Journal of Knowledge-based Innovation in China

Empirical analysis of the sources of China's economic growth in 1978-2008

Wang Hongwei, Li Ping,
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China’s economic
Empirical analysis of the sources growth in
of China’s economic growth 1978-2008
in 1978-2008
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91
Wang Hongwei
Institute of Quantitative and Technical Economics,
Chinese Academy of Social Sciences, Beijing, China, and
Li Ping
Institute of Industrial Economics, Chinese Academy of Social Sciences,
Beijing, China

Abstract
Purpose – This paper aims to reflect the quality of Chinese economic growth and analyze its
influential factors through measuring the change rate of technological progress and its contribution
rate to economic growth between 1978 and 2008.
Design/methodology/approach – In this paper, an all factor productivity (AFP) method is taken.
AFP is essentially a weighted sum of all input factors’ productivity. Besides, general hypotheses for
production function, such assumptions are not required as neutral technological progress, constant
returns to scale and producer equilibrium in method of AFP. Furthermore, specific forms of production
function are not needed and can be calculated directly. This method tries to relax the assumptions to
make the estimated rate of technological progress closer to the reality in China.
Findings – Empirical research using the AFP method shows a contribution rate of AFP to economic
growth has been significantly improved since reform and opening-up; however, that AFP fluctuates
during different periods. China’s economic growth is driven by investment and mainly depends on
accumulation of capital input and moderate technological progress. Generally speaking, China’s
change of technological progress is consistent with its economic growth and technological progress
plays an important role in its economic growth. The paper concludes that it is becoming significant for
China to speed up its large-scale technological progress, strengthen indigenous innovation, accelerate
human resource development, and to facilitate promotion of system reform in an in-depth manner.
Originality/value – First, in order to ensure the accuracy measurement, and taking into account the
impact of macro-economic control policies, the rate of change of technological progress and its
contribution to economic growth are measured, according to the stages of China’s economic cycles.
Second, the perpetual inventory method is taken to calculate the annual value of fixed asset
investment, and price deflated index is used to convert fixed asset investment into comparable data of
the base year, 1978. Since the data of fixed assets price index began to be released from 1992, data from
1978 to 1991 are obtained by mathematical method through extension. Third, the theoretical model of
AFP is transformed into an empirical one to estimate the change rate of technological progress and its
contribution to economic growth in China.
Keywords Productivity rate, Economic growth, Contribution margin, China
Paper type Research paper

Journal of Knowledge-based
Innovation in China
The views expressed in this paper are exclusively those of the authors and do not necessarily Vol. 3 No. 2, 2011
reflect the views of their affiliated institutes. The authors would like to thank Professor pp. 91-105
q Emerald Group Publishing Limited
Zhong Xueyi, Professor Gongfeihong, and Dr Shang Chuanghong for helpful comments. All errors 1756-1418
are, of course, the authors’ own. DOI 10.1108/17561411111138946
 JKIC Introduction
3,2 Total factor productivity (TFP) is an important concept in macroeconomics, but also an
important source for economic growth, especially an important basis of the
government policy for long-term sustainable growth. With China’s long-term stable,
rapid economic development, more and more scholars pay special attention to China’s
technological progress and the relationship between technological progress and
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92 economic growth. The relevant research has, systematically, been delving deeper since
the 1980s. Fan, who made use of the method of Solow residual by measuring TFP in
different areas, concluded that about 46-49 percent of China’s gross domestic product
(GDP) growth came from the growth of TFP between 1982 and 1999. In the same way,
Zhao found that China’s contribution rate of technological progress to economic
growth was more than 40 percent between 1978 and 2002 (Zhao, 2005). By Solow
residual, the contribution rate of China’s TFP was considered to be up to 37 percent
between 1981 and 2005 and that the contribution of capital input was the most
important source of economic growth. Also by Solow residual, recessive variables, and
potential output, it is thought that, overall, China’s TFP experienced fierce fluctuation
between 1979 and 1993 and China’s economic growth mainly depends on the growth of
factor inputs, a typical pattern of investment growth (Guo and Jia, 2005). Cao et al.
(2009) measured China’s TFP with the stochastic frontier production function and
found that China’s economic growth was driven by the accumulation of capital input
and moderate total growth of TFP. They argued that the growth of China’s TFP would
show a decline in the future. Islam et al. (2006) estimated China’s TFP using a dual
method in which price information plays its role independently, reaching the
conclusion that the growth rate of China’s TFP has slightly declined in recent years.
The contribution rate of China’s TFP is around 30 percent between 1979 and 1990,
according to the estimation by Li et. al. (1993), using the method of trans-log production
function proposed by Jorgenson et al. (1987).
Nevertheless, so far no consistency has been reached among researchers. The big
differences come from measurement of output data, capital, and labor inputs. The option
of TFP estimation methods and measurement periods result in different conclusions in
measurement of the contribution rate of China’s technological progress on economy.
This paper, on the grounds of the option of research method and period, and
measurement of output and input data, examines China’s aggregate TFP change and its
contribution to economic growth between 1978 and 2008 with the method of all factor
productivity (AFP).

