Why is China Growing so Fast?

Zuliu Hu, Mohsin S Khan (1997)

After 1978, the year when most reforms took place in China, China has seen growth of over 9 percent a year! But why? There are many factors which have contributed to this staggering growth. These vary from things like liberalised foreign trade to relaxed state control. Each of these would have had an impact on China’s growth each in their own way but what exactly has been the key and most important elements of China’s flourish over the past 40 years? Capital accumulation-the growth in many assets like factories, manufacturing machinery etc- has been thought of as the main reason for China’s growth. However, it’s impact has been shown to be on the decline. Post-1978 compared with pre-1978, capital formation and labour has shown to take a slide of over 25 percentage points! So if the importance of capital on growth has declined, what has taken its place? The answer is an increase in productivity. During the 15 years after 1978, productivity gains have accounted for over 42% of China’s growth and this figure is still increasing today. To understand more about this, we must understand the reasons for the productivity gains.

One main reason is the decrease in involvement from SOEs; these are state-owned-enterprises. Prior to 1978, China’s economy was largely controlled by SOEs. However, this completely changed after the reforms. There is clear evidence to prove this as well: between 1978 and 1992, the output of SOEs contribution to national output declined by around 16 percentage points! In contrast, the share of collective enterprises and private businesses rose. This led to increased productivity because of profit incentives- these private businesses were incentivised by profits whereas SOEs were more interested in meeting government-set targets.

Another main reason was due to the changes in agriculture. Prior to 1978, nearly 80% of the Chinese worked in agriculture. By 1994, this decreased to around 50%. This was largely due to urbanisation. People were more attracted to the idea of working in higher-value-added manufacturing as wage prospects suddenly increased. This led to increased productivity gains as productivity is the ratio between output volumes and input volumes. As people were now working with more technology, more machinery, output inevitably grew, leading to productivity gains.

These are just two of the main reasons for the increase in productivity, which had a great impact on China’s growth. If you would like more reasons, have a look at the original document: https://www.imf.org/EXTERNAL/PUBS/FT/ISSUES8/INDEX.HTM

Summary written by Aryan Chopra

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