented
The
the
observed
gains largely
during reform
period.
productivity
growth
market-oriented
reflect
reforms,
especiallytheexpansionofthenonstatesecabouta dramatic
tor,as wellas China's "open-door"policy,whichbrought
direct
investment.
in
trade
and
[JEL04, 05]
foreign
expansion foreign

APITAL ACCUMULATION played a

dominantrole in China's economic

growthduringthecentralplanningera of 1952-78 (Perkins,1988 and
to mobi1989; and Chow, 1993) because of theabilityof thegovernment
in physicaland human
lize savingand undertakelarge-scaleinvestments
Growthrates,while
capitalto supportitspolicyof rapidindustrialization.
below those thathave been witnessedin
impressive,were substantially
economicreforms
werelaunched
morerecentyears.Since market-oriented
in 1978, China has achievedquitephenomenalratesof growth,withreal
GNP growingon averageby nearly10 percenta year.WhataretheprinciIn particular,
economicgrowth?
whathas
pal sourcesofChina's postreform
oftheimprovements
in
beentherolein China's recentgrowthperformance
thattypicallyare expectedto accompanystructural
productiveefficiency
reforms?
These are themainquestionsaddressedin thispaper.
in theResearchDepartment
whenthispaper
*ZuliuF. Hu was an Economist
oftheNationalCenterforEconomicRewascompleted.
He is nowCo-Director
MohsinS. Khanis
searchin Beijing.He holdsa Ph.D.fromHarvard
University.

and the
theDirectorof theIMF Institute.
He is a graduateof ColumbiaUniversity

toEdLondonSchoolofEconomics
andPolitical
Science.Theauthors
aregrateful
at seminars
atOxford
UniTamimBayoumi,
andparticipants
uardoBorensztein,
ofSocialSciences,as well
andtheChineseAcademy
University,
versity,
Tsinghua
as toan anonymous
forhelpful
comments.
referee,
103

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104

ZULIUF. HU andMOHSINS. KHAN

Itisuseful
first
ofthe
toconsider
somestylized
factstoobtain
anoverview
1
behavior
issueunderconsideration.
the
of
the
investmentFigure depicts
inthe1952-94period.
andoutput
ratio,
output
employment
growth,
growth
inthe
Realnational
incomeexpanded
byanaverageof7.2percent
annually
ratiowasabove27percent
investment-output
pastfourdecades.Theaverage
theperiod,andinfactrosetoover40 percent
toward
thefinal
throughout
was fairlysteady,
yearsof theperiod.By contrast,
employment
growth
2.6percent,
ofthelaborforce,
theeducational
attainment
although
averaging
andthusitsquality,
increased
overthisperiod.
significantly
Thisstudyexaminesthecontributions
ofcapitalandlaborinputs,
and
to
economic
in
the
China
within
standard
growth
particularly
productivity,
framework.
To undertake
neoclassicalgrowth
thisexercise,a comprehensivedatasetbasedlargelyon official
sourceswas
Chinese-language
Thisdatasetcontains
constructed.
consistent
timeserieson therelevant
variables
fora longerperiodthanhitherto
available.Theresults
ofthedein
of
the
relative
of
composition growth
highlight
importance eachfactor
ofoutput
thegrowth
andthusprovide
about
insights
explaining
important
inChina.
theunderlying
causesofeconomic
growth
fromthisstudyis that,whilephysical
Thecentral
thatemerges
finding
investment
continuedto play a dominantrole in China's economic
Figure1. FactorSupplyand OutputGrowth
(In percent)

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105

WHY IS CHINA GROWING SO FAST?

duringthe regrowth,its importancediminishedover time,particularly

formperiod 1979-94. Since economicreformswereinitiated,productivforcein drivingtheChinese
itygrowthhas become themoresignificant
economy.Figure 2 shows the relativeimportanceof capital,labor,and
in China's economic growthbeforeand afterthe reforms.
productivity
contributed
over65 percentof theoutputgrowthin the
Capitalformation
centralplanningera of 1952-78, while productivity
growthcontributed
only 18 percent.However,a new patternemergedfollowingChina's economicreforms.In the 1979-94 period,productivity
growthbecame suband accountedforabout42 percentof China's
stantiallymoreimportant
aggregategrowth.
This studyadds to a growingliterature
examiningChina's recentgrowth
experience,includingMcMillan,Whalley,and Zhu (1989), Li and others
(1993), Woo (1995), Borenszteinand Ostry(1996), and Sachs and Woo
(1997). Since these studiesare all motivatedby a set of closely related
issues concerningChina's growth,some of the differences
betweenthe
hereand theresultsobtainedin theseotherstudieswill be briefly
findings
outlined.Comparisonsof theresultsforChina in thepaperare also made
withavailableestimatesforindustrialized
some LatinAmerican
countries,
and fourEast Asian newlyindustrialized
economies.
countries,
Figure 2. Sources of Economic Growth,1952-94

Productivity
18.0%

Productivity
41.6%

Labor input
16.9%

65.2%
Centralplanning
(1952-78)

Capitalinput
45.6%

128 input
Labor
Economicreform
(1979-94)

Source: Authors'estimates.

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106

ZULIU F. HU and MOHSIN S. KHAN

outofthispaperproceedsas follows.SectionI briefly

Theremainder
howthedata
SectionII describes
linesthemethodology
usedinthisstudy.
oftheanalysis.
themainfindings
SectionIII presents
setwasconstructed.
ina number
ofdirections
andcompares
the
theresults
SectionIV extends
in
The
obtained
other
studies.
final
section
with
those
for
China
findings
remarks.
contains
someconcluding

I. Methodology
Themethodology
intheanalysis
ofthispaperis thefamiliar
one
utilized
the
basedonthenotionofan aggregate
function
for
production
economy.
As is well-known
from
thelargebodyofgrowth-accounting
this
literature,
is
function
an
that
aggregate
production
approach analytical
simplification
makesit possibleto summarize
detailedinformation
aboutthecomplex
within
a simple,
unified
framework.'
growth
processofeconomic
The neoclassicalgrowth
framework
takesas itsstarting
pointan agmeasure
to
function,
F, whichrelatesa national
gregate
production
output
andtime:
capitalandlaborinputs
Y = F(K,L,T),

(1)

K andL arecapitalandlaborinputs,
andT is time.The
whereY is output,
function
selectedhereis thetranslog
specificformfortheproduction
function:2
production
Y = exp[ao + o klnK + ol InL + atT + - Pkk(ln
K)2 + Pkl nKlnL

1
+ ktTlnK + - ,(ln L)2 +PTlnL+

1
(2)
ttT2].
2
2
to scale
function
constantreturns
The translogproduction
represents
if
if
the
conditions:
and
the
satisfy following
technology only
parameters
a(k + a, = ,

kk + Pk

= 0,

Pkl+ P,1 = ,

Pk+ P=

(3)

inoutput
as
Thesharesofprimary
canbe defined
inputs
Vk -

V,

(4)

'See Solow(1957),Denison(1962),Jorgenson,
(1987),
Gallop,andFraumeni
others.
and,morerecently,
Young(1995),amongnumerous
2SeeChristensen,
andLau (1971and1973).
Jorgenson,

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107

WHY IS CHINA GROWINGSO FAST?

wherePk,Pi,andQyarepricesofcapital,labor,andoutput,
respectively.
the
conditions
are
Assuming
perfect
competition, necessary
equilibrium
between
each
share
value
and
the
of
givenbyequalities
elasticity output
tothecorresponding
withrespect
as follows:
input,
Vk

~}lnY

n(K,
alnK

L, T) =

+ PkllnL+ PktT=
k + PlkkInK

k,

(5)

and
v =

alnY

+
= al +PlllnL tkllnK
anL(K, L, T)

+ ,tT = El,

(6)

withrespect
tocapitalandlabor,
ofoutput
where?kandElaretheelasticities
ofconstant
toscale,
undertheassumption
returns
Moreover,
respectively.
holds:
condition
thefollowing
Vk +

alnY
ailnY
l (K, L,T)+
(K, L,T) =1.

aIUnK

alnL

(7)

therate
sumtounity.
Thatis,thevaluesharesandtheelasticities
Finally,
is
defined
as
the
rate
intotalfactor
ofgrowth
v,
(TFP),
growth
productivity
the
and
labor
ofoutput
withrespect
totime,
constant:
inputs
holding capital
v =

)lnY

(K, L, T).

