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Chapter 20

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Economics (Arts)
ECON 336
Christopher Green

Chapter 20 (845-881) Fostering China’s Economic Growth to 2025 China’s Growth Prospects Will the Savings and Investment Rate Remain High?  While productivity growth has been the leading factor of Chinese growth over the past decade it is hard to believe that further improvements are possible at the same rate of growth and thus invests will probably decrease as the marginal productivity will decrease.  Even though China has attracted a lot of foreign investment a lot of the capital stock comes from domestic investment, which is mostly financed by domestic savings.  A couple reasons for the increased savings rate: o Accumulate fund for the purchase of durable goods (automobiles) o The desire to purchase private housing o The main cause is to save for retirement due to the increased costs of health care and education. o There is also an inverse relationship between dependency and savings: children and retirees consume more than they earn, while adults in the prime working ages accumulate savings to benefit their children and finance their own retirement. o With people just entering retirement now and the one child policy, household savings is most likely to be high until 2025. o It is really hard to determine the future of government and industry savings. Future Growth of the Labor Force and Human Capital  China’s work force is likely to increase until 2015 and then decrease.  Although the labor force will decline after 2015, the portion of the labor force that is educated will increase and opportunities in urban areas (attracting a lot of rural workers) seem to be improving however the classification between rural and urban workers is obviously caused for concern. Future Growth of Total Factor Productivity (TFP)  TFP growth accounted for two-fifths of China’s overall GDP increase between 1978 and 2005. Productivity Implications of Expected Growth of Capital, Labor, and Education  A bunch of calculations are done. I am skipping straight to the conclusions for this section.  To sustain a growth rate of 9% per year for another two decades, China would have to push the annual growth of TFP above 4% (higher than the level during 1978-2005). This is unlikely.  Compares China to Tawain, Japan, and S. Korea and notices that these three countries experience the same type of growth but then slowed down. So will China.  Believes that Chinese GDP can only increase quickly for another decade – NOT two. Econometric Estimates of the Sources of Growth  I don’t think we will need to know this.  Landlocked states have slow growth  TFP leads to growth  Strong link between economic openness and growth  Negative association between large resource exports and growth  High levels of economic consumption (as a share of GDP) retard economic growth  Education leads to growth  Positive link between political stability and economic growth  TABLE 20.7 ON PAGE 860 SUMMARIZES ALL OF THIS NEATLY Can Chinese Institutions Support Continued Rapid Growth The Role of the State  Chinese experience supports the view that a higher degree of state involvement in ownership and direct management of economic activity is likely to reduce the future increase of TFP.  There has been an obvious trend towards the privatization of resources after reform.  Anticipate further declines both in the number of state firms, especially at the
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