OXFORD BULLETIN OF ECONOMICS AND STATISTICS, 73, 6 (2011) 0305-9049 doi: 10.1111/j.1468-0084.2011.00679.

Economic Growth in China: Productivity and Policy Editorial Introduction

Guest Editors: John Knight, Yang Yao and Linda Yueh

Since 1978, when economic reform commenced, the Chinese economy has grown at a prodigious rate. The growth of gross domestic product (GDP) per capita averaged above 8% per annum over three decades. More than 300 million people have been raised out of dollar-a-day poverty. Why and how this has happened are some of the most important questions that a contemporary economist can tackle. However, to answer the big questions, many smaller questions need also to be addressed because they can provide insights into particular aspects of growth. This Special Issue the outcome of a workshop1 gathers together seven papers, each of which contributes to the understanding of the China growth phenomenon. However, the questions that they pose are quite varied. Part of the explanation for Chinas high growth rate is the rapid accumulation of both physical and human capital combined with an abundant supply of unskilled labour. This factor accumulation, along with technical progress, has involved an outward movement in the production frontier of the economy. Beginning with weak incentives and distorted prices causing great inefciency in the use of resources, and uneven knowledge and technology, Chinas rapid growth is also due to a movement of production towards the production frontier. Some of the papers are concerned with the former effect, some with the latter, and some with both. The papers vary also in their data sources. Some analyse rm-level data, some province- (or city-) level data and some combine both. The two main underlying themes are productivity growth and its determinants, and policy interventions and their effects. Starting at a lower level in 1980, Chinas GDP per capita exceeded twice that of India in 2006. The more rapid growth of China invites a comparison of the underlying reasons for their differences in performance. Li, Mengistae and Xu use recent, fairly comparable, rm-level investment climate datasets to explore this issue, concentrating on the business environment of the city in which each rm is located. They nd that rm productivity is higher in Chinese rms, which have the advantage of access to more-skilled workers, higher payoffs to skills, better infrastructure and greater labour exibility. Chinese rms are at a disadvantage, however, in access to nance and in facing higher regulatory uncertainty. Chinas larger average size of rm, which the authors attribute to its better business environment, is an important factor in its superior productivity.

1 Held at St Edmund Hall, University of Oxford, in July 2010 and organized jointly by the China Growth Centre (CGC) of St Edmund Hall and the China Center for Economic Research (CCER) at Peking University. John Knight and Linda Yueh are at CGC and Yang Yao at CCER.

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Li and Yueh examine the effect of improved institutions and incentives on industrial efciency in China. Much research has been conducted on the effect of ownership on efciency but less on the effect of the associated but distinct effect of legal incorporation, which accords property rights and limited liability protection. Using a very recent rm dataset, the authors show that incorporation has a positive causal effect, improving the productivity of both previously state-owned and private rms, and that this is separate from the effect of privatization and stock market listing. Firm incorporations have contributed to the rapid growth of industry in the 2000s, and the prospect of more incorporations augurs well. Hong and Sun examine the determinants of total factor productivity (TFP) growth of provincial GDP. In recent years China has received a great deal of foreign direct investment (FDI), the main attractions being low labour costs and a welcoming environment. FDI is in principle of particular value to China because of the knowledge, technology and market access that it provides. Hong and Sun are concerned to measure the effects of FDI on TFP directly, and also indirectly through the externalities that it can generate. Using provincial data, they nd evidence that the FDI intensity of investment, spatial spillovers from FDI and labour mobility, all contribute to provincial TFP growth. The paper opens the way for empirical studies of the channels by which these spillovers actually occur. Most of Chinas great surge in exports in recent years has taken the form of processing manufactures. Much of this processing is performed by multinational companies, often drawn to China by its labour cost advantages. Fu examines the nature of externalities owing from foreign to indigenous exporters, using a panel dataset that combines rm-level production data with product-level trade data. She shows that processing-trade FDI has generated positive information spillover effects (such as market intelligence and marketing techniques) on the export performance of indigenous rms. In contrast, the technological spillovers are found to have curbed the export performance of indigenous rms. This may be because the scope for technological transfer in labour-intensive assembly of (even technologically sophisticated) products is limited and the foreign-owned rms actually create more export competition. Deng and Jefferson analyse an enterprise-level industrial dataset for China over a decade and an international dataset covering the United States and European Union, which measures labour productivity at the industry level. Their object is to measure changes in the international technology gap across Chinese provinces. They nd that the coastal provinces have closed the technology gap with the international frontier. However, industrial labour productivity growth in the coastal provinces has slowed down relative to that in the interior provinces, perhaps because their smaller international productivity gap reduces the scope for further productivity improvement. The implication is that this recent trend is a force reducing spatial income inequality across China. There is a lively literature on the effect of nancial liberalization on economic development. China provides an interesting case study. Analysing both macroeconomic time series and province panel data, Huang and Wang examine the effect on Chinas economic growth of nancial repression and its gradual weakening as nancial liberalization occurred. Financial repression had been introduced under central planning as a means of accelerating industrialization: it enabled the state to control and dominate both borrowing and lending. The authors nd that the effect on economic growth of their index of nancial
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repression was positive up to 2000 but turned negative thereafter. They surmise that this reversal was due to the growth of the non-state sector and of nancial markets, which made the states role increasingly inefcient. The paper by Chen and Yao makes an original contribution to the vast literature on Chinas investment and saving. Chinas extremely high investment rate would not have been possible had it not been matched by a high saving rate. Part of the high ratio of national saving to GDP was due to a low, and falling, ratio of household consumption to GDP. Using province-level data over time, Chen and Yao provide an explanation for this fall. It is that government infrastructure investment has reduced household consumption. It has done so through two channels: by increasing the importance of the more capitalintensive, secondary sector; and by increasing the prot rate and prot share in the manufacturing sector. More government infrastructure investment, unlike more private investment, has subsidized industrial production and has squeezed the share of household income in GDP. The literature pertaining to the growth of the Chinese economy is growing even more rapidly than the economy itself. Systematic explanations of Chinas growth as a whole are still rare, although one of us has attempted such an account (Knight and Ding, 2011). The papers in this Special Issue add illuminating pieces to the jigsaw puzzle of Chinas exceptional growth.

Reference
Knight, J. and Ding, S. (2011). Chinas Remarkable Economic Growth, Oxford University Press, Oxford, forthcoming, 2012.

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