(8)

indexoftotalfactor
A Divisiaindexforv,,calledthetranslog
productivity,
thelogarithm
oftheproduction
funccanbe derivedbyfirst
differencing
tiongiveninequation(2):
=
vt_l,t

lnY(t)- lnY(t-1) - Ek[lnK(t)- lnK(t- 1)]

- E[lnL(t)- lnL(t- 1)],

wherev,_l,is therateofgrowthofTFP fromyeart- 1 to t,and Ekand e are

ofoutput
withrespect
tocapitalinput
andlaborinput
theaverageelasticities

in yeart - 1 and in yeart:

k=
-

Y (K,L, T)+
(K,L,T-1)
2 alnK
3lnK
2 (?kt

+ Ekt-l),

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(10)

108

ZULIU F. HU and MOHSIN S. KHAN

and
1 a-lnY

alnY

= 2 lnY(K,L, T)+ an (K, L, T-l)

2 dlnL
alnL
2(t

()

t-l)

In theanalysis,thedirectly
observedfactorsharesvkandvl wereused as
measures
of
these
elasticitiesto estimateTFP growth,
assumapproximate
that
the
restrictions
the
described
above
hold.
underlying methodology
ing
The estimatesof productivity
for
in
growth China may be biased either
directionif thereare deviationsfromthe assumptionsimposed by the
is widelyused in
However,sincethismethodology
adoptedmethodology.
studyingsourcesof economicgrowthformembersof theOrganizationfor
Economic Cooperationand Development,thenewlyindustrialized
economiesofEast Asia, and manydevelopingcountrieswithdivergent
income
levels and economicstructures,
it is of interest,
certainlyas a firststep,to
the
same
to
the
Chinese
apply
analysis
economyto obtainwhatcould be
viewedas "benchmark"
estimates.

II. Data Construction

DecomposingChina's economicgrowthintoitssourcesrequiresan enormousamountofdetaileddataforbothpricesandquantitiesofnationalouthave been made in thispaperto collect,
putand inputs,and majorefforts
and
data.
All
reconstruct
originaldata were obtainedfromthe
compile,
Bureau
and
various
ministries.Because of
State Statistical
government
manyunusualfeaturesof the Chinese statisticalsystem,extracare was
of each seriesfromthe
takento evaluatethecompatibility
and consistency
seriesdefinedbythe
Chinesenationalaccountsdatawiththecorresponding
SystemofNationalAccounts(SNA). Some ofthemajorseriesused in this
studyare shownin AppendixTable Al.3
Measuring Aggregate Output
Chinesecentralplannersemphasized"grosssocial output"(GSO) as the
principalindicatorof nationaloutput.Contraryto whatthe name might
3Thecomplete
datasetis availablefrom
theauthors
Variousissues
uponrequest.

of China StatisticalYearbook,StatisticalYearbookofChineseIndustry,
Statistical
Yearbookof Chinese Agriculture,Population StatisticalYearbook,and Labor
Statisticswereused to compilethedata.

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WHY IS CHINA GROWINGSO FAST?

109

in Chinathisindicator
is limitedto theso-calledmaterial
suggest,
production
sectors,
construction,
industry,
comprising
agriculture,
transportafrom
allother
suchas banking,
education,andcommerce.4
services,
Output
hasbeenexcludedfrom
tion,healthcare,realestate,andsocialservices,
GSO. Moreover,
GSO does notnetoutthevalueof intermediate
inputs
itdifficult
suchas energy
andmaterial
to use in
rendering
consumption,
international
ofoutput.
comparisons
SinceChinaopenedup totheoutsideworldinthe1970sandembarked
onmarket-oriented
effort
considerable
hasbeenmadetobring
the
reforms,
its
statistical
national
and
income
accountry's
system,
particularly
product
more
into
line
with
those
in
market
counts,
typically
adopted developed
economies.
The StateStatistical
Bureauhasbeencompiling
a newseries
forgrossnationalproduct
the
since
1978, beginning
(GNP)
yearofeconomicreforms.
estimates
for
the
GNP seriesare
however,
Unfortunately,
notavailablefortheperiodpriorto 1978,thereby
precluding
comparisons
withtheprereform
period.
seriescallednationalincome(NI), which
However,an intermediate
lies somewhere
betweenGSO andGNP,is availablebeginning
in 1952
and endingin 1993.5The ChineseNI seriessharesa commonfeature
withGNP inthatitis a value-added
measure.Likethetraditional
GSO,
butunlikeGNP,theNI measureexcludesthevaluesofa variety
ofservices.WhiletheNI seriesis netof depreciation
of fixedcapitalassets
andotherallowancesforcapitalconsumption,
itis grossofindirect
businesstaxesandbusinesstransfer
the
NI
measure
as
Therefore,
payments.
the
Chinese
authorities
could
be
more
dubbed
by
reported
appropriately
a variantofnetnationalproduct(NNP) originating
in thefivematerial
sectorsoftheeconomy.Sinceindirect
taxesintroduce
a disproduction
betweenmarket
all increpancy
pricesandpricesreceivedbyproducers,
directtaxesnetofenterprise
subsidiesweredeductedfromthereported
NI to derivethevalue of outputat factorcostsratherthanat market
prices.Thisderivedseries-adjustedNI-is chosenhereas thepreferred
measureof aggregate
outputfortheChineseeconomyovertheperiod
1952-94.
Intherestofthispaper,theterms
"valueadded,"and"national
"output,"
income"all essentially
refer
totheadjusted
NI series.Theaverageratesof
in realoutputforvarioussubperiods
are givenin Table 1. It is
growth
4The

coversfarming,
sector
andanimalhusagricultural
broadly
forestry,
fishery
thetransport
sectoralsoincludes
andtelecommunications
services.
bandry;
postal
5TheNI figure
for1994canbe estimated
fromthereported
GNP figure
byadforintermediate
offixedassets,andthevaluesofall
justing
depreciation
purchases,
services
andpostandtelecommunications.
excepttransport

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110

ZULIUF. HU andMOHSINS. KHAN

Table 1. Real OutputGrowthin SelectedPeriods
(Averageannualpercentchange)

Output
Outputpercapita
Outputperemployee

1953-94

1953-78

1979-94

7.2
6.0
5.0

5.8
4.5
3.8

9.3
8.4
7.0

Sources:StateStatistical
Bureau,People'sRepublicofChina,andvariousministries;
andauthors'estimates.

thatoutputgrowth
in thereform
noteworthy
period(1979-94)exceeded
in
the
central
growth
period(1953-78)6by3.5 percentage
output
planning
rateofoutput
points.Also,forall periodstheaveragegrowth
percapita
exceededthatof outputperemployee,
owingto thefasterexpansionin
relative
topopulation
employment
growth.
MeasuringCapitalInput
forthe
TheChineseauthorities
undertake
fixedassetsurveys
regularly
fixed
state-owned
information
on
the
stock
of
sector,
(1)
gross
obtaining
assetsvaluedattheoriginal
of
the
and
assets;
acquisition
prices
respective
of
fixed
valued
at
in
the
the
stock
assets
current
(2)
surveyyears,
prices
In comparing
netofdepreciation.
thenetstockvalueseries,as reported
withthecapitalstockestimated
bytheofficialassetsurveys,
usingcuflowsandtheofficial
table
for
thestatemulated
investment
depreciation
is
ownedsector,largediscrepancies
One
emerge.
possibleexplanation
to
thatthestate-owned
fail use
(SOEs) andotherstateentities
enterprises
consistent
forthoseassetsurveys.
Another
possiblereason
pricedeflators
is thatofficial
suffer
from
seriousreporting
errors
andomissions.
surveys
In anyevent,suchassetsurveysarenotconducted
forurbancollective
and ruralagricultural
sectors,and thusdo notcovertheeconomyas a
whole.Therefore,
fortheexercisein thispaper,thecapitalstockvalues
wereconstructed
basedon grossinvestment
flowdatafromtheChinese
nationalaccounts.
decision
MeasuringcapitalinputsforChinainvolvesan important
thetreatment
of"circulating
thecapital
funds"in computing
concerning
6

Withdataforoutput
levelsbeginning
in1952,dataforoutput
ratesbegin
growth

in 1953.

