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Title: Growing like China

Author(s): Zheng Michael Song, Kjetil Storesletten and Fabrizio Zilibotti

Publication Date: January 2009

Keyword(s): China, Economic Growth, Entrepreneurs, Foreign Surplus, Investment, Productivity Heterogeneity, Rate of Return on Capital, Reallocation and State-Owned Firms.

Programme Area(s): International Macroeconomics

Abstract: This paper constructs a growth model that is consistent with salient features of the Chinese growth experience since 1992: high output growth, sustained returns on capital investments, extensive reallocation within the manufacturing sector, falling labor share and accumulation of a large foreign surplus. The theory makes only minimal deviations from a neoclassical growth model. Its building blocks are financial imperfections and reallocation among firms with heterogeneous productivity. Some firms use more productive technologies than others, but low-productivity firms survive because of better access to credit markets. Due to the financial imperfections, high-productivity firms - which are run by entrepreneurs - must be financed out of internal savings. If these savings are sufficiently large, the high-productivity sector outgrows the low-productivity sector, and attracts an increasing employment share. During the transition, low wage growth sustains the return to capital. The downsizing of the financially integrated sector forces a growing share of domestic savings to be invested in foreign assets, generating a foreign surplus. We test some auxiliary implications of the theory and find robust empirical support.

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Bibliographic Reference

Song, Z, Storesletten, K and Zilibotti, F. 2009. 'Growing like China'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=7149