AFP measurement method

Tinbergen first conducted quantitative research about technological progress in
economic growth in 1940s, then Robert Solow put forward the method of Solow residual in
which technological progress was brought into economic growth pattern. US Economist
E. Dennison further developed the “residual value” method and his main contributions
are to put a more detailed classification of input factors, and synthesized total input index
using factor weights. Professor Dale Jorgensen further put forward translog production
function method, in the case of constant returns to scale, he decomposed economic growth
into the number of input factors, the quality of input factors, and TFP growth.
Traditional production function methods assume technique is efficient in production,
so all the residues that the output growth rate deduct, factor input growth rate attributed
 to the result of technological progress change, and ignores technical efficiency effects, China’s economic
another important component of the growth of TFP. In Aigner et al. (1977) and Meeusen growth in
and van den Broeck independently proposed the stochastic frontier production function,
allowing the existence of invalid technology, decomposing the change of TFP 1978-2008
into the movement of the possibility of frontier production and technical efficiency.
In 1978, the famous American professor Chames A. Cooper WW first proposed the data
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envelopment analysis (DEA) method, which directly uses linear optimization to give an 93
estimation of distance function and frontier production function, does not require a priori
estimate assumptions or structure parameters, and allows the existence of inefficient
behavior, so the changes in TFP can be decomposed. It has become a research hotspot
that links the DEA method and Malmquist index methods to measure TFP. After several
decades of development, the theory and method of TFP has matured and enters a new
phase (Cao et al., 2009).
The above methods of productivity measurement are divided into two major
categories: parametric methods and non-parametric methods. Parametric methods
include Solow residual method, implicit variables, and frontier production function
method. Non-parametric methods include Malmquist index methods and HMB index
methods. It is usual to use parametric methods to estimate aggregate TFP, and Solow
residual and the translog production function methods are commonly used here.
At present, more non-parametric methods are used in the estimation of regional and
industry TFP.
There are some shortcomings in the Chinese TFP measure models, mainly reflected
in the difference between model assumptions and the actual development of China.
The Solow residual method assumes technical progress is exogenous, non-expression
and Hicks neutral, constant returns to scale, and so on. Translog production function
method assumes technical progress is neutral, constant returns to scale and producer
equilibrium; some of the quadratics in the function cannot be reasonably explained
from an economic point of view, and the method assumes that the parameters are the
same in each year, neglecting the diversity of economic development at stages.
Prior to the reform, China suffered from backward technology and low capital stock
per capita. After the reforms, restrictions on labor mobility were relaxed and optimal
allocation of resources was promoted. Massively advanced technology and equipment
were introduced from foreign countries, so there now exists a phenomenon of
increasing returns to scale in China. Kim and Lawrence (1994) also showed that the
scale returns of newly industrialized East Asian economies were significantly . 1.
In theory, growth of TFP may not be entirely a result of technological changes;
however, it is not certain that all technological changes can be reflected by TFP. Even
though TFP can reflect all changes in technology, such non-technical factors can be
included in TFP measurement including cost adjustment, economy of scale, economic
cycle, efficiency changes, and measurement error. Strictly speaking, these
non-technical factors make simple hypotheses of growth accounting models for TFP
invalid. In the case of non-constant returns to scale, the applicability of growth
accounting models for TFP is under discussion (OECD, 2008).
Gang et al. (2003) also show that there should be a difference in calculating TFP
between emerging economies and developed countries. Therefore, it is very important
to explore the special new model and method that adapt to the conditions and fact of
Chinese economic growth.
 JKIC Yi (2008) proposed an AFP method; in the following analyses, we throw light on
why we chose the AFP method as the empirical research base to measure and calculate
3,2 the rate of change of China’s technological progress and its contribution to economic
growth.