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WHY IS CHINA GROWINGSO FAST?

111

stock.7The literatureusually includes accumulationof liquid assets as

partof investment(Chow, 1993; and Li and others,1993). The precise
definitionand coverage of circulatingfundsare difficultto grasp. The
referto thisseriesas "workingcapital" and,
officialstatisticsalternately
morerecently,as "changes in inventory,"
addingeven moreconfusion.
The termdatesback to thecentralplanningera wheneach SOE was allocated a certainamountof "quota circulatingfunds"forpurchasingfuel,
raw materials,intermediate
inputs,etc.,accordingto theplans drawnup
the
line
ministriesand local governmentsforoutput,material,and
by
creditallocations.The mainfunction
ofcirculating
fundswas thusto meet
enterprises'demandforworkingcapital in the productionprocess,and
therewas littlerole for"inventories"in a commandeconomycharacterized by chronicshortagesand unsatisfiedinvestmentneeds. However,
economicreformsdisruptedtheworkingof theplanningsystem,and the
in China's economy,as inforbuildupof inventoriesbecame significant
mationon inventorieswas lumpedtogetherwiththeconventionalseries
on circulatingfunds.A puzzle thatarises is thattheratioof "circulating
funds/inventories"
to fixedinvestment
is extraordinarily
high-typically
above 20 percent-formuchof theperiod.WhiletheSNA treatschanges
in inventoriesas investment,
it is difficultto justifyalso includingthe
of
accumulation circulatingfunds,as theyare used in China, as investment.This is just one of the areas wherethe Chinese statisticalsystem
fails to deliver reliable information.For all the above reasons, it is
to includecirculatingfundsin themeasurement
of capital
inappropriate
forChina; onlyfixedinvestment
data wereused in thisstudyin estimatingtheaggregatecapitalstock.
To estimatethe capital stockforthe aggregateeconomy,the standard
perpetualinventory
approachwas used.Thisprocedureinvolvedfoursteps.
data forthe state-ownedsector,urbancollectives,rural
First,investment
collectives,the individualbusiness sector,and otherprivatebusinesses
werecollectedandcombinedintoa singleconsolidatedinvestment
seriesat
current
an
investment
index
was
constructed
to
deflate
prices.Second,
price
the aggregateinvestmentat currentprices, thus generatingaggregate
investment
at constantprices(with1978 as thebase year).Whileformuch
of thecentralplanningperiodproducergoods priceswerefixedbythegovernment,
capitalgoodspricesbegandisplayinga risingandvariabletrendin
theearly1980s,as theplanningauthorities
graduallyloosenedtheirgripon
becamesignificant,
forbuildprices,andproducer
priceinflation
particularly
theinvestment
ing materialssuchas steel,cement,and glass. Specifically,
7 Theterm
funds"
is adopted
from
theofficial
translation
Theorigi"circulating
nalterminChinesecanalsobe interpreted
as "liquidassets."

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112

ZULIU F. HU and MOHSIN S. KHAN

foraccumulation
deflator
estimated
priceindexwasbasedontheimplicit
by
Chow(1993)fortheperiodprior
to 1978,thepriceseriesforbuilding
materialsbetween
1978and1990,andthepriceseriesforfixedassetsthereafter.
Thisindexshouldmimicthepathofassetinflation
well.8Third,
reasonably
aninitial
valueofY175billionwassetfortheaggregate
stock
in1952
capital
theestimate
usedbyChow(1993).9Finally,
official
(at 1952prices),
depreciationrateswereused to construct
netinvestment
data.It shouldbe
thatChineseplanners
havelongusedartificially
lowratesof
acknowledged
a year,as compared
todepreciation
rates
3.6percent
depreciation,
averaging
of 13.3percent
for
a
broad
class
of
U.S.
averages)
(unweighted
geometric
assets
and
(Hulten
1981).
Wykoff,
equipment
newcapitalinvestChineseofficialdevelopment
policiesemphasized
mentprojects,
withtheobjectiveofexpanding
China'soverallscaleand
thecontinual
and
meanwhile,
updating
production;
capacityofindustrial
and
infrastructure
were
of
the
machinery,
equipment,
replacement existing
and
fortechnologically
obsoletemachinery
It is commonplace
neglected.
inserviceinChinesefirms
toremain
(WorldBank,1983).The
equipment
tothetruevintage
ratesthusbearlittlerelation
official
price
depreciation
ofcapitalassetsin
functions
thatcharacterize
therelative
efficiency
profile
estimates
of depreciation,
the
China,but,in theabsenceofindependent
hadtobe used.Low ratesofdepreciation
official
lowrateofdepreciation
and thusbias
of thecapitalstockgrowth
couldlead to overestimation
to
whilebiasof
economic
the
contributions
growth
upward
capitalinputs
of
caveat
should
be
the
role
other
factors.
This
downward
keptinmind
ing
theresults.
whenanalyzing
theaggregate
theprocedure
forestimating
To summarize,
capitalstock
formula:
is basedonthefollowing
Kt = It + (1 - t)K1,

(12)

whereK,is thestockofcapitalinperiodt,I, is thetotalrealinvestment

(in

constantChineseyuan)in periodt,and 4, is therateof depreciation.The

ratesofcalculated
economy
averagegrowth
capitalstocksfortheaggregate
sectorare shownin Table 2. For compariand forthenonagricultural
real
ratesoftheofficial
also shownaretheaveragegrowth
sonpurposes,
the
stock
state-owned
(for
sector).
capital
8 Pricesoffixed
averweredetermined
theweighted
assetinvestment
bytaking
andinstallation,
andequipment,
pricesofconstruction
age ofpricesofmachinery
andother
prices.
9 Chow's(1993)estimate
thevalueofland.
ofinitial
capitalstockvalueincludes
Theestimate
of2.5 in 1978prices.
impliesa ratioofcapitaltooutput

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113

WHYIS CHINAGROWING
SO FAST?

andLaborForceGrowth
inSelectedPeriods
Table2. CapitalFormation
(Averageannualpercentchange,unlessotherwiseindicated)

Real capitalstockgrowtha
economy
Aggregate
Excludingresidential
capital
Real capitalstockgrowthb
Officialestimates
ratio(inpercent)
Investment-output
ratio(in percent)
Capital-output
Employment
Population

1953-94

1953-78

1979-94

6.8
6.3

6.2
6.0

7.7
6.8

11.4
27.1
2.58
2.6
1.8

11.4
22.3
2.59
2.5
2.0

11.4
34.9
2.56
2.7
1.4

Sources:StateStatistical
Bureau,People'sRepublicofChina,andvariousministries;
andauthors'estimates.
aIn 1978base prices.
sector.
bChangesinthenetvalueoffixedassetsinthestate-owned

MeasuringLabor Input
The sources of the Chinese labor statisticsare annual employment
conductedpopulationcensuses.10
These sursurveysand theinfrequently
and
censuses
accurate
estimates
of
total
in
veys
producefairly
employment
termsof head counts,cross-classified
and forms
by gender,age, industry,
of economicownership.However,almostno officialattempts
have been
made so farto measurethe numberof actual workinghours.With the
possibleexceptionof thestate-ownedsector,whereall employerstendto
followstandard
48-hourweeksas mandatedbytheChineseStateCouncil,1
littleinformation
is available on the hours workedby the urban selfemployedand the vast rurallabor force.Thus, the labor inputfor the
Chinese aggregateeconomywas simplyassumedto be equal to thetotal
numberof employedpersons.The averagegrowthratesof thelaborforce
(employment)for the aggregateeconomy and for its nonagricultural
componentare shownin Table 2.

