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Date Submitted: 09/11/2011 12:11 PM

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Do you think China and other ASEAN countries will continue their record Growth? What factors do you think will hinder their growth?

A Surprising Find

Much previous research on economic development has suggested a significant role for capital investment in economic growth, and a sizable portion of China's recent growth is in fact attributable to capital investment that has made the country more productive. In other words, new machinery, better technology, and more investment in infrastructure have helped to raise output. Yet, although the capital stock grew by nearly 7 percent a year over 1979-94, the capital-output ratio has hardly budged. In other words, despite a huge expenditure of capital, production of goods and services per unit of capital remained about the same. This pronounced lack of capital deepening suggests a constrained role for capital. The labor input--an abundant resource in China--also saw its relative weight in the economy decline. Thus, while capital formation alone accounted for over 65 percent of pre-1978 growth, with labor adding another 17 percent, together they accounted for only 58 percent of the post-1978 boom, a slide of almost 25 percentage points. Productivity increases made up the rest.

It turns out that it is higher productivity that has performed this newest economic miracle in Asia. Chinese productivity increased at an annual rate of 3.9 percent during 1979-94, compared with 1.1 percent during 1953-78. By the early 1990s, productivity's share of output growth exceeded 50 percent, while the share contributed by capital formation fell below 33 percent. Such explosive growth in productivity is remarkable--the U.S. productivity growth rate averaged 0.4 percent during 1960-89--and enviable, since productivity-led growth is more likely to be sustained. Analysis of the pre- and post-1978 periods indicates that the market-oriented reforms undertaken by China were critical...

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