ec440 presentation - growth model

China’s Growth In The Past Decade:

A Natural ‘Catch Up’?

Arthur Kong, Nadimah Mohammed, Marshiella Pandji, Samira Noronha and Jessie Levine

Monday 5 May 2015

Jessie Levine

Hi friends, when we export this to a regual PPT, I can put in my ppt slide and animate it so that you see the blue lines first and see how the blue lines become the red lines and where the new steady state becomes. Jessie

Outline● What is a “natural catch-up”: the Solow Model

● What has China’s growth been over the past decade?

● Decomposing China’s growth: Is it a ‘catch up’?

● Conclusion

What is a ‘Catch Up’: The Solow Model

Definition:A country is catching up when it is in its stage prior (in transition to) to the steady state. We understand that it is conditional convergence where each country is heading towards its own steady state, rather than one steady state for all countries.

If China’s growth is due to a ‘catch up’, we expect:Growth should be primarily driven by capital accumulation

Arthur Kong

I think conditional convergence is not only the stage "prior" to the steady state. It will also converge BACK to the steady state when there is excess capital. As shown in the previous diagram. So we should reword that a little

Samira Noronha

I don't think we should use "catch up" as an academic definition, but only our understanding of it. From what I read in Mankiw, I believe the slide should be something like this:"Convergence: poor countries grow faster than economies that start off rich. Therefore, they will (supposedly) catch up with richer economies.Conditional convergence: countries converge to their own steady states (different saving, population growth and human capital).Our definition of "natural catch-up expected from a developing economy": growth driven by capital accumulation (getting to a fixed steady state)."

Nadimah Mohammed

I was thinking having presented the catch up on the model/graph, we should then reiterate our definition in words here - so we can just summarise this. Buzz word: Conditional Convergence

What is a ‘Catch Up’: The Solow ModelOutput, Y/L, y

k*

y*y =A F(k)

Investment = s F(k)

MPKk

“Catch Up” Growth

K1 K2

y1

y2

k

Capital per capita, K/L, k

Depreciation = (δ +n+…)k

China’s Growth in the Last Decade

Source: World Bank Data Bank

China’s average growth rate

between 2000 to 2013 was 9.9% compared to 7% in India, 3.5% in Brazil and 1.7%

in the OECD

Contextualising Growth in the Last Decade

Source: Zhu (2012)

Capital accumulation is unlikely to produce such high growth for for so long based on

the Solow Model

Current decade is a continuation of more than 3 decades of

high growth

Samira Noronha

Ethan will probably ask why. I think we should rephrase to something like this: "1952-1978: growth driven by capital accumulation1978-2015: growth driven by increase in TFP and saving"And in the presentation we can focus on the huge difference =)

Marshiella Pandji

Agree, that makes it more clear. Although I don't think we should use the word 'saving'; "1978-2015: growth driven by increase in TFP" is fine as TFP is what we're focusing on. We don't have reliable sources that say that the savings rate has gone up in China, do we?

Nadimah Mohammed

I had intended to mention that the Solow model predicts diminishing marginal returns to capital as a country moves to the steady state (had put it in the notes below) - not sure if that's sufficient

Decomposing China’s Growth

Source: Zhu (2012)

China’s growth in the last 3 decades

primarily driven by growth in total factor

productivity

TFP growth=

Reallocation to efficient firms (70%)

+Technological improvement

(Song, Storesletten and Zilibotti, 2011)

Policy Context● Pre-1978: Great Leap Forward - state direct all factors of

production toward capital accumulation● Post-1978: Economic reform (post-Mao)

o Agriculture Reforms: Reallocation of factors of productiono Decentralization (to townships and collectives) o One Child Policy

● Post-1998: Era of Privatization & Trade Liberalizationo Opening up of the Chinese economy o FDI inflows, China joins WTO (2001)o Increased competition has forced manufacturing companies to

become more competitive

Arthur Kong

Good transition talking point from Zhu (2012) that MAY be suitable:"The finding that aggregate productivity growth has been the most important source of China's growth since 1978 may seem surprising because it runs in theface of a popular view that China has followed an investment-driven growth model that relied heavily on capital-deepening for growth over the last three decades"

Marshiella Pandji

Great.

Where do capital investment & population growth fit in China’s growth story?

Capital (Invesment =Savings)

Post 1978 reversed roles with TFP. Contributed to overall 15% of overall per capita growth. Capital accumlation includes physical capital and human capital.

China's capital investment since 1978 has been keeping up with its rapid rate of output growth but not leading it. Examining the data between 1978 and 1998, Young (2003) also comes to the conclusion that capital deepening was not the source of China's growth

Population growth (n)

From 1978 to 2007, due to “one child” policy, the labour force growth rate was a modest 0.57% in those years. Only 7% of overall GDP/capita growth (vs. TFP makes up 78%) (Zhu, 2012)

Zhu (2012)

Arthur Kong

Im also thinking about how we can include Savings rate into the picture. In the Solow Growth model we assume S = I... so in this case, Zhu focuses on I (capital investment)

Samira Noronha

Song, Storesletten and Zilibotti (2011) say "The rate of return on investment has remained well above 20 percent, higher than in most industrialized and developing economies." Since investment = saving, could we put that?

Marshiella Pandji

I believe 'rate of return' is a different thing, it's more like an interest rate, so I don't think we can put that. I would also suggest us not to worry so much about savings rate as that would complicate things and require further explanation. Given time constraint, I think arguing that 'China's capital investment since 1978 has been keeping up with its rapid rate of output growth but not leading it' and showing that capital accumulation contributes 15% to the total growth is enough.

Arthur Kong

I found this stuff in Zhu which mostly analyzes between 78 and 07... if anyone has anything more recent, that'll begreat

How does this fit with the Solow Model?Output, Y/L, y

k1*

y2=2 F(k)

y1 = F(k)y1*

Capital per capita, K/L, k

Example: A=2

k2*

y2*

Depreciation = (δ +n+…)k

Investment2 = 2sF(k)

Investment1 = 2F(k)

Conclusion● China’s growth in the past decade does not fit the

“expected natural catch-up of a developing country”.● Growth primarily driven by gains in total factor

productivity.● Reduced population growth and capital accumulation

continue to play a role but are not main drivers.

Marshiella Pandji

Do we want to mention 'high savings rate'? Since we don't have strong evidence I don't think we need to mention it..

SourcesChow, Gregory C. 1993. “Capital Formation and Economic Growth in China”. The Quarterly Journal of Economics 108(3): 809-842.

Cowen, Tyler and Alex Tabarrok. “Modern Principles of Economics”. 2010 Worth Publishers. Chapter 7: Growth, Capital Accumulation, and the Economics of Ideas.

Ding, Sai, and John Knight. 2008. “Can the Augmented Solow Model Explains China’s Economic Growth? A Cross-Country Panel Data Analysis”. Discussion Paper Series Number 380, Department of Economics, University of Oxford.

Hou, Jack W. 2011. “Economic reform of China: Cause and effects.” The Social Science Journal 48: 419-434.

Song, Michael Zheng, Kjetil Storesletten, and Fabrizio Zilibotti. 2011. “Growing Like China.” American Economy Review 101(1): 202–241.

Zhu, Xiaodong. 2012. “Understanding China’s Growth: Past, Present, Future.” The Journal of Economic Perspectives 26(4): 103-124.

ec440 presentation - growth model

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