FactorShares
Estimating
To calculatelaborcompensation,
totalwage paymentsin each industry
forthe state-ownedsectorand forthe urbancollectivesectorwere first
10Chinaconducted
itsfirst
censusin 1954;subsequently,
censuses
population
in 1970,1982,and,mostrecently,
wereconducted
1990.
11In 1995,theofficial
hoursforthestatesectorwerefirst
reducedto
working
44 hoursa weekandfinally
fixedat40 hoursa week.

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114

ZULIU F. HU and MOHSIN S. KHAN

summedtoobtainthetotalwage billforChina's formalemployment

economy.To thisfigurewas thenadded totallaborinsuranceand welfarepaymentsto obtaintotallaborcompensationforall formalsectoremployees,
thatis, wage earners.Forrurallaborers,severalsurveyson ruralhousehold
wereused to obtainthescaled-uptotallaborinincomeand expenditure
come of peasantsforthe period 1990-94. The average ratioof peasant
laborincometolaborcompensation
forformally
salariedurbanemployees
was thenused to derivethe labor income of rurallaborersforall other
years.Consideringtherelativelyrapidgrowthin ruralincomein recent
rurallabor incomeand thusthe
years,thisapproachmightoverestimate
aggregatelabor income share.However,in-kindincome,such as subsidized housingin urbanareas and self-consumed
agricultural
productsin
ruralareas, mightbe important
enoughto offsetany upwardbias of the
laborshareestimate.
As can be seen fromTable 3, the measuredlabor income,or factor,
share of NI averaged 0.411 in the 1952-94 period for the aggregate
economy.If agricultureis excluded,the estimatedlabor sharebecomes
0.399. The estimateforthe labor share is consistentwiththe assigned
value of 0.40 in Chow (1993). It also appearsreasonablein comparison
withthe few available estimatesof labor income sharesfordeveloping
countries.The studyby Li and others(1993), however,has produced
somewhathigherestimatesforthelaborincome sharein China, withan
averagevalue of 0.484 fortheperiod 1952-90. That study,however,included implicithousing subsidies (state-controlled
rent)in labor compensation.Such implicithousing subsidies were not includedhere for
labor compensationon the groundsthatthe imputedvalue of housing
as partoftheaggregatevalue added
servicesis notcountedsymmetrically
in Chineseofficialstatistics.

Table3. Estimated
FactorSharesinSelectedPeriodsa
(Inpercent)
economy
Aggregate
Nonagricultural
Li andothers(1993)c

1952-94b

1952-78

1979-94C

0.411
0.399
0.484

0.386
0.400
0.462

0.453
0.397
0.536

Sources:StateStatistical
Bureau,People'sRepublicofChina,andvariousministries;
andauthors'estimates.
aLaborincomeas a shareoftotalvalueadded(NI); periodaverage.
bTheperiodforLi andothers(1993) endsin 1990.
cEstimates Li andothers
(1993) includeimplicit
housingsubsidies(state-controlled
by
rent)in laborcompensation.

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115

WHY IS CHINA GROWINGSO FAST?

III. SourcesofEconomicGrowthin China

Growth
AggregateProductivity
netoutAs showninTable1,China'srealnational
income(thederived
a yearonaverageoverthefourdecades
grewby7.2 percent
putmeasure)
With
to 1994.At thesametime,therewas extraordinary
inputgrowth.
ofnational
investment
27 percent
income,China'srealcapital
averaging
stockexpanded
a yearfortheperiod(Table2). Surprisingly,
by6.8percent
thecapital-output
ratioremained
constant
atabout2.6.Theabsence
roughly
ofpronounced
in
the
Chinese
that
"capitaldeepening"
economy
suggests
accumulation
is
a
of
the
behind
China's
economic
only part
story
capital
growth.
in Chinafor1953-94andthevarioussubperiods
was
Outputgrowth
the
lines
indicated
in
Section
I.
From
this
(9)
decomposed
along
byequation
it
is
oftherateofgrowth
in
decomposition, possibleto obtainestimates
ofoutput
withrespect
totime,holding
TFP,thatis,thegrowth
capitaland
laborinputs
Theresults
constant.
areshowninTable4.
Table4. Aggregate
inSelectedPeriods
Growth
Productivity
(Averageannualpercent
change)
1953-94

Output

Capitalstock
Employment
Totalfactorproductivity
(TFP)

7.2
6.8
2.6
2.1

1953-78

1979-94

5.8

9.3

6.2
2.5
1.1

7.7
2.7
3.9

Sources:StateStatistical
Bureau,People'sRepublicofChina,andvariousministries;
andauthors'estimates.

As canbe seenfromTable4, capitalgrewforthe1953-94periodas a

wholeat 6.8 percent,
andlaborgrewat 2.6 percent.
TFP
By comparison,
was2.1 percent.
draHowever,
growth
productivity
performance
improved
rate
matically
duringthereform
period.WhiletheaverageTFP growth
toabout1.1percent
amounted
it
rose
to
3.9
1953-78,
during
sharply percent
market-oriented
economic
during1979-94whenChinawasimplementing
reforms.12
It is interesting
tonotethatChow(1993)finds
no technological
Theresults
here
progress
priorto 1978intheChineseeconomy.
presented
12 Fora more-detailed
of theChineseeconomicreforms,see Bell,
description
Khor,and Kochhar(1993) and Perkins(1988 and 1989).

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116

ZULIU F. HU and MOHSIN S. KHAN

indicatethat,althoughproductivity
differed
performance
sharplybeforeand
after1978,it was positivein theprereform
era. The openingup to foreign
tradeand investment,
thegradualpricedecontrol,
theriseofruraltownship
andvillageenterprises
(TVEs), andtheexpansionofnewprivatebusinesses
forcesintotheChineseeconomyandhelpedmakethe
brought
competitive
efficient
more
economy
duringthereform
period.
Sources of Economic Growth
of capital, labor, and proTable 5 shows the relativecontributions
to aggregateoutputgrowthin 1953-94 and varioussubperiods.
ductivity
The percentagecontributions
of capitaland laborare obtainedby weightthe
ing
corresponding
growthratesbytheirrespectiveincomeshares.For
source
theperiod1953-94 as a whole,capitalis clearlythemostimportant
of growthin China. Duringthecentralplanningperiod 1953-78, capital
inputalone accountedfor65 percentof theoutputgrowth.The relative
importanceof capitalhas diminishedovertime,however.For thereform
less thanhalfoftheoutputgrowth;for
period1979-94, capitalcontributed
thelast fiveyearsof thesampleperiod,capitalaccountedforonlyabout
source of
30 percentof the outputgrowth.Labor is the least important
growth.Fortheperiod1953-94 as a whole,laboraccountedfor15 percent
of theoutputgrowth.Labor was responsiblefor17 percentof thegrowth
forthecentralplanningperiod 1953-78, but its contribution
droppedto
less than13 percentduringthereformperiod.
WhiletheChineseeconomyexperiencedlow productivity
growthin the
a significant
has
become
centralplanningera,productivity
growth clearly
Table5. SourcesofEconomic
Growth
(Inpercent)
Variables
Outputgrowth
Capitalinputgrowth
Laborinputgrowth
Totalfactorproductivity
(TFP)
ofcapitala
Contribution
oflabor"
Contribution
ofproductivity
Contribution
growthb

1953-94

1953-78

1979-94

7.2
6.8
2.6
2.1
55.6
14.9
29.5

5.8
6.2
2.5
1.1
65.2
16.8
18.0

9.3
7.7
2.7
3.9
45.6
12.8
41.6

Sources:StateStatistical
Bureau,People'sRepublicofChina,andvariousministries;
andauthors'estimates.
a
incomeshare,tooutput
Ratioofinputgrowth,
factor
weighted
bythecorresponding
growth.
bRatioofTFP growth
tooutputgrowth.

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WHY IS CHINA GROWINGSO FAST?

