Rethinking China's Growth Model and a look at different factors in China's Economic Rise

The South China Morning Post has Zhang Jun,professor of economics and director of the China Centre for Economic Studies at Fudan University, Shanghai, look at the role of efficiency in China's growth model He identifies as a primary consideration is what drove historical total factor productivity gains, but he does not provide an answer. He lays out the case why it is important.

On the demand side, many economists endorse a shift from investment-led to consumption-driven growth. Even more popular is the supply-side recommendation of a shift from extensive to intensive growth - that is, from a model based on capital accumulation to one propelled by gains in efficiency, measured by total factor productivity.

These recommendations are presumably influenced by Paul Krugman's criticism in 1994 of Soviet-style extensive growth in East Asian economies. At the time, Jeffery Sachs disagreed, asserting that the East Asian model included far more efficient market-based investment allocation than the Soviet model did; nonetheless, the criticism stuck.

But empirical research reveals a fundamental problem with this argument: China's total factor productivity has grown at an average annual rate of nearly 4 per cent since Deng's reforms began. If the US economy, with a total factor productivity growth rate of only 1-2 per cent annually, is seen as efficiency-driven, why is China's not?

More important, if China's figure is expected to fall, as major drivers like the convergence effect wane, what does it mean to say that efficiency gains should propel China's future growth?

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