Basic theories for AFP method

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94 Consider dynamic aggregate production function with single production and n

different input factors:
Y ¼ FðX; tÞ
This function meets general requirements as production function. Y is aggregate
output, X ¼ ðX 1 ; X 2 ; . . . ; X n ÞT is n dimensional vector representing n factors, and t
means time variable. The function’s Derivation of Logarithm will be:
Xn

dY 1 ›F ›F X i dX i
¼ dt þ ð1Þ
Y Y ›t i¼1
›X i Y Xi

Thus, we suppose ai as output elasticity for factor X i and:

›F X i
ai ¼ ; ði ¼ 1; 2; . . . ; nÞ
›X i Y
If lT stands for TFP, the first term in the right-hand of the expression (1) is the growth
rate of TFPlT . We describe it as: dlT =lT :
dlT 1 ›F
¼ dt:
lT Y ›t
Let us rewrite equation (1) as the following:

dY d lT X n
dX i
¼ þ ai ð2Þ
Y lT i¼1
Xi

Equation (2) is a growth accounting equation Pwith which we are familiar.

If we describe elasticity of scale as: a ¼ ni¼1 ai and, single factor productivity as:
li ¼ Y =X i ; ði ¼ 1; 2; . . . ; nÞ, then we will have growth rate of single factor
productivity as the following:
dli dY dX i
¼ 2 ; ði ¼ 1; 2; . . . ; nÞ
li Y Xi
Introducing:
dli dY dX i
¼ 2 ; ði ¼ 1; 2; . . . ; nÞ
li Y Xi
to equation (2), we will obtain:

dY d lT dY X n
dli
¼ þa 2 ai
Y lT Y i¼1
li
 Then will get equation (3) by comparison: China’s economic
dY X n
ai d l i X n
ai dX i
growth in
¼ þ ð3Þ 1978-2008
Y i¼1
a li i¼1
a Xi

The first term on the right-hand side of equation (3) is weighted sum of growth rate of
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single factor productivity and we define it as growth rate of AFP: 95

d lA X n
ai d li
¼
lA i¼1
a li

So, equation (3) can be rewritten as equation (4):

dY d lA X n
ai dX i
¼ þ ð4Þ
Y lA i¼1
a Xi

Suppose the price vector is: w ¼ ðw1 ; w2 ; . . . ; wn ÞT . Given cost equilibrium, weight can
be changed from elasticity share into cost share of factor input.
Then definition of the growth rate of AFP can be rewritten as following equation (5):

dlA X n
wi X i dli
¼ ð5Þ
lA i¼1
w T X li

In essence, growth rate of AFP is the weighted sum of growth rate of all single factor
productivities. AFP method releases the assumption conditions of neutral
technological progress, constant returns to scale, price equalization, and tries to
meet China’s development path and particular reality. In addition, the change rate of
technical progress can be calculated directly, does not need a specific production
function, and only cost equilibrium is required to apply the AFP method.

Specific methods of estimating AFP

Data sequence of aggregate output: Y t ðt ¼ 0; 1; 2; . . .Þ; t ¼ 0, means
base year.
Data sequence of labor input: Lt ðt ¼ 0; 1; 2; . . .Þ.
Data sequence of compensation of laborers: wLt Lt ðt ¼ 0; 1; 2; . . .Þ:
Data sequence of capital input: K t ðt ¼ 0; 1; 2; . . .Þ:
Data sequence of capital service costs: wK t K t ðt ¼ 0; 1; 2; . . .Þ:
Data sequence of labor productivity: lLt ¼ YLtt ðt ¼ 0; 1; 2; . . .Þ:
Data sequence of capital productivit: lK t ¼ YK tt ðt ¼ 0; 1; 2; . . .Þ:
Y t 2Y t21
Economic growth rate in year t: Y t21 ðt ¼ 1; 2; . . .Þ:
According to the definition of AFP, AFP growth rate in year t can be deduced as
follows:
 JKIC lAt 2 lAt21 wLt Lt lLt 2 lLt21 wK t K t lK t 2 lK t21
¼ þ
3,2 lAt21 wLt Lt þ wK t K t lLt21 wLt Lt þ wK t K t lK t21
ðt ¼ 1; 2; . . .Þ
The contribution rate of AFP in year t will be expressed as:
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ðlAt 2 lAt21 Þ=ðlAt21 Þ

