Growing Like China
Zheng Michael Song
Fudan University - School of Economics
University of Oslo - Department of Economics; Centre for Economic Policy Research (CEPR)
University of Zurich; Centre for Economic Policy Research (CEPR)
CEPR Discussion Paper No. DP7149
This paper constructs a growth model that is consistent with salient features of the Chinese growth experience since 1992: high output growth, sustained returns on capital investments, extensive reallocation within the manufacturing sector, falling labor share and accumulation of a large foreign surplus. The theory makes only minimal deviations from a neoclassical growth model. Its building blocks are financial imperfections and reallocation among firms with heterogeneous productivity. Some firms use more productive technologies than others, but low-productivity firms survive because of better access to credit markets. Due to the financial imperfections, high-productivity firms - which are run by entrepreneurs - must be financed out of internal savings. If these savings are sufficiently large, the high-productivity sector outgrows the low-productivity sector, and attracts an increasing employment share. During the transition, low wage growth sustains the return to capital. The downsizing of the financially integrated sector forces a growing share of domestic savings to be invested in foreign assets, generating a foreign surplus. We test some auxiliary implications of the theory and find robust empirical support.
Number of Pages in PDF File: 56
Keywords: China, Economic Growth, Entrepreneurs, Foreign Surplus, Investment, Productivity Heterogeneity, Rate of Return on Capital, Reallocation, State-Owned Firms
JEL Classification: G18, O11, O16, O47, O53, P31working papers series
Date posted: February 18, 2009
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