117

sourceof economicgrowthsincethebeginning
of economicreforms.
contributed
42
of theoutputgrowth
in the
Productivity
growth
percent
reform
thepercentage
contribution
ofcapital.
period1979-94,rivaling
Insum,China'srateofoutput
increased
growth
bymorethan3 percentage
withthecentralplanning
pointsin thereform
periodcompared
period.
ratesinbothcapitalandlaborinputs
rosesignificantly
in
Although
growth
differential
1979-94,theproductivity
growth
appearstoexplainthebulkof
thedifference
inoutput
between
andreform
growth
prereform
periods.
Causes ofProductivity
Growth
A variety
ofmarket-oriented
reforms
andincreased
intothe
integration
are
the
most
for
the
globaleconomy
likelyexplanations
rapidproductivity
inChinainrecent
observed
severalfactors
are
growth
years.Specifically,
in
related
to
the
reform
directly
productivity
growth
period.
oflaborfromagriculture
reallocation
First,therehasbeena significant
totheindustry
andservices
sectors.
as a shareof
Agricultural
employment
laborforcefellfrommorethan70 percent
in 1978to54 percent
by 1994.
Theprocessoflaborreallocation
intoactivities
withhigher
valueadded,
suchas manufacturing,
hasbeenanimportant
sourceofaggregate
producfortheeconomy
as a whole,as notedbyWoo(1995),Borentivity
growth
szteinandOstry(1996),andSachsandWoo (1997),all ofwhomattribute
a largepartofaggregate
TFP growth
totheeffects
oflaborreallocation.
ofthenonstate
sectorSecond,as can be seenfromFigure3, output
defined
toincludetheurbancollective
ruralindustry,
sector,
broadly
agriandprivate
andforeign
businesses-hasrisendramatically
overthe
culture,
decades.Evenifagriculture,
whichhadalreadybeen
pastone-and-a-half
liberalized
from
thecollective
commune
system
bytheearly1980s,is exinChina'snonagricultural
sector
cluded,theshareofthenonstate
economy,
whichwasoncedominated
ofoutrosefrom
25 percent
bythestatesector,
in
the
late
1970s
to
56
A
ex1994.
literature
has
put
percent
by
growing
the
nature
and
of
China's
nonstate
plored
operations
enterprises,
especially
theruralTVEs. Severalfeatures
thatdistinguish
TVEs fromSOEs are
in explaining
businesses
SOEs.
important
whynonstate
mayoutperform
TVEs
havestrong
incentives
andsharply
focuson theirfinanFirst,
profit
cial bottomlines,whereasSOEs oftenhave a varietyof nonfinancial
theprovision
ofsocialservices
objectives,
including
(ByrdandGelb,1990;
andHu 1994).Second,unliketheircounterparts
inthestatesector,
TVEs
face hardbudgetconstraints,
withhighbankruptcy
rates,whilelossand creditsubsidies(Qian andXu,
makingSOEs can obtainbudgetary
TVEsenjoymoreoperational
are
and,inparticular,
1993).Third,
autonomy
from
freeofinterference
thecentral
andlocalbureaucracy
intheir
relatively

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ZULIU F. HU and MOHSIN S. KHAN

118

Figure 3. Foreign Direct Investment

(In percent)
70

70

' -60

60 _

50 40 -

sectora
Outputofnonstate
-'

30-

20 -

Foreigntradeb

10 0

i .

- 40
30
- 20

directinvestmentc
78 79

- 50

- 10

"

i
_4
I
I
I
..4 --t80 81 82 83 84 85 86 87 88 89 90 91 92 93 94

Sources: Chinese authoritiesand authors'estimates.

aThe share of the nonstatesectoroutputin totalnonagriculturaloutput.
bThe share of the totalforeigntradein nationalincome.
CThe share of foreigndirectinvestmentin totalfixedinvestment.

laborhiring
andwage-setting
andfiring
practices,
allowingforfargreater
in theruralTVEs
labormarket
The
(Hu,
1994).
flexibility
rapidgrowth
an
role
of
millions
ofworkers
tens
played especially
important bydrawing
fromagriculture
intothehigher-value-added
The
industry.
manufacturing
of
sector
relative
to
the
state
sector
the
nonstate
clearlyhelped
expansion
raiseoverallproduction
intheChineseeconomy.
Jefferson
and
efficiency
in
forsectoral
ChiRawski(1994) provideestimates
productivity
growth
in
nese industry,
classifiedby ownership.
Theyfindthatproductivity
in
China'snonstate
sectorgrewmorethantwiceas fastas thestatesector
between1980and1992.Duringthesubperiod
1984-88,forexample,
proin thestatesector,
in theurban
5.9 percent
ductivity
grewby3.0 percent
and6.6 percent
in thetownship
andvillagesector.The
collectivesector,
inthesurgeof
sectoral
evidence
underscores
theroleofthenonstate
sector
China'saggregate
inthereform
productivity
period.
Third,China'sopen-door
policyand"specialeconomiczones"helped
massiveforeign
into
attract
directinvestment.
Foreigndirectinvestment
Chinawasnegligible
cumulative
priorto 1979.By 1994,however,
foreign
directinvestment
hadreachedUS$95.6billion.Annualinflows
increased
fromabout0.5 percent
oftotalfixedinvestment
in
in 1979to 18 percent
1994.Significant
in technology
andmanagerial
know-how
was
spillover

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WHY IS CHINA GROWINGSO FAST?

119

and whollyownedforeign
thenumerous
jointventures
likelythrough
in the
China's
coastalprovinces
that
have
sprungup along
enterprises
lastdecade.
overthelastdecade.
as an exportpowerhouse
Finally,Chinaemerged
lessthan6 percent
in
incomerosefrom
as a shareofnational
Totalexports
were
1978 to over30 percentin 1994. Manufacturing
exports,in particular,

ata rateof19percent
a yearinthe1981-94
inU.S. dollarterms
expanding
froma littleover10
of
to
national
increased
output
period.Theratio trade
in 1978toover60 percent
from
a largenumby1994.Theevidence
percent
studies
thatexport
hasa strong
berofcross-country
growth
suggests
positive
indomestic
withproductivity
industries.
Thecompetition
correlation
growth
onChineseindustry
inworldmarkets
exerted
to
strong
apparently
pressure
andimprove
practices
efficiency.
adoptthebestmanufacturing
International
Comparisons
A recent
theEastAsiangrowth
exstudy
byYoung(1995)documenting
a heateddebate.NotingYoung'sfindings
thatEast
periencehas stirred
Asianeconomieshad rather
TFP growth
rates,Krugman
unspectacular
theEastAsianeconomicmiracleas a myth
andgoesso
(1994) dismisses
faras toputSingapore
andtheformer
SovietUnioninthesamecategory
ofeconomic
As itis widelysuggested
thatChinais wellonits
inefficiency!
theexamplesofitsEastAsianneighbors,
to achieving
an
way,following
economicmiracleofa farbiggerproportion
Perkins,
(forexample,
1989),
tocompare
itis interesting
China'sgrowth
withthoseofother
experience
countries.
Table6 tabulates
from
fortheGroupofSeven
estimates
studies
previous
industrialized
countries
several
Latin
American
1991),
(Dougherty,
developand
four
industrialized
countries
EastAsianecon(Elias,1992),
ing
newly
omies(Young,1995).WhileChina'sTFPgrowth
intheprereform
was
period
lackluster
in comparison
withproductivity
in othereconomies,
its TFP
ratein thepostreform
thanthoseexperiyearswas notably
growth
higher
intheperiods
encedbyother
countries
showninthetable.China'shighTFP
thatitis rapidly
indicates
growth
catching
upwithinternational
productivity
thoseintheadvanced
industrialized
countries.
levels,particularly

IV. FurtherExplorations
and Sensitivity
Analysis
is nevertheless
a verydeluseful,
Although
extremely
growth
accounting
Thequestion
iswhether
theresults
in
icateexercise.
this
reported
paperconfirmevidencethattheChineseeconomyhas trulymovedsince
stitute

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120

ZULIUF. HU andMOHSINS. KHAN

Table 6. Productivity
in China and SelectedCountries
Performance
(Averageannualpercentchange)
Period

Totalfactorproductivity
(TFP)
growth

countriesa
G-7 industrial
Canada
France
Germany
Italy
Japan
UnitedKingdom
UnitedStates

1960-89
1960-89
1960-89
1960-89
1960-89
1960-89
1960-89

0.5
1.5
1.6
2.0
2.0
1.3
0.4

LatinAmericab
Brazil
Chile
Mexico
Venezuela(manufacturing)

