Can the augmented Solow model explain China remark

CantheaugmentedSolowmodelexplainChina’sremarkableeconomicgrowth?Across-countrypaneldataanalysisSaiDing*,JohnKnightUniversityofOxford,ManorRoadBuilding,OxfordOX13UQ,UKarticleinfoArticlehistory:Received17July2008Revised24March2009Availableonline8June2009JELclassification:O11O47Keywords:ChinaEconomicgrowthAugmentedSolowmodelCross-countrygrowthregressionStructuralchangeabstractDing,Sai,andKnight,John—CantheaugmentedSolowmodelexplainChina’sremarkableeconomicgrowth?Across-countrypaneldataanalysisChina’seconomygrewatanaverageannualrateof9%overthelastthreedecades.Despitethevastempiricalliteratureontestingtheneoclassicalmodelofeconomicgrowthusingdataonvariousgroupsofcountries,veryfewcross-countryregressionsincludeChinaandnoneofthemparticularlyfocusesontheexplanationofChina’sremarkableeconomicgrowth.Weattempttofillthisgapbyutilisingpaneldataon146countriesovertheperiod1980–2004toexaminetheextenttowhichtherapidgrowthofChinaandthehugegapinthegrowthratebetweenChinaandothercountriescanbeexplainedbytheaugmentedSolowmodel.UsingsystemGMMestimationtechniques,wefindthat,inspiteoftherestrictiveassumptionsinvolved,theSolowmodelaugmentedbybothhumancapitalandstructuralchangeprovidesafairlygoodaccountofinternationalvariationineconomicgrowth.Inparticular,China’srelativesuccessineconomicgrowthisduetohighphysicalcapitalinvestment,conditionalconvergencegain,dramaticchangesinthestructureofemploymentandoutput,andlowpopulationgrowth.JournalofComparativeEconomics37(3)(2009)432-452.UniversityofOxford,ManorRoadBuilding,OxfordOX13UQ,UK.2009AssociationforComparativeEconomicStudies.PublishedbyElsevierInc.Allrightsreserved.1.IntroductionFewcountrieshavebeenabletomatchthepaceofChina’ssustainedeconomicgrowth.Sincethestartofeconomicreformin1978,Chinahasmaintainedaremarkablegrowthrate.AccordingtoofficialChinesestatistics,theaverageGDPgrowthrateduringtheperiod1979–2000was9.2%,anditacceleratedto10.1%between2000and2006.Despitethecontroversyoverthereliabilityoftheofficialfiguresofrealoutputgrowth,1thefactthatChinahasgrownfastisbeyonddispute.Beingtheworld’slargestdevelopingcountry,withone-fifthoftheworldpopulation,China’sgrowthhascontributedsignificantlytothereductionofglobalincomepovertyandinequalitybyliftingover300millionpeopleoutofone-dollar-a-daypovertyinthepastthreedecades.2WhileChina’seconomicgrowthoverthereformperiodhasreceivedmuchattentionintheeconomicliterature,researchhasfocusedmainlyonrelativelynarrowtopicssuchasissuesofgrowthconvergenceordivergenceamongprovinces,deter-minantsofcross-provincialgrowthvariation,andassessmentofthesustainabilityofChina’sgrowth,allofwhicharebased0147-5967/$-seefrontmatter2009AssociationforComparativeEconomicStudies.PublishedbyElsevierInc.Allrightsreserved.doi:10.1016/j.jce.2009.04.006*Correspondingauthor.Fax:[phone].E-mailaddresses:[e-mail](S.Ding),[e-mail](J.Knight).1Influentialworkonthe(un)reliabilityofChina’sGDPstatisticsincludesMaddison(1998),Rawski(2001),Lardy(2002),Young(2003),andHolz(2006).Wethankananonymousrefereeforraisingthispoint.2ThefigureiscalculatedfromRavallionandChen(2007).JournalofComparativeEconomics37(2009)432–452ContentslistsavailableatScienceDirectJournalofComparativeEconomicsjournalhomepage:fillthegapintheliteraturebyincorporatingChinaintoacross-countrygrowthstudybasedonaneoclassicalframework.Thenoveltyandoriginalcontributionofthestudylieinthefollowingthreeaspects.Firstly,theempiricalgrowthmodelweadoptisarevisedcross-countryspecificationoftheaugmentedSolowmodelwhichallowsforcross-countrydifferencesinproductivitygrowthasmeasuredbystructuralchange.Unlikethegrowthaccountingap-proach,itisausefulmeansofestimatinggrowthinaggregateefficiencywithoutusingcapitalstockdata,thusavoidingmak-ingstrongassumptionsaboutunknownparametersofproductionfunctions.Thestructuralmodelusedinthispaperalsoreducestheproblemofmodeluncertaintyfacedbyinformalgrowthregressions.Secondly,concerningtheeconometricmethodology,weextendthepreviouscross-sectionworkofTempleandWößmann(2006)tothedynamicpaneldatacontext,inwhichtheunobservedcountry-specificeffectsandpotentialendogeneityandmeasurementerrorofregressorsarecontrolledfor.Byclassifyingcountriesatsimilarlevelsofdevelopmentintothesamesample,wecontrolpartiallyforthedifferencesintechnologyandinstitutionsandalleviatetheproblemofparameterhet-erogeneity.Robustregressiontechniquesareusedtoisolatetheinfluenceofpotentialoutlierssothatweareabletoconcen-trateonthemostcoherentpartofthedataset.Oureffortsinjointlydealingwiththeproblemsofomittedvariables,parameterheterogeneity,measurementerror,endogenousregressorsandinfluentialoutliersprovidenewinsightsonempir-icalestimationofcross-countrygrowthregressions.Thirdly,toexplainChina’srelativegrowthsuccess,weusetheestimatedequationtodecomposethesou