Trade linkages and economic growth in China

The recent resurgent interest in the process of economic growth among academic economists has been characterised by an endeavour to invoke knowledge and human capital as determinants of long-run economic growth and, thereby, empirically explain the divergent pattems of rates of economic growth observed across countries and regions. This approach is distmctive from the conventional growth paradigm, which in contrast, concentrates mainly on the growth of physical inputs as the sources of growth. The new approach, by endogenising technical change, has created a framework in which to explain why economic institutions and policies can have long-run effects on growth rates. This thesis examines the post-reform (1978-92) growth experience of China, with respect to the relationship between (i) trade, investment, and economic growth; (ii) the rise of township enterprises (TWEs) and economic development; and (iii) government policies and economic growth, in light of endogenous growth theory. In this study, a number of hypotheses are examined against the data sets of the aggregate economy and three Chinese regional economies (1978-93) in a simple log-linear econometric framework. To allow for the likely presence of inter-regional correlations between the regressions' error terms, A. Zellner's iterative seemingly unrelated regressions technique is used to estimate the regional equations. The study identifies three major elements in the rapid post-reform growth, namely, the continued expansion of foreign frade, the rapid growth of the nonstate sector comprising TWEs and foreign-funded enterprises, and the high levels and rates of savings and investment. These are in tum a function in part of government policy choices. The results indicate that the influence of foreign trade and investment on the Chinese economy has been positive and significant over the 1978-93 period. Exports and unports, either when treated separately or taken as the jomt frade variable, all seem to have a significant effect on long-run economic performance. The results also show that the sfrong growth of the nonstate sector has positive and significant effects on economic growth. The major findings of this study sfrongly support the basic theoretical contentions found in the endogenous growth literature. They are consistent with the main stylised facts of growth and structural change which are occurring in China, as reviewed m this study. These findings have also underlined the importance of government polices, such as the decisions taken in the late 1970s and early 1980s to fransform rural institutions and reform the enterprise system; the sequenced measures to liberalise the foreign frade and exchange regimes, and the efforts to promote physical and hxraian capital infrastructure. This study suggests that future policy making in China should be directed towards further promoting outward-looking, export-oriented industrial activities, reducing distortions and protectionism, enhancing privatisation, improving economic efficiency and encouraging competition, and stabilising the macroeconomic environment. IN MEMORY OF MY FATHER WU DONGZHOU 12.1932 7.1995