Essays on China's economic growth

Longfeng Ye

Research output: ThesisDoctoral Thesis

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The overall aim of this thesis is to gain a better understanding of China's growth prospects as it moves from a labor intensive exporter, with low wages and high investment, to a middle-income country with high wages and new challenges.

The thesis looks at this issue first by attempting to gain a better understanding of whether there exists a "middle-income trap", as suggested by the World Bank. The concept of a "middle-income trap" has attracted enormous interest but the existing literature lacks formal tests. I develop and apply a test of some necessary conditions for a country to be in a middle-income trap that takes into account short-run dynamics, stochastic trends and structural breaks. The results are sensitive to the model specification, but I find evidence of a middle-income trap in around half my sample of middle-income countries, suggesting the concept survives a more formal critique. Nevertheless the list of countries is smaller than often claimed and diers from the usual suspects. China, by my test, is not a candidate for a middle-income trap.

The analysis then proceeds to the analysis of the TFP gains from rural-urban migration. Numerous studies report growth eects from labor reallocation in China to be 1-2 percentage points per year, which would appear to be a significant fraction of China's growth. Contrary to this conventional wisdom I show that the Solow-Denison-Kuznets labor reallocation eect is an order of only 0.25 percentage points per year in terms of TFP growth. There are two reasons for this dierence. First almost all existing studies have used a denition of a "reallocation effect" that differs from the conventional TFP based denition of Denison and Kuznets. Second I also allow for sectoral dierences in human capital, which are substantial in China. I conclude that the conventional view, that labor migration has made a major contribution to China's growth, cannot be justified by the standard growth accounting framework.

The thesis then goes beyond the growth accounting framework where the growth rate of factor inputs is exogenous. Following the Ramsey-Cass-Koopmans framework, I develop a two-sector neoclassical growth model with optimal capital accumulation, migration and the Hukou restriction in labor market. I find that the impact of migration on aggregate growth, that includes eciency gains and induced capital accumulation, is around 2 percentage points per year. Capital accumulation facilitated by migration accounts for the majority of this 2 percentage points. The labor reallocation effect in absence of capital adjustment is in fact small. Furthermore, this induced capital accumulation is shown to be due to the impact of efficiency gains resulted from migration on the return to capital, and also the effect of migration on the relative price of nonagricultural goods, hence a lower price of investment relative to consumption.

Original languageEnglish
QualificationDoctor of Philosophy
Publication statusUnpublished - 2016


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