China As a 'Developmental State' Miracle: Industrial Policy, Technological Change, and Productivity Growth

Abstract

Existing explanations of China’s dramatic economic growth since 1978 have neglected a key piece of the China Puzzle, that is, China since 1978 has been a typical “East Asian Developmental State (EADS)” with a long socialist legacy that regularly deploys industrial and science & technology (S&T) policies to “create winners” in key industries. Combining an original dataset on China’s industrial policy and S&T policy with an original dataset on performance of Chinese firms, we demonstrate that China’s industrial and S&T policies indeed succeeded in “creating winners” in certain industries with. Moreover, whether the state can succeed in “creating winners” critically depends on the nature of an industry. When an industry is an emerging one with rapid pace of technological change, China’s industrial and S&T policies have indeed led to rapid productivity growth and by implication, significant technological catch-up in the industry. In contrast, when an industry is a fairly mature one with only slow pace of technological change, China’s industrial and S&T policies have had little effect on productivity growth. By providing the EADS model with positive econometric evidence for the first time, our study also yields critical policy implications for medium to large developing countries to craft their industrial and S&T policies.

Keywords: industrial policy; creating winners; China; East Asia; developmental state

JEL Classification: L16; L25; L52; O14; O25; O38