The PRC’s Long-Run Growth through the Lens of the Export-Led Growth Model

33 Pages Posted: 22 Feb 2019

See all articles by Jesus Felipe

Jesus Felipe

Asian Development Bank

Matteo Lanzafame

Asian Development Bank - ERCD, ERMR; University of Messina - Department of Economics

Date Written: August 28, 2018

Abstract

The People’s Republic of China’s (PRC) remarkable growth performance over the last 3 decades has been associated to very robust export growth, so much so that many refer to it as a clear example of export-led growth (ELG). Using the concept of the balance-of-payments equilibrium (BOPE) growth rate, which provides a framework to test the ELG hypothesis, we show that the PRC’s actual long-run growth is well approximated by its BOPE growth rate. This growth rate is given by the ratio of the growth rate of exports to the income elasticity of imports. We estimate the latter using the Kalman filter, which allows us to obtain a time-varying estimate of the PRC’s BOPE growth rate. We find that the average value of the PRC’s BOPE growth rate during 1981–2016 was 11%, but it varied significantly over time and declined notably after 2007. Today, it is estimated at a much lower 5.9%. We then discuss the determinants of the PRC’s BOPE growth rate and of the income elasticity of imports, with the help of the Bayesian model averaging technique. The analysis highlights the role of the composition of aggregate demand as the main driving force, both for its direct effects on the income elasticity of imports, and for the indirect effects on export growth via capital accumulation, in particular fixed asset investment. Our analysis has important implications to understand the PRC’s transition to a “New Normal” of a lower growth rate.

Keywords: balance-of-payments equilibrium growth rate, Bayesian model averaging, export-led growth, Kalman filter, People’s Republic of China

JEL Classification: E24, E32, O14, O47, O50

Suggested Citation

Felipe, Jesus and Lanzafame, Matteo, The PRC’s Long-Run Growth through the Lens of the Export-Led Growth Model (August 28, 2018). Asian Development Bank Economics Working Paper Series No. 555 (August, 2018). Available at SSRN: https://ssrn.com/abstract=3339116 or http://dx.doi.org/10.2139/ssrn.3339116

Jesus Felipe (Contact Author)

Asian Development Bank ( email )

6 ADB Avenue, Mandaluyong City 1550
Metro Manila
Philippines

Matteo Lanzafame

Asian Development Bank - ERCD, ERMR ( email )

Manila
Philippines

University of Messina - Department of Economics ( email )

Piazza Pugliatti 1
Messina, 98122
Italy

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