High Savings and High Investment During the Labor Transfer Process and Economic Growth in China

Li Yang and Yin Jianfeng

Chinese Economy, 2007, vol. 40, issue 1, 61-91

Abstract: The transitional economy in China has its own unique growth mode. Typical characteristics are sustainable high savings and high investment rates. This article explains the foundation of such a growth mode from the perspective of labor transfer. We believe that the continuous transfer of surplus labor from agriculture to industry (industrialization), from rural areas to urban areas (urbanization), and from state ownership to nonstate ownership (marketization) is the key to the longterm and high-speed growth of China's economy. Not only are high savings and high investment rates the natural outcome of this growth mode, but also they are the key to its sustainability and the continuous transfer of labor. In order to prevent the inefficient financial sector from blocking labor transfer under the conditions of an open economy, the introduction of international direct investment in a purely financial sense has become a necessity. In the meantime, the Chinese financial sector will also see a gradually expanding foreign exchange reserve. Another important conclusion in this article is that growth and the fluctuation of the Chinese economy are mutually consistent. Although the mechanism differs from the real economic cycle theory, "neutralism" should still be the basic starting point of macroeconomic policies.

Date: 2007
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