96 £ 100% ðt ¼ 1; 2; . . .Þ
ðY t 2 Y t21 Þ=ðY t21 Þ
Data specifications and measurement periods
Aggregate output data. It is deflated aggregate data of GDP at constant price (Data in
1978 is 100).
Factor inputs are capital input and labor input. Data of labor input are the number of
labor force. During 1978-2008, China’s economy grew rapidly with strong market
demand, and as the labor system is imperfect, most labor-intensive industries’ labor
forces work more overtime, however, related statistical data are lacking. Therefore,
labor input data use the number of laborers instead of labor time. Capital input data are
stock of capital, which is the cumulative value of investment in annual fixed assets,
calculated by the perpetual inventory method. In addition, investment in annual fixed
assets is deflated by the price index of investment in fixed assets and converted into
comparable capital input for which the base year is 1978. As, since 1992, China’s price
indices of investment in fixed assets have been announced year by year, price indices
of investment in fixed assets and fixed base indices between 1978 and 1991 are
obtained by mathematical methods, through extension, at the 96.4 percent confidence
level. The method for calculating capital stock is as follows:
CS ¼ CS 21 *ð1 2 dÞ þ C
CS is capital stock, CS2 1 is capital stock of the previous year, d is average depreciation
rate, and C is investment in fixed assets of the current year.
Measurement period. If contribution rates of technological progress are calculated
year by year, they are higher in boom years (with fast economic growth) and vice
versa. Thus, the average value over the years is chosen to calculate the contribution
rate of technological progress and to weaken the effect of economic growth wave’s
influence on contribution rates. However, if the base year in a measurement period is at
the bottom of the economic cycle and the end year is at the peak (the base year and end
year are not necessarily in the same economic cycle), the measured contribution rate
will be a little higher than normal, and vice versa.
According to Shucheng Liu[1], China’s economic development is divided into five
periods:
(1) 1977-1981;
(2) 1982-1986;
(3) 1987-1990;
(4) 1991-1999; and
(5) 2000-now (not yet completed).

The division is used to calculate the change rate and contribution rate of technological
progress in each period and complete period. Since China’s economic cycle is much
 associated with macroeconomic regulation and control policies, the change rate China’s economic
of technological progress, and its contribution rate that we calculate on the basis of the growth in
division of the economic cycle, contains the influence of policy factors.
1978-2008
Summary for the empirical analysis by AFP method
Utilizing the above method of AFP, some results have been obtained through
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calculation, including the growth rate of technology progress, the contribution rate of 97
capital input, the contribution rate of labor input, and the contribution rate of technology
progress for complete periods between 1978 and 2008, and five sub-periods: 1978-1981;
1982-1986; 1987-1990; 1991-1999; and 2001-2008.

1. China’s contribution rate of technological progress has been significantly improved

China’s economy has entered the industrializing stage oriented by market demand and
clearly sped up since the reform and opening-up. China’s GDP has increased by nearly
14.79 times as comparable price and average annual growth rate reached 10.02 percent
during 1978-2008.
Since 1978, China’s AFP has significantly improved. The average annual growth
rates of AFP and its contribution to economic growth are up to 3.96 and 28.89 percent,
respectively, during 1978-2008. This indicates that China’s economic efficiency has
continuously increased, and that economic growth has gradually turned to relying on
technological progress and workforce quality.
Between 1991 and 1999, the growth rate and contribution rate of AFP are highest,
up to 5.35 and 48.27 percent, respectively. The next period is from 1982 to 1986, with
4.52 percent growth rate and 37.29 percent contribution rate of AFP. The values from
2000 to 2008 are 2.60 and 32.24 percent, respectively (Tables I and II).
It is noticed that a negative contribution rate of productivity is consistent with a
negative growth rate of productivity. If inefficient production management and
inadequate use of equipment capacity and human resources existed, it could result in
that growth rate of the weighted sum of all factor inputs being greater than the growth
rate of output. In this case, the growth rate of productivity is negative. That does
not mean a lack of technological progress during the production process, rather that
the overgrowth of investment conceals the share of contribution of technological
to economic growth. This phenomenon will arise frequently when industrial investment
is overheating.

