Resource allocation and economic growth in China

SHUANGLIN LIN [*] This article shows that the allocation of resources among enterprises of different types of ownership is important to economic growth. The data on 30 Chinese provinces indicate that the investment share of state enterprises is negatively related to the growth rate of per-capita GDP, while the investment share of private enterprises is positively related to the growth rate. Meanwhile, the effect of total investment on the growth rate of per-capita GDP appears to be insignificant. The share of trade in GDP was positively related to economic growth. Also, the illiteracy rate of employees was negatively related to economic growth. (JEL O11, O53, P2, P52) I. INTRODUCTION In 1957, China completed socialist reform on the ownership of production means. For 20 years, while her neighboring countries were making economic strides, China was still a low-income country. In 1978, another reform started which intended to bring market mechanics into the economy. Since then, the Chinese economy has been growing at an astonishing rate, with an average annual growth rate of GDP of around 10%. What are the ultimate forces (if any) which caused the rapid Chinese economic growth? This article intends to address this issue by examining the effects of the allocation of resources among enterprises of different types of ownership, along with other factors, on economic growth. Based on the theory of endogenous economic growth, allocation of resources between public sector and private sector affects economic growth. Romer [1989], King and Rebelo [1990], Rebelo [1991], and Jones and Manueli [1990] showed that if more resources are allocated to the government sector (through an increase in taxes), economic growth will be slower. By considering productive services which the government provides for private firms, Barro [1990] showed theoretically that government spending (measured by government spending-output ratio) may be either positively or negatively related to the growth rate of output, but empirically government consumption expenditures were negatively related and government investment expenditures were insignificantly related to economic growth. In many countries, particularly the centrally planned socialist countries, government not only collects taxes to finance its spending, but also directly runs state-owned enterprises. The Chinese economy is characterized by a large state production sector. In China, the output share of state enterprises in total output was 76% in 1980. The private production sector has been growing rapidly since early 1980. In 1996, the industrial output share of state enterprises declined to 28.5%. Chow [1993] analyzed how physical capital formation in the national economy and the five productive sectors of agriculture, industry, construction, transportation, and commerce contributed to economic growth. He found that capital formation played an important role and that technical change was absent in the growth of the Chinese economy from 1952 to 1980. So far the relationship between the allocation of resources between private and state sectors on economic growth has not been studied. It has long been argued that the private sector is more efficient than the public sector (see, for example, Hayek [1935] and Friedman [1980]). In this article, we will test the hypothesis that an increase in the investment share of private enterprises can increase the growth rate of per-capita GDP by using data from 30 Chinese provinces. The data are mainly from the recently published statistics book Seventeen Years' Regional Statistics after Reforms and Opening-Up [1997] and the various issues of Statistical Yearbook of China. [1] It is found that the investment share of state enterprises is negatively related to the growth rate of per-capita GDP, while the investment share of private enterprises is positively related to the rate of growth; that is, the provinces with a larger share of investment in state enterprises grow slower than the provinces with a smaller share of investment in state enterprises. …