Sustainability of China's Growth Model: A Productivity Perspective

Abstract

AbstractIn the present paper, the debate on China's growth sustainability is first revisited by highlighting the importance of total factor productivity (TFP). China's TFP performance is then assessed by applying the Jorgensonian aggregate production possibility frontier framework to the latest version of the China Industry Productivity (CIP) database. We find that of China's 8.9‐percent annual GDP growth over the period 1980–2012, 7.0 percentage points (ppts) could be attributed to the growth of labor productivity and 1.9 ppts to the increase in hours worked. Nevertheless, the labor productivity growth is found to be heavily dependent on capital deepening (5.7) rather than TFP growth (0.8). Notably, the TFP growth turned negative over 2007–2012, which brings into question the sustainability of China's growth. Besides, industries that are less prone to state intervention show faster TFP growth than those controlled by the state. Incorporating the Domar aggregation scheme into our model, we further reveal that two‐thirds of the TFP growth originates from within industries and the remainder is attributed to a net factor reallocation effect in which labor plays a positive role, whereas capital appears to behave irrationally. Finally, using a revised Maddison–Wu approach to address the potential flaws in official statistics, we arrive at an annual growth rate of 7.2 percent, or 1.7‐ppts slower than the 8.9 percent obtained based on the CIP data reconstructed using the official national accounts.