Annual growth Annual growth rate Annual growth rate Annual growth rate
rate of GDP of capital input of labor input of AFP

1978-1981 8.75 7.65 2.88 3.44

1982-1986 11.48 10.84 3.24 4.52
1987-1990 7.68 9.79 6.18 20.04
1991-1999 10.68 9.91 1.09 5.35
2000-2008 9.88 12.96 0.91 2.60 Table I.
1978-2008 9.70 10.23 2.86 3.17 Growth rate of capital
input, labor input, and
Source: China Statistics Press (2002), China Statistics Press (various year) AFP in 1978-2008
 JKIC 2. The change rate of China’s technological progress is consistent with the economic
3,2 growth rate and technological progress obviously contributes to economic growth
Generally, in the economic expansion stage, growth, and contribution rates of AFP are
higher than normal and vice versa. Therefore, China’s change of AFP is consistent with
the economic growth rate. Put differently, technological progress plays an important
role in economic growth.
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98 The lowest annual growth rates of AFP appeared during 1989-1990 in which they
were 2 0.52 and 2 7.25 percent, respectively. Correspondingly, contribution rates of
AFP in 1989 and 1990 were at their lowest at 2 12.76 and 2 189.04 percent. Negative
contribution rates of AFP between 1987 and 1990 mainly result from low AFP in 1989
and 1990, which was the contraction stage of the third economic cycle.
The highest annual growth rates of AFP appear in 1992 and 1978, i.e. 9.34 and
7.65 percent. Correspondingly, the contribution rates of AFP in these two years are
65.58 and 58.01 percent. These two years are each in the expansion stages of the
1979-1981 and 1991-1999 economic cycles. In addition, the change rate of China’s
technological progress is consistent with the economic growth rate in most other years
(Tables III-V).

3. China‘s AFP comes to an fluctuation in different periods since 1978

The change of China’s AFP tends to fluctuate at different stages of the reform and
opening-up since 1978.
In the early stages of China’s reform and opening up, China’s AFP steadily went up in
1978-1986. This was mainly due to the institutional transformation from planned

Economic Contribution rate Contribution rate Contribution rate

growth of capital input of labor input of AFP

1978-1981 100 47.75 20.93 31.33

1982-1986 100 46.87 15.84 37.29
1987-1990 100 67.35 66.42 233.77
Table II. 1991-1999 100 45.87 5.86 48.27
Contribution rate of 2000-2008 100 63.04 4.72 32.24
capital input, labor input, 1978-2008 100 54.17 22.75 23.07
and AFP between 1978
and 2008 Source: China Statistics Press (2002), China Statistics Press (various year)

Cycles Stages Expansion stages Contraction stages

Cycle 1 1977-1981 1979-1980 1981

Cycle 2 1982-1986 1982-1984 1985-1986
Cycle 3 1987-1990 1987-1988 1989-1990
Table III. Cycle 4 1991-1999 1991-1992 1993-1999
Expansion and Cycle 5 2000-2008 Not yet completed
contraction stages in five
economic cycles Source: China Statistics Press (2002), China Statistics Press (various year)
 China’s economic
Annual growth rate Annual growth rate of Annual growth rate of Annual growth rate
of GDP capital input labor input of AFP growth in
1979 13.19 8.48 2.17 7.65
1978-2008
1980 7.81 7.49 3.26 2.40
1981 5.26 6.99 3.22 0.28
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1982 9.01 8.79 3.59 2.90 99

1983 10.89 9.13 2.52 5.12
1984 15.18 10.82 3.79 7.71
1985 13.47 12.66 3.48 5.42
1986 8.86 12.79 2.83 1.44
1987 11.57 12.58 2.93 3.90
1988 11.27 12.29 2.94 3.72
1989 4.07 7.70 1.83 2 0.52
1990 3.83 6.60 17.03 2 7.25
1991 9.19 6.89 1.15 5.18
1992 14.24 8.22 1.01 9.34
1993 13.94 10.65 0.99 7.97
1994 13.09 11.50 0.97 6.84
1995 10.93 11.21 0.90 5.14
1996 10.01 11.07 1.30 4.02
1997 9.28 9.86 1.26 4.11
1998 7.83 10.54 1.17 2.55
1999 7.63 9.22 1.07 2.99
2000 8.42 9.19 0.97 3.66
2001 8.30 9.53 1.30 3.01
2002 9.09 10.68 0.98 3.51
2003 10.02 12.82 0.94 3.21
2004 10.08 14.20 1.03 2.63
2005 10.43 15.60 0.83 1.32
2006 11.65 10.00 0.76 5.28
2007 11.93 15.00 0.77 2.80 Table IV.
2008 9.00 19.57 0.64 2 2.02 Growth rate of capital
input, labor input, and
Source: China Statistics Press (2002), China Statistics Press (various year) AFP (1978-2008)

