China's economic growth and convergence

• Published date: 01 November 2017
• Author: Jong‐Wha Lee
• DOI: http://doi.org/10.1111/twec.12554
• Date: 01 November 2017

ORIGINAL ARTICLE

China’s economic growth and convergence*

Jong-Wha Lee

Asiatic Research Institute, Korea University, Seoul, Korea

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INTRODUCTION

China’s economic performance—with an average annual gross domestic product (GDP) growth rate

of 9.3% during the 1980–2015 period—has been astonishing and has enabled the miraculous transfor-

mation of China from a rural and command economy into a global economic superpower. Its startling

long-term performance has significantly improved the real income and living standards of 1.38 billion

people. However, China’s economy has been slowing down in recent years. It struggles to advance

from an upper-middle-income to a high-income economy. Considering its sheer economic size and

influence in the world economy, its future growth should be of serious concern to us all.

This study empirically analyses Chinese economic growth from global comparative perspec-

tives. Using cross-country regression analysis, this study identifies and discusses major factors that

have enabled China to achieve strong growth over the last four decades. Furthermore, this study

makes use of industry-level data to assess structural changes and sectoral growth in the Chinese

economy. It then discusses the prospects of Chinese economic growth in the coming decades and

suggests possible policy measures that China could adopt to sustain its strong growth and thereby

continue its convergence with advanced economies in terms of income level.

There is a considerable body of literature studying the characteristics and prospects of Chinese

economic growth and structural transformation. The growth accounting is one of the popular tech-

niques that many empirical papers adopt to identify sources of economic growth based on China’s

aggregate and industry data (Bosworth & Collins, 2008; Lee & Hong, 2012; Wu, 2014; Ye &

Robertson, 2017; Young, 2003; Zhu, 2012). The results of growth accounting suggest that the

most of China’s growth has been associated with physical capital accumulation, technological pro-

gress and labour reallocation, although there is a wide disagreement over the relative contributions

of each factor. However, this methodology has several limitations such as imposing a number of

simplistic assumptions on production function and factor markets and identifying technological

progress by total factor productivity (TFP) growth—an unexplained residual in the growth account-

ing. As it provides only a mechanical decomposition of output growth into a variety of inputs and

TFP, it is limited to capture the interactions of technology and physical and human capital accumu-

lation. In addition, recent papers, such as Brandt, Van Biesebroeck, and Zhang (2012), Hsieh and

*The author thanks the associate editor, two reviewers, Robert Barro, Yiping Huang, Harry Wu and seminar participants at

the Australian National University, the Brookings Institution and Korea University for their helpful comments and sugges-

tions and Hanol Lee for research assistance. This work was supported by a Korea University Grant (K1709811).

DOI: 10.1111/twec.12554

World Econ. 2017;40:2455–2474. wileyonlinelibrary.com/journal/twec ©2017 John Wiley & Sons Ltd

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Klenow (2009), and Yu (2015), make use of more detailed firm-level data to explore the sources

of China’s economic growth and examine the effects of certain policies on firm productivity. How-

ever, measuring TFP at the firm level is also subject to significant measurement errors.

Against this backdrop, this paper adopts another approach based on cross-country regression to

identify important factors for economic growth and their relevance to China. Recent papers includ-

ing Eichengreen, Park, and Shin (2012) and Huang, Qin, and Xun (2014) use cross-country regres-

sions to assess if China will get caught in the “middle-income trap”, where an economy

experiences a sharp slowdown in the growth rate once it reaches middle income. Based on cross-

country regression results, Barro (2016) and Pritchett and Summers (2014) project a significant

slowdown of China’s growth rate. Built on this line of literature, this paper makes an additional

contribution by assessing quantitatively the role of various growth factors in China’s economic

growth and convergence process.

Over the past 35 years, China has developed its own economic development model ever since

Deng Xiaoping embarked on economic opening up and reforms. Since then, the government has

implemented structural changes and growth-enhancing policies in gradual and pragmatic ways

(Naughton, 2007). The model has its own unique historical features. Additionally, Chin a differs

significantly from other economies in many respects, such as country size and the nature of its

economic and political institutions. Despite these differences, however, it would be useful to figure

out common features that can be observed in economic successes and failures across both time

and geographical space through cross-country comparative analysis. In fact, many factors behind

fast growth and convergence in the Chinese economy can also be found in other fast-growing East

Asian economies, including Japan and Korea. These economies adopted an outward-looking devel-

opment strategy that provided them with access to inexpensive imported intermediate goods, larger

markets and more advanced technologies and thereby contributed to rapid productivity growth.

China is at a critical development stage, wherein it is transitioning from a middle-income to a

high-income economy (Vandenberg, Zhuang, & Huang, 2015; World Bank and the Development

Research Center of the State Council (DRC), 2013). For China to continue catching up and

achieve a higher level of development comparable to those seen in Korea, Japan or the USA,

strong and sustainable growth is required in the coming decades. It would be useful for China to

investigate and learn from the experiences of advanced economies.

This paper also contributes to the literature by analysing the role of structural change and ser-

vices sector in China’s economic growth. China’s remarkable economic performance and transfor-

mation are characterised by rapid industrialisation and an orientation towards exports, with the

manufacturing sector being a key growth driver. Exporters have been able to build up their

comparative advantages in labour-intensive manufacturing and then move to more capital and

technology-intensive industries. China is moving up the value chain towards more sophisticated,

high-value products and transitioning to a more innovative economy (Fan, 2014; Wei, Xie, &

Zhang, 2016). On the other hand, there have been major employment shifts towards the services

sector over the past decades. Chinese authorities are now striving to rebalance the economy

towards domestic consumption and service-based one. By making use of industry-level data, this

paper examines structural changes and sectoral growth in the Chinese economy. We compare

labour productivity growth in individual sectors and examine the impact of labour reallocation

across these sectors, especially towards services sector, on aggregate labour productivity growth,

using the “shift-share analysis”technique. Recent studies—such as those of de Vries, Erumban,

Timmer, Voskoboynikov, and Wu (2012), Maroto-S

anchez and Cuadrado-Roura (2009) and

McMillan, Rodrik, and Verduzco-Gallo (2014)—use such technique to explore the impact of struc-

tural change on economic growth in various countries. The focus of the current paper, however, is

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