# **1. Accounting for China’s past growth performance**

In the standard growth accounting framework, growth in output per worker can be allocated into contributions from changes in physical capital, employment, human capital (the education and skills of the labor force), and a residual, total factor productivity. TFP measures gains in economic efficiency (the quantity of output produced with a given quantity of inputs), including those driven by technological progress.

Assuming a Cobb-Douglas production function, output is a function of capital, labor, and TFP: Y, A, K, and α are measures of output, TFP, physical capital, and the capital share of income, respectively. L is labor and H accounts for educational attainment and the return to each additional year of education. Dividing both sides of the production function by the labor input L, taking logarithms of both sides, and taking first differences yields: Growth in output per worker, ⁄ ), is decomposed into contributions from growth in capital per worker, ⁄ ), increases in education per worker, , and a residual measure of improvement in TFP, ∆ln(YYLL. ∆ln(KKLL ∆ln LL The data on output (real GDP), employment and the labor share of income (i.e., labor ∆ln AA compensation divided by GDP) are from China’s National Bureau of Statistics (NBS). The capital stock estimates are from Herd (2020) and the human capital variable is from Penn World Table (PWT) 9.1 (Feenstra et al., 2015).<sup>6</sup> In China, the growth contribution of TFP was particularly high in the initial stages of reform and opening, when many structural reforms were implemented. We estimate that TFP grew by 3.5 percent a year in the first decade (1979-1988) (Figure 1). Annual TFP growth averaged 3.1 percent in 1979–2008, generating 40 percent of growth in output per worker.<sup>7</sup> Bosworth and

> 6 We use China’s official national accounts. PWT 9.1 adjusts China’s GDP growth down by an average of 2.1 percentage points in 1953–2017 (with a standard deviation of 4.4) compared with NBS data, arguing that “official statistics systematically overstate growth” (Feenstra et al. 2013 and 2015). In the PWT, average TFP growth in 1979-2008 was 1.6 percent and TFP contributed about 30 percent to growth in output per worker. Although the PWT output and TFP growth rates for China are on average lower than ours, the two sets of variables are highly correlated (correlation of 0.78 for output growth and 0.70 for TFP growth) and tell a similar story over time.

The quality of China’s official statistics has received a lot of attention in the literature (see, for example, Adams and Chen, 1996; Holz, 2014; Maddison and Wu, 2008; Perkins and Rawski, 2008; Rawski, 2001). Four recent papers explore this issue after 2007. Clark et al. (2018) and Hu and Yao (2019) use satellite–recorded nighttime lights to estimate GDP. The former conclude that growth in recent years has been underreported in official statistics, while the latter find that official GDP has been systematically overestimated. Re-estimating GDP using value added tax revenues, Chen et al. (2019) find that official statistics overstated growth by 1.7 percentage points in 2008-2016. In contrast, linking trading-partner data on exports to China and China’s GDP, Fernald et al. (2019) conclude that official statistics have become generally more reliable over time.

> 7 An alternative way to calculate the growth contribution of TFP is to attribute to technology both the direct increase in GDP due to TFP growth and the indirect effect that results from the endogenous increase in capital in

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