economy to market economy, where a series of institutional innovations released their

potential technical efficiency. China’s redevelopment began with the reformation of the
rural household contract responsibility system; then, in the city, new reform measures
were adopted to strengthen the vitality of state-owned enterprises to change their
operating mechanisms; and finally the transformation of government functions by
consolidating and developing the public sector in the economy, encouraging individual,
private and foreign economies, and other sectors of the economy further. This innovation
aroused great enthusiasm for production in farmers and workers by improving the
efficiency of resource allocation and technical efficiency. As a result of this period, where
techniques were advanced, the economy showed a substantial growth, and the allocation
of resources improved, which also improved the all factor productivity.
However, the contribution rate substantially decreased and showed negative values
between 1987 and 1990. It mainly resulted from the slow improvement in technological
progress, weak market, and tightened economic policy making by the Chinese
 JKIC
Contribution rate Contribution rate Contribution rate
3,2 Year Economic growth of capital input of labor input of AFP

1979 100 33.04 8.94 58.01

1980 100 47.62 21.69 30.69
1981 100 62.58 32.14 5.27
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100 1982 100 46.10 21.74 32.16

1983 100 40.20 12.78 47.03
1984 100 35.01 14.21 50.78
1985 100 45.76 13.97 40.27
1986 100 67.28 16.48 16.24
1987 100 53.10 13.21 33.69
1988 100 53.42 13.54 33.04
1989 100 90.20 22.56 212.76
1990 100 72.66 216.38 2189.04
1991 100 36.93 6.70 56.37
1992 100 30.65 3.78 65.58
1993 100 39.09 3.74 57.16
1994 100 43.87 3.88 52.26
1995 100 48.62 4.40 46.98
1996 100 53.11 6.76 40.13
1997 100 48.24 7.50 44.26
1998 100 59.32 8.15 32.53
1999 100 52.99 7.82 39.19
2000 100 50.27 6.23 43.50
2001 100 55.66 8.07 36.27
2002 100 55.82 5.60 38.59
2003 100 63.37 4.56 32.06
2004 100 68.99 4.94 26.08
2005 100 84.16 3.17 12.67
2006 100 52.00 2.69 45.31
Table V.
2007 100 74.06 2.51 23.43
Contribution rate of
2008 100 118.47 4.02 222.49
capital input, labor input,
and AFP (1978-2008) Source: China Statistics Press (2002), China Statistics Press (various year)

government, coupled with political factors, all of which caused low production capability,
inefficient technologies, and unreasonable resource allocation during this period.
The contribution of China’s AFP to economic growth rose dramatically during
1991-1999. During this period, China’s economic growth rate has declined compared to
the early reform period, with the average annual change rate of 7 percent. However, in
this period, China’s reform progress has been more fundamental. In 1992, China
established the socialist market economic system goals, the pace of reform accelerated,
and the market mechanism has started to play a leading role in the allocation of
resources. The main reasons for this are that:
.
In the 1990s, China increased the intensity of reforming state-owned enterprises,
which greatly improved technological progress and efficiency of enterprises by
layoffs.
.
Fast development of high and new technology industries in China promoted the
renewal of traditional industries and upgrading the technological progress as a
whole.
 .
After 1992, China strengthened links with the international economy, more and China’s economic
more large multinational companies entered into China, causing them to growth in
introduce a large number of advanced technologies.
1978-2008
Productivity has steadily been in decline since 2000, once more. Although the economy
kept a rapid growth, productivity still was falling during 2004-2005. This exposes
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inefficient utilization of technological potential. It is caused by overcapitalization and 101

