Growing like China

Kjetil Storesletten, Fabrizio Zilibotti and Zheng Song ()

No 912, 2009 Meeting Papers from Society for Economic Dynamics

Abstract: China has been growing at a high rate and has at the same time accumulated a staggering foreign surplus. We construct a theory that explains these seemingly puzzling observations, while being consistent with salient features of the Chinese growth experience since 1992: high output growth, sustained returns on capital investments, extensive reallocation within the manufacturing sector, falling labor share and accumulation of a large foreign surplus. The theory makes only minimal deviations from a neoclassical growth model. Its building blocks are financial imperfections and reallocation among firms with heterogeneous productivity. Some firms use more productive technologies than others, but low-productivity firms survive because of better access to credit markets. Due to the financial imperfections, high-productivity firms - which are run by entrepreneurs -must be financed out of internal savings. If these savings are sufficiently large, the high-productivity sector outgrows the low-productivity sector, and attracts an increasing employment share. During the transition, low wage growth sustains the return to capital. The downsizing of the financially integrated sector forces a growing share of domestic savings to be invested in foreign assets, generating a foreign surplus. We test some auxiliary implications of the theory and find robust empirical support.

Date: 2009
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Citations: View citations in EconPapers (18)

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Journal Article: Growing Like China (2011)
Working Paper: Growing like China (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed009:912

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