1950-85
1940-85
1940-85
1950-70

1.6
0.8
1.2
2.6

1966-91
1979-96
1979-96
1966-90
1979-96
1966-90
1966-90

2.3
0.9
2.0
0.2
2.5
1.7
2.1

1953-94
1953-78
1979-94

2.1
1.1
3.9

Country

EastAsiac
HongKong
Indonesia
Malaysia
Singapore
Koread
TaiwanProvinceofChinad
China

andreferences
citedinthefootnotes.
Sources:Authors'estimates

aSee Dougherty
(1991).

bSee Elias (1992).

cThe estimates
ofTFP growth
forearlierperiods(1966-91) arefromYoung(1995)
formore
forHongKong,Singapore,Korea,andTaiwanProvinceofChina;estimates
recentperiod(1979-96) aretakenfromSarel(1996).
dExcluding
agriculture.

thereforms
ontoa sustainable
growth.
pathofhighproductivity
long-term
of thefindings,
theanalysiswas redoneusing
To checktherobustness
alternative
dataandmethodologies
suggested
byotherstudies.
Impactof PoliticalDisruptions
inthecentral
andgrowth
ofChina'sefficiency
Comparisons
performance
and
economic
reform
the
be
affected
periods
may
by majorpolitiplanning

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121

WHYIS CHINAGROWING
SO FAST?

cal disruptions
thatoccurred
before
thecountry's
opening
uptotheoutside
worldin 1979.Duringthecentral
planning
period1952-78,Chinaexperiencedperiodicpoliticalupheavals,
highlighted
by the1966-69Cultural
Revolution.
It is well-known
thatin thosepolitically
chaoticyearsChina
subordinated
thenational
ofeconomicdevelopment
to political
priorities
andthattheideologicalstruggles
economic
objectives,
greatly
disrupted
As notedby a number
of studies,including
Chow(1993) and
activity.
Borensztein
andOstry
toseparate
outtheinfluence
of
(1996),itis important
on
China's
Borensztein
and
political
disruptions
growth
performance.
Ostry
ofprereform
Chinais taken
(1996) findthat,oncethepoliticalturbulence
intoconsideration,
in thegrowth
thedifference
ratesofGDP perworker
theprereform
between
andpostreform
becomes
lessdramatic.
Their
periods
to
results
the
the
that,excluding
possibility
point
politicalinfluences, true
in
in
China's
improvement
productivity
growth thereform
periodmaybe
the
smaller
thansuggested
official
data.
by unadjusted
to takeouttheimpactofpoliticaldisruptions
We also findthatfailure
ofoutput
inprereform
wouldleadtounderestimation
China.When
growth
thepolitically
disruptive
yearsfrom1958 to 1970 wereexcluded,the
intheprereform
rateinoutput
was4.5percent
peremployee
growth
period,
rather
than3.8 percent,
as estimated
fromtheunadjusted
data(Table7).
theTFP growth
ratein theprereform
the
Nevertheless,
period,excluding
amounted
to
1.6
politically
disruptive
years,
percent,
onlymarginally
thantheTFPgrowth
fortheentire
because
higher
period,
mainly
prereform
in
the
stable
was
also
years
higher
growth
politically
accompanied
output
It thusseemsthatpoliticaleventsalone
by higherinvestment
growth.
inChina'scencannotcompletely
efficiency
explainthelowerproductive
Even
after
the
most
tralplanning
excluding politically disruptive
period.
in estimated
TFP growth
rates
yearsfrom1958 to 1970,thedifference
thecentral
reform
remains
between
and
substantial.
planning
periods
onEfficiency
Table7. ImpactofPoliticalDisruptions
andGrowth
(Averageannualpercent
change)
1953-78
1953-78a
Output

Outputpercapita
Outputperemployee
Real capitalstock
Employment
Totalfactorproductivity
(TFP)

5.8

4.5
3.8
6.2
2.5
1.1

6.6

4.7
4.5
6.5
2.2
1.6

Sources:StateStatistical
Bureau,People'sRepublicofChina,andvariousministries;
andauthors'estimates.
disruptive
yearsfrom1958to 1970.
aExcludingthepolitically

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122

ZULIUF. HU andMOHSINS. KHAN

Table 8. Efficiency
and Growthin theNonagricultural
Economy
(Averageannualpercentchange)

Output
Capitalinput
Laborinput
Totalfactor
(TFP)
productivity

1953-94

1953-78a

1979-94

8.5
10.1
5.0
0.9

9.3
12.1
6.5
-0.8

10.0
9.3
5.4
3.1

Sources:StateStatistical
Bureau,People'sRepublicofChina,andvariousministries;
andauthors'estimates.
aExcludingthepolitically
yearsfrom1958to 1970.
disruptive

ofChina's Nonagricultural
Efficiency
Economy
In the 1952-78 period, Chinese centralplannersfavoredthe urban
industrialsector over agriculture,allocatingthe predominantshare of
nationalsavingsas capitalinvestment
to industry
while forcingtherural
in
to
population stay agriculture
by strictlycontrollingmigrationto the
cities.In thereform
Chineseindustry
continuedtoreceive
1979-94,
period
a dominantshareof capital,butthegovernment
also adopteda moreflexible labormarketpolicythatpermitted
ruralsurpluslaborto move out of
into
rural
or
the
urban
servicessector.Atthesametime,
agriculture
industry
shrank
from
of
40
the
national
incomeintheearly1980s
agriculture
percent
to about25 percentby 1994.13
Withthe continuingreductionin the sharesof agricultural
outputand
laborforce,and withmorecapitaland laborresourcesdrawn
agricultural
intothenonagricultural
economythaneverbefore,an important
question
arises: How have such sectoralshiftsin outputand reallocationof labor
of China's nonagricultural
affectedtheefficiency
economy?
As can be seenfromTable 4 andTable 8, growth
innonagricultural
output
fortheeconomyas a whole,butgrowthininputsfor
outpacedoutputgrowth
thenonagricultural
economywas considerably
higherthangrowthin inputs
fortheaggregateeconomy.The capitalstockexpandedby 10 percenta year
forthenonagricultural
economy,comparedwith6.8 percentfortheaggregateeconomy,whilegrowthin laborinputsaveraged5 percentin China's
nonagricultural
economy,as opposedto 2.6 percentfortheeconomyas a
whole.Excludingagriculture,
TFP growthturnedoutto be negative(minus
13In the1950s,theChineseeconomy
waspredominantly
theshare
agricultural:
ofagricultural
in nationalincomewas 58 percent
in 1952.Indeed,ifthe
output
forced
concentration
ofpopulation
intheruralareasis nottakenintoaccount,
one
couldarguethatChina'sofficial
industrialization
development
policiesfavoring
overagriculture
muchoftheperiodwerelargely
successful.
through

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WHY IS CHINA GROWINGSO FAST?