an insufficient demand for consumption. Especially, in 2008, China’s contribution rate
of AFP became 2 33.84 percent and the contribution rate by labor investment was only
2.81 percent; however, the contribution rate of capital input was up to 131.03 percent,
which is directly interrelated with China’s governmental economic stimulus package of
RMB 4,000 billion to cope with global financial crises.
Obviously, China is driven by an investment-oriented recovery for a fast escape from
the global financial crisis. In this special, historic stage, investment expansion is still the
most direct and effective way to fuel the economy. However, it is difficult to deal with
some problems such as overcapacity, repetitive construction, and the state-owned
economy expansion, but the private economy will continue to withdraw from industrial
markets if non-governmental autonomous investment cannot be freed through
structural adjustment in demand, industry, and ownership. Furthermore, it is hard to
fulfill the shifts of economic growth dynamics from“domestic demand expansion by
policy stimulating” to “autonomous domestic demand increase” and can hardly promote
the quality and performance of economic operation to keep a continuous rapid growth in
a macro-economy.

4. China’s economic growth is driven by investment, mainly depending on accumulation

of capital input and moderate technological progress
According to our calculations, China’s contribution rate of factor input to economic
growth reached 70.32 percent during 1978-2008, of which the contribution rate of capital
input was 53.09 percent. This indicates that China’s economic growth is typically driven
by investment, mainly from accumulation of capital input and moderate technological
progress.
The contribution rate of AFP was on the decrease during 1987-1990 and 2000-2008.
In contrast, the contribution rates of capital input were up to 67.35 and 59.98 percent,
respectively, during those periods. This decline of the AFP was primarily caused by
over capitalization and insufficient demand for consumption.
From an input perspective, due to the economic development path dependence
effect, China’s economic growth in the longer period of time showed extensive features.
During 1987-1990 and 2000-2008, China’s economic growth highlights this feature. The
decline of all factor productivity growth was mainly due to excessive investment,
which caused a decline in capacity utilization and production capacity. Since China’s
reform and opening up, by strongly advocating the development of township
enterprises, labor-intensive industries have grown by taking advantage of a surplus of
the rural labor force, and with the large amount of foreign investment poured into
China and the unprecedented development of China’s processing trade, large amounts
of capital have been accumulated, and the savings balance of urban and rural
households sharply increased. With the capital markets and other means of financing
rapidly emerging, capital is no longer a very scarce resource. At the same time, strong
 JKIC market demand has also brought a redundant construction, production overcapacity
3,2 and low-tech manufacturing plant born. Again, the Chinese Government and people
also pay attention to investment in education, and more and more people
have/need/require/want/benefit from access to higher education, which not only
improves the overall quality of a workforce, but also makes a considerable proportion
of capital investment, human capital (Hui and Aijun, 2009).
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102 From an output perspective, since the 1990s, insufficient demand for consumption
has been a big issue in China, due to the slowdown of per capita income growth and
consumption propensity. In the case of insufficient demand for consumption, the
growth of GDP is below its potential growth rate. Hence, China’s economic growth is
more stimulated by investment, giving rise to its higher rate of investment and
overcapitalization.
The above two factors are especially reflected in the long running excessive rate of
capital formation, which has been higher than other developing and developed countries
throughout. Hence, the unbalanced ratio between investment and consumption can be
used to explain the growth status of China’s productivity.

