How Much Slack Was There in the Chinese Economy Prior to its Economic Reform of 1978?

37 Pages Posted: 10 Sep 2015 Last revised: 16 Mar 2016

See all articles by Lawrence J. Lau

Lawrence J. Lau

Chinese University of Hong Kong-Institute of Global Economics and Finance

Huanhuan Zheng

The Chinese University of Hong Kong (CUHK)

Date Written: September 1, 2015

Abstract

The existence of economic slack or inefficiency is a common phenomenon of economies that operate under mandatory central planning. It implies that the economy operates in the interior of its set of production possibilities and not on its frontier. It also implies that output can be increased without any increase in the inputs if the constraints which prevent the economy from operating on the frontier in the first place are removed. Thus, there is “surplus potential output”. The objective of this study is to attempt to identify and estimate the surplus potential output in the Chinese economy prior to its economic reform in 1978. This will help answer the question of how much of the Chinese economic growth since 1978 can be attributed to the reduction and elimination of the pre-existing economic slack. This question is important because the increase in output due to the reduction or elimination of the economic slack can only take effect once and cannot be continuing. It will also affect the attribution of the sources of Chinese economic growth. Our investigation suggests that a reasonable estimate of the magnitude of the surplus potential output of the Chinese economy on the eve of its reform is approximately 50% of the actual realized output in 1978.

Keywords: Economic Slack, transitional economies, reform, surplus potential output, centrally-planned economies

JEL Classification: O1, O2, P5

Suggested Citation

Lau, Lawrence J. and Zheng, Huanhuan, How Much Slack Was There in the Chinese Economy Prior to its Economic Reform of 1978? (September 1, 2015). IGEF Working Paper No. 34. Available at SSRN: https://ssrn.com/abstract=2657691 or http://dx.doi.org/10.2139/ssrn.2657691

Lawrence J. Lau (Contact Author)

Chinese University of Hong Kong-Institute of Global Economics and Finance ( email )

13/F., Cheng Yu Tung Building
12 Chak Cheung St.
Shatin, NT
Hong Kong
+852 3943-1611 (Phone)
+852 2603-5230 (Fax)

HOME PAGE: http://www.igef.cuhk.edu.hk/ljl

Huanhuan Zheng

The Chinese University of Hong Kong (CUHK) ( email )

Shatin, N.T.
Hong Kong
Hong Kong

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