How the land system with Chinese characteristics affects China's economic growth – an analysis based on a multisector dynamic general equilibrium framework

Kai Liu

doi:10.1108/cpe-05-2020-0009

Abstract

PurposeWhat is the relation between the land system with Chinese characteristics and the country's high-speed economic growth in the past decades? There is a lack of rigorous academic research based on the general equilibrium theory of macroeconomics on this issue.Design/methodology/approachBy building a multisector dynamic general equilibrium framework with land system, this paper explores how the land supply mode with Chinese characteristics affects China's economic growth as well as its transmission mechanism.FindingsThis paper confirms the importance of land system with Chinese characteristics in explaining the mystery of China's high-speed economic growth. Counterfactual analysis shows that if China adopts a land system similar to that of other developing countries, GDP will drop 36% from the current level under the baseline model.Originality/valueAs the industrial sector shrinks relatively and the output elasticity of infrastructure decreases, this inhibitory effect will become more apparent. China should improve its land supply mode, especially expand the supply of commercial and residential land and reduce the cost of land in the service sector. This can promote better economic development in the future and thus improve household welfare and the structure of aggregate demand, replace “land-based public finance” and thus inhibit the “high leverage” risks of local governments.

Highlights

Land is an important factor of production
Further simulation analysis shows that adjusting the current land supply mode, especially lowering the “commercial land” price, can effectively relieve the pressure on economic growth brought by the elastic decline of infrastructure output; At the optimal land policy, the steady-state GDP level will increase by 7.5% over the baseline model
Summary The land system with Chinese characteristics is an important factor to explain China’s high economic growth, and the adjustment of land supply mode is closely related to future economic development

Summary

Introduction

Land is an important factor of production. Effective supply of land is essential for the development of manufacturing industry and service industries such as real estate, catering and storage, and financial services. With reference to existing literature (Zhao et al, 2017; Mei et al, 2018)’s model setting, this paper makes the following assumptions: we do not consider international trade and view China’s economy as a closed economy; we will not consider the labor market, and the factors of production include only the material capital KP;t invested and purchased by enterprises, the infrastructure KI;t invested and built by the government, and the land Lt. We will not distinguish between state-owned enterprises and private enterprises; we will not consider the agricultural sector; to be in line with China’s land policy, this paper divides the economy into the “industrial sector” (including part of the production of infrastructure in reality) and the “commercial sector” (including the real estate industry in reality).

Production of final products

Findings

Model equilibrium