5. Reform in depth manner is the key to maintain sustainable economic growth in China
In the early stages of reform and opening-up, China’s TFP growth was mainly due to
three factors: first, a new economic system implemented fairly adapted to the relations
of production, promoted the improvement of technology progress. Second, the transfer
of large numbers of surplus rural labor from lower productivity agriculture to higher
productivity industries (mainly township and village enterprises) promote the
achievement of the re-allocation of production factors and improvement of the
efficiency of production; and third, it is due to the opening policy that advanced
technology and management experiences of developed countries is introduced, so the
level of productivity and efficiency increase substantially in the short-term, thus
leading to rapid growth in AFP.
In the later reform stage, the main reasons for the decline and fluctuation of AFP
growth are as follows: first, excessive growth of investment causes a decline in AFP;
second, there have been system bottlenecks in the process of economic restructuring
in recent years, so difficulty of reform is growing, and many problems are hard to be
effectively addressed. As it is difficult to reform the state-owned enterprises in depth,
financial reform has seriously lagged behind, political reform falls behind economic
reform, and reform in rural areas (such as household registration system, input system,
land systems, etc.) has become stagnated Juan, 2009).
In brief, at the beginning, increased AFP considerably benefited from the reforms in
improving efficiency of resource allocation. In later stages, the decline of AFP and its
contribution rate to economic growth lay in hindered structure improvement or stalled
substantial structural reforms.
Fundamentally speaking, China’s economy belongs to transition economy, besides
the factor input growth of labor, capital, raw materials, and energy, the economic
restructuring and institutional change also plays a very important role in economic
growth. Institutional change and economic improvement of the structure are important
sources of power for China’s economic and TFP growth. Thus, reform in an in depth
manner is the key to maintaining sustainable economic growth in China. In addition,
 industrialization and urbanization are still effective means to maintaining economic China’s economic
growth at this stage. growth in
6. The change tendency in AFP is consistent with current stage of economic development
1978-2008
and, relatively in line with phased laws of shifts in economic growth pattern
In fact, according to Porter (1992), economic development can be divided into four
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phases: take-off stage, where the economic growth is mainly driven by increasing 103
investment in land and other resources; investment-driven stage, where the economic
growth is mainly driven by large-scale investment; innovation-driven stage, where
the economic growth is mainly driven by technological progress and production
efficiency; and the information phase, where the economic growth is mainly driven by
the information. China is just in the transfer stage from capital-driven growth to
innovation-driven growth. At the present stage, and even in some periods in future,
China’s economic growth will still rely on the growth of factor input.
However, it should be recognized that, in the long run, high growth driven by a
reliance on factor inputs is a “non-sustainable growth”. Maintaining long-term economic
sustainable growth should rely mainly on the growth of all factor productivity. In
the future, speeding up large-scale technological progress, strengthening indigenous
innovation, optimizing the allocation of resources, accelerating human resource
development, and facilitating the shift of economic growth and increasing AFP, will
become more significant for China.

Conclusions
It is strongly and practically significant to research changes in the trend of China’s
technological progress’ contribution rate to economic growth from the reform and
opening-up, in order to understand the economic problems, improve the quality of its
economic growth, and keep the economic development sound and sustainable. Although
there is abundant quantitative research on China’s technological progress, research
results about the change rate and contribution rate of technological progress are quite
different from each other because of scholars’ differences in their understanding of the
meaning of technological progress, selection of measurement method, choice of index
and parameter, and division of economic period.
In essence, AFP is a weighted sum of all input factor productivity. Besides, general
hypotheses for production function, such assumptions are not as necessary as neutral
technological progress, constant returns to scale, and producer equilibrium in the AFP
method. Furthermore, a specific form of production function is not needed and can be
calculated directly. Thus, it is suggested to adopt AFP to calculate the contribution rate
of technological progress.
Empirical research using the AFP method shows China’s contribution rate has been
significantly improved since its reform and opening-up. But AFP fluctuates in different
periods. Moreover, China’s change of technological progress is consistent with its
economic growth and technological progress takes a promoter action in economic
growth.
In the end, after reform and opening up, although China’s economic growth has been
significantly changing – technological progress and its contribution to economic
growth improved – overall economic growth in China is still a capital-driven
pattern. Such economic growth pattern is unsustainable in the long run. In the future,
 JKIC China’s economic growth should rely more on technological progress and innovation,
3,2 not the accumulation of factor input; Although innovation could be generated through
technology diffusion (spillover), technical imitation and innovation, for China’s
economic growth conditions, in the future, the only feasible way of sustained economic
growth is mainly reliant on independent innovation. On the other hand, system reform in
an in depth manner, including market and ownership reforms, should be further
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104 promoted to improve AFP and maintain sustainable economic growth in China.

Note
1. Currently, the division of Chinese economic cycle is based on economic growth or inflation
fluctuations. More representative theory is made by professor Liu Shucheng. Based on his
“valley-valley” theories, he set up econometric mode and see the economic growth rate, fixed
assets change and upgrading of industrial structure as periodic basis to divide Chinese
economic cycle.

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About the authors

Wang Hongwei is an Associate Professor, Institute of Quantitative and Technical Economics at
Chinese Academy of Social Sciences.
Li Ping is a Professor at Institute of Industrial Economics at Chinese Academy of Social
Sciences. Li Ping is the corresponding author and can be contacted at: lipingmsn@msn.com

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