Chinese growth, Future prospects and less developed countries
Introduction
The yet another mathematical credential has been submitted by China to rest of the world last week to further fortify the well-established belief that the political and economic tectonic plates has been moved to Asia by climbing to world number 1 economy after 150 years.
This growth of China has amazed the area of economics and politics which provoked the economists and other social scientists to write numerous books and articles to explain the phenomenon. Though world is definitely in a common ground to accept the fact that China did witness the sweeping changes in the second half of the 20th century, the reasoning behind those changes could be vastly different from just considering it a ‘miracle’ or trying to explain the tangible economic, political and industrial policies that made it possible. The attempt of this piece is to review the economic policies on the fundamental basis of one of the most popular economic growth model.
China after being released from the state control in 1978 embarked into a tremendous journey of economic reform program to establish itself as the world’s largest economy. By encouraging the private and rural enterprises, liberalizing the foreign trade and investment, investing in industrial production, increasing savings rate and investment, strengthening macro-economic management and educating its workforce to create quality human capital and introducing new technologies it enjoyed the average annual growth rate of more than 9% throughout these years which grasped the serious attention of the world academic and business fraternity.
The attempt here will be to analyze this amazing growth using one of the most popular and important growth model “Solow Growth Model”. This model tries to explain the economic growth considering Capital accumulation, Labor force (population) and Technological progress as the main engines of the growth. It does so by looking at how diminishing returns on capital accumulation, Savings rate, labor and population growth determines the short term growth and how technological progress and human capital affect long run economic growth (Assbring, 2012).
Capital accumulation of china
After the liberalization, china got access to Foreign Direct Investment and modern technology as well as competition started among the domestic firms which played a very important role in capital accumulation. Before 1980, 90% of international trade was controlled and import and export was monopolized by the central government (Featherstone, 2012). FDI before 1979 made up less than one percent of total fixed investment, and rose to 18% in 1994 (HU & Khan, 1997). The savings rate also which was ranged only 5% of GDP in 1992 increased to 46% in 2009 (Featherstone, 2012). But as the Solow model says, capital accumulation and savings rate cannot only sustain the economic growth in a long run because capital increases the output in a diminishing rate of return. This was proved by the fact that although capital stock grew by nearly 7 percent a year over 1979-94, the capital-output ratio has hardly changed. So, though the capital accumulation was important to build the factories and set up new machineries and communication systems the driving force was the sustained increase in worker’s productivity behind the economic boom. During 1979-94 productivity gains accounted for more than 42% of china’s growth and by the early 1990s had overtaken capital as the most significant source of that growth (Hu & Khan, 1997).
Labor force of china
Initially the quantity of Chinese labors stimulated the growth. Migration restriction placed since 1953-78 restricted the movements from country to city helped create labor surplus by 1980 (Featherstone, 2012). Before 1978 four out of five used to work in agriculture which reduced to one in two in 1994 (Hu & Khan, 1997). So, all these labors were the means of productivity in the industrialized, construction and urban area. Figure below shows the rapid increase of labor participation in 90s and 2000.
Figure 1
As the Solow model incorporates the human capital as the important factor of productivity and means of sustaining the growth, it is important to know how the standard of Chinese education was during these periods and how it facilitated the growth. Using data at national level, Wang and Yao (2003) found that the contribution of human capital stock accounted for 11% of GDP growth from 1978 to 1999(Qian, Smith, 2005). About 70% of the total population had no formal education by the end of revolution which was improved a lot later by introducing compulsory 9 years of education by 1986. But access to tertiary education has been very limited (only 8% total enrolment in 1998). However, it increased rapidly as the government aimed for 11% in 2000 and 15% in 2005(Wang, Yao, 2003). Figure below shows the increasing schooling years throughout the years.
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