The Determinant of Economics Growth in the Emerging Markets the Case Study of China

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MSc BUSINESS ECONOMIC AND FINANCE

Title of Project

The determinant of economic growth in emerging markets: A case study of China.

Tarik TOUAT

Student ID: 10034757

August 2011

Project Supervisor: Dr. Helen Solomon.

Abstract

China has enjoyed a very rapid economic growth over the past decades. The impressive growth was driven by several factors. This study aims to determine those factors which contributed to unprecedented economic growth of China and show the relationship with the economic growth by an empirically investigation.

The Ordinary Least Squares (OLS) method is applied in order to estimate a growth model using a time series data from 1984 to 2009. The results shows that trade openness, government size and inflation have a significant effect on economic growth. On the other hand, foreign direct investments, the level of human capital and return on investment have minor impact on economic growth in China. The relationship is established though the vector error correction model (VECM), the finding is that trade openness, government size and inflation had a positive impact on gross domestic product of China in the long-run.

Word account: 13.112 words.

Acknowledgements

Allow me to pay tribute to my supervisor, Dr. Solomon for kindly supervising this study and giving her time and her knowledge to the success of this project.

I take this opportunity to thanks my elder brother Arezki TOUAT who was a model of success and constant source of motivation; I’m here to express my sincere gratitude and I wish him all the best for his wedding day.

Dedication

I dedicated this work to my parents Mouloud and Saliha TOUAT, who have contributed in an extraordinary way to my studies. To my younger sister Louiza TOUAT who is very special for me.

Table of Contents

1INTRODUCTION6
1.1Main objective7
1.2Organization of the study7
2OVERVIEW OF THE CHINESE ECONOMY8
2.1Geopolitical characteristics of China9
2.1.1Population9
2.2Economic reforms in China10
3REVIEW OF LITERATURE12
3.1Growth models12
3.1.1Basic Economic Growth Model12
3.1.2The Harrod-Domar model13
3.1.3Exogenous growth Solow model14
3.1.4The augmented Solow-MRW15
3.1.5The growth accounting model16
3.2The determinants of growth17
3.2.1Foreign direct investment17
3.2.2Trade Openness19
3.2.3Human capital20
3.2.4Government size21
3.2.5Inflation22
3.2.6Infrastructure23
3.2.7Return on investment (Portfolio investment)24
4DATA AND METHODOLOGY25
4.1Presentation of the data and statistical analysis25
4.2Description of the variable26
4.2.1GDP per Capita26
4.2.2Foreign Direct Investment Net Inflows (% of GDP)27
4.2.3Trade openness28
4.2.4School enrolment, tertiary29
4.2.5General government final consumption expenditure30
4.2.6Inflation31
4.2.7Portfolio investment, bonds32
4.2.8Electric power consumption33
4.3Descriptive Statistics34
4.4Methodology35
4.4.1Estimation of the general model35
4.4.2The hypothesized relationships between GDP and its determinant36 5MODEL ESTIMATION AND FINDING37
5.1Testing For Stationary using the Augmented Dickey Fuller Test37
5.1.1Results of the stationarity test.39
5.2Estimation of a Short-Run Growth Model for China41
5.3Results of Robustness Tests44
5.3.1Testing for autocorrelation:44
5.3.2Testing for hetereoskedasticity:45
5.3.3Testing for non-linear functional form46
5.4Estimating a long-run growth model for China47
5.4.1Testing for Co-integration: Engle-Granger Approach47
5.4.2Results using Engle and Granger Approach49
5.4.3Result of Johansen co-integration test.52
5.4.4Vector correction model:55
6CONCLUSION59

LIST OF TABLES AND FIGURES
TABLES

Table 1: Literature review on foreign direct investment.18
Table 2: Literature review on inflation.22
Table 3:...
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