How material stocks sustain economic growth: Evidence from provincial steel use in China

Abstract

The rapid economic development in emerging economies is deeply coupled with massive material use, which poses serious challenges to the environment. Thus, the desired transition towards sustainable society requires a more complete understanding of the interplay of material stock and economic development. To investigate how the productivity of materials evolves as the economy grows, we develop a modified Cobb-Douglas production function model by incorporating steel stock as one input factor and conduct a panel regression analysis based on China's provincial-level data from 1990 to 2016. Our empirical results indicate that steel stock plays a vital role, almost equivalent to labor and non-steel capital stock, in economic growth in China, and output elasticity of steel stock, which reflects its productivity, increases with economic development but might decline at a very developed stage. Potential factors leading to such variations in steel stock productivity are further explored by an extended model. It is found that industrialization and urbanization levels contribute positively to the output elasticity of steel stock while the existing stock level plays an opposite role. As industrialization and urbanization levels hit the upper limit when the economy matures, we predict that China's steel stock productivity will reach a plateau or start decreasing, depending on the future path of investment in materials.