China's Economic Growth Source Decomposition

Since 1978, when China began reforming its economy and openning up to the outside world, its economic growth rate during 1978-2005 reached a stunning 9.7% (adjusted for inflation) and was called "China Miracle" in the West. What caused this rapid growth? What are its prospects? The answers to these questions have important implications both in theory and in practice.There were numerous studies on the decomposition of China's economic growth sources since 1978, but these researches had the following inadequacies: the majority researches adopted C-D production function, which is too restrictive and its specification needs to be tested; the data set on provincial output and input were incomplete; most studies regarded technology change as Total Factor Productivity and did not decompose TFP into different parts. Most used single method to decompose Total Factor Productivity. Researches using the most advanced mothodology, Translog Stochasitc Frontier Analysis (SFA), did not conduct econometric tests; and there was no research in China which incorporates major decomposition of economic growth methods and compares them. Most important, in 2005, China Statistics Bureau revised China's GDP in 2005 and the years before. Thus it made studies based on previous GDP data inaccurate. The dissertation tries to fix these problems.The dissertation first reviews China's economic growth, major policy change and resources relocation since 1978. Then based on economic growth theory of Development Economics, it caculates labor and capital productivity, capital-to-labor ratio of China's 31 provinces during 1978-2005, and conduct Cluster Analysis to divide 31 provinces into different groups. The statistic test result shows that fixed-coefficients production function and Harrod-Domar Model's hypothesis doesn't fit China's economy data. I then use Solow's growth accounting method (sources of growth analysis) to decompose China's economic growth sources. But since Solow's growth accounting method does not decompose Total Factor Productivity into more detail sources, its assumption that firms are fully technically efficient is not a true reflection of economic reality, and the specification of C-D production function is too restrictive, this thesis then uses translog Stochastic Frontier Analysis (SFA) and panel data of 31 provinces during 1978-2005 to decompose China's economic growth sources into contribution of capital, contribution of labor, and contribution by TFP. In the following steps, TFP was decomposed into technical efficiency change, technological progess, and scale effect change. As the method using Stochastic Frontier Production Function may encounter possible function specification problem, the thesis adopts another method, nonparametric method, Data Envelopment Analysis (DEA), to decompose TFP from 1978-2005, and compares the findings of the above mentioned methods.The thesis is consisted of 7 chapters:Chapter 1 introduces research background, research objectives, major issues examined by the thesis, the theory on which this study is based, research methodology, etc;Chapter 2 is literature review and a review of economy development theory. It first reviews the current researches of this field. These researches provided research inspiration and reseach methods, their finding can be compared with the finding of this thesis; after this is a review of economy development theory, it provides theoretical background of the thesis.Chapter 3 is a review of China's economy development and major policy changes since 1978, and I point out some serious problems which need to be tackled by policy-makers. Then I review labor and capital stock relocation since 1978. The chapter provides China's economy development background;Chapter 4 explains the data this thesis uses and calculates labor productivity, capital productivity and capital-to-labor ratios, then test whether the hypothesis of fixed-coefficients production function and Harrod-Domar Model fit China's economy data. The results show that they don't. So it is more scientific to uses national output and input data during 1978-2005 and Solow's growth accounting method to decompose China's economic growth sources;Chaprte 5 uses Stochastic Frontier Analysis method to decompose the sources of economic growth of China's 30 provinces from 1978 to 2005. It first explains major methods used in the calculation of Total Factor Productivity (TFP). Following this is a detail explaination of the major econometric method of this thesis—Stochastic Frontier Production Function, including the specifications, estimation, test methods and results of estimation, tests and analysis of Stochastic Frontier Production Function. It is the major part of this thesis;Chapter 6 uses nonparametric Data Envelopment Analysis method to decompose the important growth sources—TFP to technical efficiency change, technological progress, and then proceed to decompose technical efficiency change into scale effect and pure technical efficiency change;Chapter 7 compares the different methods the dissertation used, summarizes the thesis finding, and some policy implications are then suggested. Following these are future research proposals. The research results show: China's economic development during 1978-2005 was resource extensive, driven by fast factors (esspecally capital) accumulation; during the early stage of the reform, the quality of development was not good; in later period, technology advanced, Total Factor Productivity was improving, economic scale was good. Thus we can say that China's Economic reform have been successful. If China keeps increasing investment on science and technology and makes technology's contribution a major part to economic growth source, China's fast economic growth can be expected to keep going for some time to come. However, when China's per capita GDP reach that of developed countries, according to Neoclassical Development Economics, China's economic growth will slow down.