Economic Growth And China's Macro-investment Efficiency

China's real GDP has grown 8.35 times during 1978 and 2003 with an annual growth rate of 9.36%. The Chinese growth miracle has attracted great attention all around the world, and inspired people's curiosity to find the forces behind it.In classical economic growth theories, investment------ especially the physicalcapital investment------ is regarded as one of the essential factors of a country'sindustrialization, the transformation of society and the economic growth. But at the same time, there are a lot of examples to suggest that the massive investment itself is not sufficient to guarantee growth. Besides of the investment quantity, there is something more important, in this study, we refer as "the investment efficiency at macroeconomic level".As for investment efficiency, there are two examples should be mentioned, one is the East Asian Newly Industrializing Economies (EANIEs), the other is the East Europe and the former Soviet Union (EEFSU). The EEFSU was once the growth star in 1950s and 1960s, while the EANIEs, especially the so-called Four Asian Tigers turned out to be the more glowing star after 1960s. In 1990s, the sharp contrast between the EEFSU's collapse and the EANIEs' success has led many to call their performance a East Asian "miracle", which has attracted considerable interest from economists as well as policy-makers (World Bank, 1995).At the same time, however, Krugman(1994) was harsh in his criticisms of the economic growth style of EANIEs, stating that their exceptional rate of growth was to be expected given the massive capital accumulation. He called the East Asian miracle a "myth" and went on to say that due to diminishing returns, countries with input-driven growth, such as the EEFSU as well as EANIEs, would not be able to sustain their high rates of growth. Young(1 994, 1 995) also indicated that the major source of economic growth for the EANIEs should not be credited to productivityincreases, but rather to factor accumulation, much like what was seen in the former Soviet Union. When the East Asian currency crisis burst out in 1997, the whole world was shocked, not only by the crisis, but also the reechoing words from Krugman and Young.Then, what about China? Many scholars have pointed out that China's growth style is also "input-driven" and in many respects is very similar to EANIEs and EEFSU. Is it true? Is the criticism appropriate? Should we believe in the existence of the China "miracle", or is it just another figures illusion? And most of all, we concern about whether China's growth trend could continue in the future, or alternatively taking a pessimistic view, we are wondering would China at some time turn into stagnation and collapse, just like the EEFSU.All these questions are connected to an important issue------ the evaluation ofChina's investment efficiency at macroeconomic level------ which is the theme ofthis dissertation. The argument behind our definition of investment efficiency is straightforward. If a country's capital investment is more efficient than other countries, then at the same level of capital investment per capita, she should experience more rapid and sustainable economic growth than her counterparts. The same argument is applicable to different regions or different periods of a country. That is at the same level of capital investment per capita, if a country's investment efficiency has improved in period T2 than in period T1, then it is natural that she would perform more rapid and efficient economic growth in T2 than in T1.With this straightforward narration of investment efficiency, the doubts about China's economic growth could be transformed into the following questions: (1) In the last two decades, what is the main source of China's rapid growth? Is the growth entirely due to capital accumulation without any real improvement in investment efficiency? Or maybe there is some evidence that the improvement of China's investment efficiency as well as her heavy investment have combined together as the main force driving the rapid economic growth. (2)How about China's investment efficiency comparing with the developed OECD countries, the booming EANIEs, the socialism EEFSU, and the other developing countries? If wecould find any evidence showing that China's investment efficiency is not inferior to the EANIEs and EEFSU, then we could have more confidence in China's future growth. (3)Has China's investment efficiency improved in the post-reformed period? How to evaluate the effects of the major policy reformation and regulation changes? (4)ls there any investment efficiency difference between China's different regions? If the answer is "yes", then what is the reason? What should we do to improve the efficiency?The questions posed will be addressed in the following chapters.Chapter 1 provides a literature review of investment efficiency analysis in China and abroad. It is found that there is a wide variety of definition and measurement method of investment efficiency. Different scholars made different definitions, performed different empirical analysis and got greatly different results. The gap is so large that it is hardly possible to find a common ground to compare the methods and results. So the first problem we should solve is to find a solid theory foundation and widely accepted empirical analysis method for the investigation of investment efficiency. This is the major task of Chapter 2, in which three classical economic growth model are utilized and extended. Based on the demonstration of three important propositions in Chapter 2, the definition of a country's "investment efficiency at macroeconomic level" could be strictly narrated as follows:"Supposed that country A and B have the same growth rate of physical capital per capita and their total output could be described by CES production function, when other things are the same or unchanged, if country A could: (1) sustain greater capital-output-elasticity than country B; or(2) have more rapid technology progress than country B; or(3)have greater capital-output-elasticity parameter in CES production function than country B; or(4)have greater capital-labor substitution than country B, then country A is defined to have better investment efficiency than country B."In Chapter 3, we put forward the above mentioned definition and further detailed measurement standards of investment efficiency, which provide thetheoretic hypothesis to be verified in later empirical analysis.Chapter 4 and Chapter 5 fulfill the empirical analysis with the multi-country data from Duffy and Papageorgiou (2000) and the Chinese provincial growth data from Liu(2004). The major conclusions are: (1) During 1960 and 1987, the 10 Asian countries' (including Korea, Singapore and China et al.) investment efficiency is inferior to 22 OECD countries, but better than 50 other developing countries. (2) China, Korea and East Asia countries in general have better investment efficiency than former Soviet Union, and the criticism of Krugman(1994) is overstated. The economic growth of China and the EENIEs should be more efficient and sustainable than FSU. (3) China's investment efficiency has significantly improved after the Reform and Openness. The major investment regulation changes in the 1 980s and 1990s have positive effects on the improvement of investment efficiency. (4) Even in the late 1990s, negatively affected by the East Asian currency crisis, China's investment efficiency is not worse off significantly. The massive infrastructure investment after 1998 should be taken as potential benefit for China's future growth, rather than an ominous sign of over-investment. (5) There is no solid evidence that the provinces in East region of China have better investment efficiency than the Middle region, nor the latter's investment efficiency is better off than the West region. But when we use the "relative market development index" as another standard to divide the provinces into three regions, the solid evidence emerges that it is the region with more developed market system has the better investment efficiency. So this means that the market-oriented reformation will improve the allocation of capital and labor, will encourage competition and technology development, and will boost the economic growth.Concluding remarks and the unanswered questions to be taken up in future work are contained in Chapter 6.It is hoped that this paper has successfully fulfilled two tasks. The first is to put forward a precise definition and an applicable empirical method for the research of investment efficiency, on a solid basis of economic growth theories. The second...