CHINA’S GROWTH STORY: THE ROLE OF PHYSICAL AND SOCIAL INFRASTRUCTURE

Abstract

The paper investigates the role of infrastructure in promoting economic growth in China using ARDL and GMM techniques for the period 1975 to 2007. In this context, an attempt is made to understand growth accounting equations to investigate the impact of infrastructure development on output. Overall, the results reveal that infrastructure stock, labour force, public and private investment play an important role in economic growth in China. More importantly, the study finds that Infrastructure development in China has significant positive contribution to growth than both private and public investment. Further, there is unidirectional causality from infrastructure development to output growth justifying China's high spending on infrastructure development since the early nineties. The experience from China suggests that it is necessary to design an economic policy that improves the physical infrastructure as well as human capital formation for sustainable economic growth in developing countries.Keywords: China, Infrastructure Development, Investment, Output GrowthJEL classification: H4, H54, L9, O1(ProQuest: ... denotes formulae omitted.)1. INTRODUCTIONChina is the fastest growing country in the world for last few decades and accounts for nearly one fifth of the world population. Economic growth in China increased from 7.5% during 1970 to 1999 to over 10% per annum between 1999 to 2008. This has attracted many scholars to examine the major determinates of growth in China. Over the last two decades, academic research has devoted considerable attention to the role of trade and Foreign Direct Investment (FDI) in promoting growth. However, the role of infrastructure and human capital development has been neglected. Therefore, this paper offers an empirical assessment of the impact of infrastructure and human capital development on growth in the case of China.The role of infrastructure in enhancing economic development has been well documented both in the academic literature and in the policy debate (Aschauer, 1989; Munnell, 1990; World Bank, 1994; Calderon and Serven, 2003; Estache, 2006; Sahoo, 2006; Sahoo and Dash, 2010; and 2011). More recently, increasing attention has also been paid to the impact of infrastructure on poverty and inequality (World Bank, 2006). Further, it has been found that social infrastructure such as education, health, and housing are essential to promote better utilization of physical infrastructure and human resources, thereby leading to higher economic growth and improving quality of life (Hall and Jones, 1999).Over the past two decades, one of the defining features of China's growth has been investment led growth supported by domestic savings. China's sustained high economic growth and increased competitiveness has been underpinned by a massive development of physical infrastructure (Chatterjee, 2005; Stephane et al., 2007). The open economic policy made it possible for the inflow of foreign direct investment (FDI) mainly to the manufacturing sector. Cheap labour and better than adequate infrastructure were important pre-requisites that led to a successful the export-led growth strategy. With seemingly unlimited supply of cheap labour from the rural sector, public investment in infrastructure became the keystone in the strategy. A major focus by the government at all levels on infrastructure thus ensued.1Though infrastructure development certainly helped export-led economic growth in China, the Chinese economy started showing signs of overheating in recent years because of basic infrastructure constraints. Clearly, there is an increasing gap between the potential demand and the available supply of infrastructure to sustain high growth. Given the importance of infrastructure development for sustainable economic growth and poverty reduction in China, the present study examines the output elasticity of infrastructure development in China for the period 1970-2008. …