123

in1953-78and3.1percent
in 1979-94.14
0.8percent)
WhileTFPgrowth
for
thenonagricultural
was
a
lower
the
little
than
3.9
for
the
economy
percent
overalleconomy
inthe1979-94period,
thecontrast
(including
agriculture)
in productivity
of
the
between
the
performances nonagricultural
economy
central
eraandthereform
planning
periodis remarkable.
Can China's TFP GrowthBe Sustained?
arises,Howsustainable
periodalone,thequestion
Lookingatthereform
is China'sproductivity
Ifthedramatic
productivity
growth?15
improvement
inthe1979-94periodmainly
reflected
theonetime
gainsinduced
bytheearofcollective
suchas thedismantling
the
lierreforms,
agriculture
(including
rural
s
and
the
restoration
of
in
the
areas,
communes)
family
farming
people'
a subsequent
slowdown
inaggregate
haveobserved
onemight
productivity
for
was
exhausted
overtime.Inthe
as
the
gains
growth
potential efficiency
in therural
first
sixyearsuntil1984,Chinesereforms
wereconcentrated
As shownbyMcMillan,
successful.
and
sectorandwerelargely
Whalley,
in
Zhu(1989)andbyKhanandKhan(1995),productivity
growth Chinese
in
thisperiodwasimpressive,
partly
owingtoincreases
agriculture
during
incentives
tofarmers
positive
agricultural
pricesand-moreimportant-to
theintroduction
inducedbyinstitutional
changes.Thesechangesincluded
andtheincreased
labormarket
flexofthehousehold
system
responsibility
labor
move
into
industrial
and
urban
that
rural
to
ibility permitted surplus
forthe
TFP growth
sectors.As shownin Table9, theestimated
tertiary
aggregateeconomyover the initialperiodof reforms(1979-84) was 2.5

a fullpercentage
thanintheprereform
pointhigher
period.
percent,
in
shifted
its
reform
totheurban,
stateChina
priorities
Beginning 1984,
far
more
and
ownedindustrial
sector.
Thesereforms
proved
complex chalreforms
and
than
the
earlier
rural
1988;
Bell,Khor,and
(Perkins,
lenging
withthestate
Kochhar,
1993).Itwaspossiblethatthecontinued
problems
further
wouldlimitthescopeforsustained
industry
productivity
gainsin
theChineseeconomy.
becauseofincreased
Nevertheless,
autonomy
mainly
ofreform
andstrengthened
incentives
associatedwitha number
working
eventheChineseSOEs registered
measures,
growth
higherproductivity
(Grovesand others,1994). Indeed,as shownin Table 9, TFP forthe
between
1985and1989.Inthelast
economy
grewby2.7percent
aggregate
14
is likelytoproducemoreaccurate
economy
Focusingon thenonagricultural
forthe
as a separate
factor
TFP estimates
becauselandis notincluded
productive
economy.
aggregate
15The
inChinahasrecently
beenquestioned
ofproductivity
sustainability
growth
byWoo(1995).

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124

ZULIUF. HU andMOHSINS. KHAN

Table 9. Productivity
Growthin theReformPeriod
(Averageannualpercentchange)
Ruralreform
1979-84

Output
Capitalinput
Laborinput
Totalfactor

(TFP)
productivity

Extensionofreform
to urban,state-owned
sector1985-89

Accelerated
reform
1990-94

8.0
7.1
3.0

8.8
8.6
2.8

11.5
7.5
2.1

2.5

2.7

5.8

Sources:StateStatistical
Bureau,People'sRepublicofChina,andvariousministries;
andauthors'estimates.

several years of the sample period (1990-94), TFP growthreached an

astonishing5.8 percent,and productivity
changesforthefirsttimeovertook capital as the predominantsource of China's economic growth.
Instead of slowing down (as one mighthave expected), productivity
newhighsas Chinamovedforwardon thereform
growthreachedstunning
an
albeit
at
uneven
pace.
path,
theevidencefromthisstudypointsto a somewhatdifferent
Therefore,
conclusionfromthatreachedby Sachs and Woo (1997). Even thoughthe
reformsmay have
efficiencygains broughtabout by earlieragricultural
the surgein foreigndirect
dissipated,the sharpgrowthin ruralindustry,
theexportboom,thefurther
ofthecentralplanning
investment,
dismantling
system,and the increasingmarketorientationin the state-ownedsector
have combinedto boost aggregateproductivity
growthin the 1985-94
so
1990-94.
and
even
more
during
period,
Adjusting Capital Stock Growth
was
Duringthecentralplanningperiod,muchof thefixedinvestment
allocatedto new machineryand equipmentto increasethecountry'sindustrialcapacity,while infrastructure
and residentialinvestmentwas
In
the
reform
neglected.
period,outlays in new housingby state and
nonstateentitiesincreasedsharply,takinga largershareof grossfixedinvestment.Since theChineseNI seriesexcludestheimputedvalue of residentialhousingservices,a corresponding
forthecapitalstock
adjustment
was made by deductingresidentialinvestment
fromgross fixedinvestment.As can be seen fromTable 10, suchan adjustment
has no impacton
the TFP growthestimatesforthe centralplanningperiod 1953-78 but
raisestheestimatedTFP growthforthe1979-94 reform
periodto 4.4 percentfrom3.9 percent.

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125

WHYIS CHINAGROWING
SO FAST?

Table10. Sensitivity
(TFP)
Analysis
ofTotalFactorProductivity
Growth
Estimates
(Averageannualpercent
change)

Central
planning
period
1953-78

Economic
reform
period
1979-94

TFP growth
estimates
Alternative
Li andothers(1993)a
andOstry(1996)
Borensztein
Sachs andWoo (1997)b

-0.8
-0.7
-

2.5
3.8
1.7

measuresofcapitalinputc
Alternative
investment
Excludingresidential
Reducinginitialcapitalstockd

1.1
-0.9

4.4
3.7

0.7
1.1
1.8

3.2
3.7
4.6

Assumedvaluesoflaborsharese
a = 0.3
a = 0.5
a = 0.6

and Ostry(1996), and Sachs and Woo

Sources:Li and others(1993), Borensztein
(1997); andauthors'estimates.
a The economicreform
periodcoveredis 1979-90.
b Theeconomicreform
periodcoveredis 1978-93.SachsandWoo (1997) also report
TFP growthestimatesof 3.3 percentand 0.8 percentforsubperiods1978-84 and
1985-93,respectively.
c
andfactorshares.
ofoutputgrowth,
inputgrowth,
Usingauthors'ownestimates
initialcapitalstockat Y58.9 billionin 1952,whichreducestheinitialcapid Setting
ratiofrom2.5 to 1 in 1952.
tal-output
e
ofoutputandinputgrowth.
Usingauthors'ownestimates

TFP growthestimatescan also be sensitiveto theinitialvalues of capithevalue of initialcapitalstockwas set

tal stock.To assess thispossibility,
at Y58.9 billion(1952 prices),16
whichreducesthestarting
capital-output
ratiofrom2.5 (derivedfromChow's (1993) estimate)to 1. This adjustment
in theearliercentral
increasedreal capitalstockgrowthrates,particularly
As
a
TFP
turned
estimated
result,
growth
negative(minus
planningperiod.
0.9 percent)for 1953-78, but it was only slightlylower forthe reform
period 1979-94 (3.7 percent)thanwhen Chow's (1993) estimateof the
initialcapitalstockwas used.
Measurement Errorsin Output and Input Data
errorsin the officialChinese data warrant
The potentialmeasurement
theresultspresentedin thispaperand
considerablecautionin interpreting
elsewhere.Woo (1995) and Sachs and Woo (1997) assertthattheChinese
'6Recall thatChow (1993) uses a value of Y175 billion(at 1952 prices).

