Economic growth and resource allocation: the case of China
| DOI | https://doi.org/10.1108/17544400810885933 |
| Published date | 06 June 2008 |
| Pages | 105-121 |
| Date | 06 June 2008 |
| Author | Kar‐yiu Wong |
| Subject Matter | Economics |
Economic growth and resource
allocation: the case of China
Kar-yiu Wong
Department of Economics, University of Washington, Seattle,
Washington, USA
Abstract
Purpose – This paper aims to examine the factors of growth of a developing country such as China.
Because of the existence of domestic distortions, the traditional approach of using the growth of gross
domestic product (GDP) to represent economic growth of the economy is not appropriate. This paper
seeks to estimate how a change in resource misallocation may affect the measured growth rate of GDP.
Design/methodology/approach – Using provincial data for four southern provinces of China for
the years from 2000 to 2004, the paper considers two hypothetical cases, one in which labor allocation
is fixed, and one in which labor allocation is assumed to be optimal both before and after growth. The
growth factors for GDP in these two hypothetical cases are compared with the observed growth
factors.
Findings – This paper argues that the growth rate of GDP has overestimated the growth rate of the
economy in this period. It can thus be said that the degree of the distortion caused labor misallocation
decreases over time in this period.
Research limitations/implications – Because of limitations of data, this study treats each
province as one sector, producing one homogeneous product, although the same methodology can be
applied to more than one sector in each province. Furthermore, the present work assumes constant
external prices.
Practical implications – The present study shows the importance of removing distortions in the
economy, and how an improvement in the efficiency may raise the GDP of the economy.
Originality/value – The methodology and approach introduced here are quite new and are useful in
assessing the implications of distortions on production and welfare.
Keywords Economic growth,Gross domestic product, Productionmanagement, Process efficiency,
Labour mobility,China
Paper type Research paper
1. Introduction
China opened up its economy to the rest of the world at the end of the 1970s. Since then,
its economy has been growing spectacularly, with growth rates much higher than the
corresponding world’s averages. The gross domestic product (GDP) of China grew
from US$183 billion (at constant US$2,000) in 1980 to US$ 1,885 billion in 2005, with a
compounded annual growth rate of 9.78 percent. The annual growth rate over this
period was much higher than that of the world as a whole. For example, the GDP of the
world grew from US$ 17,623 billion (also at constant 2000 US dollar) in 1980 to US$
36,411 billion in 2005, which implies a compounded annual growth rate of 2.95 percent.
With these high growth rates, the percentage of the Chinese economy in the world
economy has increased from 1.04 percent in 1980 to 5.18 percent in 2005. What is more
impressive is that the growth of the Chinese economy has been nearly uninterrupted,
even during the years when many other Asian economies were hit hard by the Asian
financial crisis[1].
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1753-4408.htm
Growth and
resource
allocation
105
Journal of Chinese Economic and
Foreign Trade Studies
Vol. 1 No. 2, 2008
pp. 105-121
qEmerald Group Publishing Limited
1753-4408
DOI 10.1108/17544400810885933
The growth of an economy refers to an expansion of its production possibility set
(PPS). However, since the PPS is not observable, it is natural to express economic
growth in terms of the growth rate of some observable variables such as GDP or per
capita GDP[2]. The question is, if the objective is to determine the growth of an
economy, is the use of the growth rate of GDP an appropriate approach? In other
words, could the growth rate of GDP overestimate or underestimate the growth of the
economy?
To answer the above questions, it is important to note that the use of the growth
rate of GDP is sensitive to the pre- and post-growth commodity prices. For example, in
theoretical analysis, it is usually assumed that domestic (and also international) prices
do not change in the period considered, but this assumption is usually not valid,
especially if period of time considered is sufficiently long[3]. Furthermore, even if
domestic and international prices are constant, the growth rate of the GDP will depend
on what the prices are. Choosing a different set of prices could give a different growth
rate of the GDP.
In this paper, we argue that if domestic distortions are present so that production is
not efficient, the use of the growth rate of an economy’s GDP to represent the
economy’s growth is even more unreliable. Based on our analysis, explained in mor e
detail in the next section, one needs to be careful when trying to measure the growth of
the Chinese economy, because, like many other developing countries, domestic
distortions are common and widespread[4].
In this paper, we try to provide an answer to the above question by focusing on a
distortion that is considered to have substantially affected the production of the
economy. It is the inefficient allocation of resources (including labor and capital).
Before the opening up of its economy, the Chinese government had strict restrictions on
the movements of capital and labor across firms, sectors, and geographical locations.
As the government permitted more and more trade and other economic relations with
other countries, it was also liberalizing the movements of labor and capital.
Furthermore, as the economy grew, the government was loosening its control on the
movements of the primary factors. Nowadays, workers have more freedom and choice
in terms of taking up a job in another firm, another industry, or even another city,
either legally or illegally. At the same time, capital owners can more easily move their
capital to other places. It is also important to note that previous growth of the Chinese
economy occurred in a very uneven way, in terms of both industries and locations.
This uneven growth of the economy thus creates bigger incentive to primary factors to
move. The resulting movements of factors help shift the production point closer to the
production possibility frontier.
This paper examines the growth factors of the Chinese economy from 2000 to 2005,
and the contribution of more efficient resource allocation to the growth of the economy.
The Chinese government publishes statistical yearbooks and census statistics of 27
provinces and four municipalities/cities: Beijing, Tianjin, Shanghai, and Chongqing[5].
The statistical yearbooks provide statistical data for estimating the aggregate
production functions of the provinces and cities.
The estimated production functions can be used to determine the output levels in
two hypothetical cases:
(1) Fixed resource allocation (FRA). In this case, the labor and capital endowments
in various provinces and cities in the year 2000 are used as bases, and then all
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