Solow Residual

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Journal of Comparative Economics 37 (2009) 432–452

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Journal of Comparative Economics
journal homepage: www.elsevier.com/locate/jce

Can the augmented Solow model explain China’s remarkable economic growth? A cross-country panel data analysis Sai Ding *, John Knight
University of Oxford, Manor Road Building, Oxford OX1 3UQ, UK

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Ding, Sai, and Knight, John—Can the augmented Solow model explain China’s remarkable economic growth? A cross-country panel data analysis China’s economy grew at an average annual rate of 9% over the last three decades. Despite the vast empirical literature on testing the neoclassical model of economic growth using data on various groups of countries, very few cross-country regressions include China and none of them particularly focuses on the explanation of China’s remarkable economic growth. We attempt to fill this gap by utilising panel data on 146 countries over the period 1980–2004 to examine the extent to which the rapid growth of China and the huge gap in the growth rate between China and other countries can be explained by the augmented Solow model. Using system GMM estimation techniques, we find that, in spite of the restrictive assumptions involved, the Solow model augmented by both human capital and structural change provides a fairly good account of international variation in economic growth. In particular, China’s relative success in economic growth is due to high physical capital investment, conditional convergence gain, dramatic changes in the structure of employment and output, and low population growth. Journal of Comparative Economics 37 (3) (2009) 432-452. University of Oxford, Manor Road Building, Oxford OX1 3UQ, UK. Ó 2009 Association for Comparative Economic Studies. Published by Elsevier Inc. All rights reserved.

Article history: Received 17 July 2008 Revised 24 March 2009 Available online 8 June 2009 JEL classification: O11 O47 Keywords: China Economic growth Augmented Solow model Cross-country growth regression Structural change

1. Introduction Few countries have been able to match the pace of China’s sustained economic growth. Since the start of economic reform in 1978, China has maintained a remarkable growth rate. According to official Chinese statistics, the average GDP growth rate during the period 1979–2000 was 9.2%, and it accelerated to 10.1% between 2000 and 2006. Despite the controversy over the reliability of the official figures of real output growth,1 the fact that China has grown fast is beyond dispute. Being the world’s largest developing country, with one-fifth of the world population, China’s growth has contributed significantly to the reduction of global income poverty and inequality by lifting over 300 million people out of one-dollar-a-day poverty in the past three decades.2 While China’s economic growth over the reform period has received much attention in the economic literature, research has focused mainly on relatively narrow topics such as issues of growth convergence or divergence among provinces, determinants of cross-provincial growth variation, and assessment of the sustainability of China’s growth, all of which are based * Corresponding author. Fax: +44 20 704 39951. E-mail addresses: sai.ding@economics.ox.ac.uk (S. Ding), john.knight@economics.ox.ac.uk (J. Knight). 1 Influential work on the (un)reliability of China’s GDP statistics includes Maddison (1998), Rawski (2001), Lardy (2002), Young (2003), and Holz (2006). We thank an anonymous referee for raising this point. 2 The figure is calculated from Ravallion and Chen (2007). 0147-5967/$ - see front matter Ó 2009 Association for Comparative Economic Studies. Published by Elsevier Inc. All rights reserved. doi:10.1016/j.jce.2009.04.006

S. Ding, J. Knight / Journal of Comparative Economics 37 (2009) 432–452

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on data for China only. Although these studies are crucial for understanding the...
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