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126

ZULIU F. HU and MOHSIN S. KHAN

officialoutputdata overstated
outputgrowthby as muchas 0.5-1.0
theiroutput
period.Ifcorrect,
adjustpercentage
pointsinthepostreform
mentwouldreducetheTFP growth
estimates
in thispaperby 0.5-1.0
andfactor
sharesatthesamelevels.
points,
percentage
holding
inputs
totheserecent
intheofficial
theerrors
datastem
studies,
According
output
from
two
sources:
of
nominal
andunindustrial
mainly
overreporting
output
of
nominal
industrial
Chinese
collective
derdeflating
output
by
enterprises,
TVEs.Itispuzzling
thatChina'snonstate
shouldinthe
especially
enterprises
reform
their
nominal
totheauthorities.
Theseenterperiodoverreport
output
have
like
ifpossible.
incentives
and
would
to
avoid
taxes
prises
strong
profit
is thatoverzealous
Onepossibility
localofficials
overstated
thetotaloutput
intheir
tojustify
their
totheir
Howjurisdictions
jobperformances
superiors.
incentives
farweakerin thepostarepresumably
ever,suchbureaucratic
eraofdecentralization
reform
andincreased
localautonomy
thantheywere
inthecentral
Infact,
ofevidence
that
China's
planning
period.
plenty
suggests
informal
sectorexpanded
sincetheeconomic
which
reforms,
substantially
hada growth
effect
as wellas a leveleffect
onoutput.
As such,itis doubtful
that
a biasresulting
from
theoverstating
ofoutput
couldreduce
the
correcting
in
differences
China's
before
and
after
reforms.
sharp
output
growth
Theunderdeflating
ofnominal
couldbe a moreimportant
sourceof
output
bias.RecentworkbyWoo(1995),Borensztein
andOstry
and
(1996), Sachs
andWoo(1997)attributes
muchoftheupward
biasinofficial
output
growth
estimates
totheimproper
inthecolofindustrial
deflating
especially
output,
lectivesector.
tothe
However,
theyfailtomakethesymmetric
adjustment
investment
official
as indusunderdeflated
series,whichcouldbe similarly
trialpricesdetermine
toa largedegreeinvestment
Thusthenet
goodsprices.
of
the
Sachs-Woo
the
TFP
is not
on
true
estimates
impact
adjustment
growth
in
clear.Oneshouldalsobearinmindthatofficial
statistics
the
cenoutput
tralplanning
are
not
free
of
the
Selectperiod
deflating"
"improper
problem.
deflator
forthatperiodis a delicate
matter
becauseofthe
inganappropriate
severe
inflation.
Thechronic
shortages,
queues,andexcessdemand
repressed
intheabsenceofpricecontrol,
forcapitalinvestment
indicate
that,
openinflation
wouldhavebeenmuchhigher.
theoutput
Thus,whileunderdeflating
seriesposesa serious
fortheestimated
itdoes
valuesofTFPgrowth,
problem
notchangethebasicconclusion
thatefficiency
hasimproved
in
substantially
thereform
period.
thebiggest
withtheofficial
statistics
lieswiththecapEssentially,
problem
italstockdata.As notedinthediscussion
ofdataconstruction
inSectionII,
theofficial
assetsurveys
do notproduce
stockestimates
withthe
consistent
investment
flowdatafrom
thenational
accounts.
Thedifferences
between
the
official
estimate
ofthecapitalstockandtheestimate
obtained
byapplying
theperpetual
method
tothedisaggregated
investment
flowdata,
inventory

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WHY IS CHINA GROWINGSO FAST?

127

withproper
aresubstantial.
Woo (1995),Borensztein
andOstry
deflating,
(1996),andSachsandWoo(1997)allusea seriesofcapitalstockestimated
earlierbyLi andothers
(1993).As discussedingreatdetailinHu (1996),
thiscapitalstockseries,although
a significant
representing
improvement
overtheofficial
overestimates
China'srealcapitalstock
series,seriously
incertain
timeperiods.
growth
Table 10 showshowTFP growth
estimates
measures
varyifdifferent
ofoutput,
and
Li
factor
shares
are
used.
and
others
(1993)
capitalinput,
estimateTFP growthratesto be minus0.8 percentfor1953-78,and
for1979-90.Woo (1995)andSachsandWoo (1997)estimate
2.5 percent
TFP forChina'saggregate
tobe 1.7percent
for1978-93.17
Boreconomy
TFP growth
andOstry
tobe 3.8percent
forthereensztein
(1996)estimate
do notdiffer
from
the
form
substantially
period1979-94.Theseestimates
of3.9percent
for1979-94reported
inthispaper,conTFPgrowth
estimate
andinput
data.Li andothers'(1993)
their
useofalternative
sidering
output
for
resultsimplya netincreaseof 3.3 percentage
pointsin TFP growth,
tothe2.8 percentage
increase
from
central
as compared
the
instance,
point
tothereform
here.Usingalternative
valuesfor
periodestimated
planning
for
Borensztein
and
factor
as
done
shares,
by
Ostry(1996),also
example
In
thedifdoesnotchangetheresults
(Table 10). particular,
significantly
inTFP growth
between
theprereform
andreform
ferential
remains
periods
ofthevaluechosenorthelaborshare(a). Byandlarge,
large,irrespective
from
thesestudies
confirms
that
theavailable
evidence
productivity
improveinChinaduring
mentsarea significant
sourceofeconomicgrowth
thereandthebasicconclusion
remains
whenalternative
form
unchanged
period,
measures
ofcapitalinputandvaluesoflaborincomeshareareused.

V. Conclusions
Thecentral
ofthispaperis that,although
finding
capitalaccumulation
inChina'seconomic
wasa dominant
factor
growth,
productivity
improverole.Becauseof China's
mentshaveassumedan increasingly
important
oflabor,thesignificance
offactor
highsavingsratesandabundance
inputs
in China'seconomicgrowth
is wellunderstood;
it is interesthowever,
to achievean impressive
recordof
ingto findthatChinahas continued
in
recent
growth
productivity
years.
Theevidenceis clearthatChinahasreapedconsiderable
gainsfromits
inthepasttwodecades.TheTFPgrowth
reforms
economic
market-oriented
wasfairly
lowfortheperiod1953-78because
rateintheChineseeconomy
17 Their TFP growthestimatesare 3.3 percentand 0.8 percentforsubperiods
1978-84 and 1984-93, respectively.

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128

ZULIU F. HU and MOHSIN S. KHAN

comthesystemof centralplanningstifledeconomicincentives,
prevented
resource
allocation.
China
achieved
and
distorted
specBy contrast,
petition,
tacularproductivity
growthin thereformperiod,withtheincreasein TFP
morethan40
4 percenta year.Productivity
growthcontributed
approaching
the
reform
periodand
percentofChina's aggregateeconomicgrowthduring
sourceofeconomicgrowth
rapidlyreplacedcapitalinputas thepredominant
in China.In theabsenceof an identified
surgein researchand development
toimproved
theobservedproductivity
efforts,
gainscanbe mainlyattributed
suchas theemergence
allocativeefficiency
undermarket-oriented
reforms,
as wellas toChina'sdecadeoffamilyfarming
andtheriseofruralindustry,
which
about
an
longopen-doorpolicy,
brought
expansionin foreigntrade
andforeign
directinvestment.
Whileatthisstageitis notpossibletopinpoint
theexactsourcesofproductivity
growthinChina,therearegood theoretical
in
andempiricalreasonsto believethatthereform
processthatwas initiated
continuesto have,an important
effecton the
1978 has had,and apparently
growthobservedoverthepastdecade.
rapidproductivity
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APPENDIX

Table Al. Selected TimeSeries of Output,Factor Supplies,and

(In hundredsof millionsof yuan,unless otherwiseindica

Year

National
income
(current
prices)

National
income
(1978
prices)

National
income
deflator
(1978= 1)

Gross fixed
investment
(current
prices)

1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969

589
709
748
788
882
908
1118
1222
1220
996
924
1000
1166
1387
1596
1467
1415
1617

664
757
801
852
972
1016
1239
1341
1322
929
869
962
1121
1310
1534
1423
1329
1586

0.8872
0.9368
0.9343
0.9252
0.9075
0.8939
0.9020
0.9112
0.9230
1.0716
1.0633
1.0396
1.0405
1.0584
1.0407
1.0312
1.0641
1.0191

57
106
125
123
202
165
300
402
432
169
110
156
220
379
329
254
220
315

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Cap
st
(1
pr

2
2
2
3
3
3
3
3
3
3
3
3
4

1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994

1926
2077
2136
2318
2348
2503
2427
2644
3010
3350
3688
3941
4258
4736
5652
7020
7859
9313
11738
13176
14384
16557
20223
24882
33312

1955
2093
2153
2332
2358
2554
2486
2680
3010
3221
3428
3595
3888
4277
4858
5514
5939
6544
7284
7549
7937
8549
9864
11354
13411

0.9848
0.9923
0.9921
0.9942
0.9957
0.9801
0.9762
0.9865
1.0000
1.0402
1.0757
1.0963
1.0949
1.1073
1.1634
1.2730
1.3233
1.4232
1.6114
1.7454
1.8122
1.9369
2.0502
2.1915
2.4836

456
512
526
565
617
720
704
747
880
947
1026
961
1230
1430
1833
2543
3020
3641
4497
4138
4449
5509
7855
12458
16370

Sources:StateStatistical
Bureau,People's RepublicofChina,and variousministries.

This content downloaded from 27.251.83.10 on Tue, 14 Jul 2015 08:15:43 UTC
All use subject to JSTOR Terms and Conditions

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