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Abstract
China's economic growth over 1978–2008 is a miracle. This article attempts to figure out and quantify the factors leading to this miracle. It is generally believed that economic reform and opening up is the key to China's economic success, but that is far from being exact and specific. This study hypothesizes that privatization and Foreign Direct Investment (FDI) inflow are the two key factors in this process. We focus on identifying the exact, specific and detailed mechanisms of privatization and FDI inflow in promoting economic growth, especially from the provincial level. Then using a panel data covering 31 provinces of Chinese mainland over 1978–2008, we find statistically significant evidence to support our hypotheses. We predict that further economic growth depends on further privatization and opening up, that is, depends on denationalization of the economy.
Acknowledgements
The author is grateful to the first‐class research conditions and services offered by the library of Macau University of Science and Technology.
Notes
1 So privatization here not only means the transformation from public enterprises to private ones, but also means the emergence of newly established private enterprises. That is to say, privatization means the growing of the private sector in the national economy.
2 Under the household responsibility system, farmers have residual claim to the agricultural output after they meet the quotas of the country and the collective farms.
3 Similarly, India did not perform well before 1990 because it also stuck to its closed‐door and self‐reliance policy as China did before 1978.
4 Post‐Keynesian growth models focused on the role of savings and investment on economic growth.
5 The Solow growth model concluded that persistent economic growth (per capita income) comes from technological progress (Solow, Citation1957).
6 New institutional economics emphasized the role of institutions in economic catch up (Cheung, Citation2002).
7 This is demonstrated by the document Several Decisions on Expanding Employment Opportunities, Revitalizing the Economy, and Solving the Urban Employment Problems, which was issued by the CCP Central Committee and the State Council in October 1981. For details, please refer to Liu (Citation2010).
8 That is, large‐sized SOEs would be owned (at least controlled) by the government, while small ones could be privatized in various forms, although the word ‘privatization’ was avoided.
9 For example, for the objective of firm efficiency and profit maximization, the government should lay off redundant workers; but for the objective of employment and social stability, the government should keep them.
10 This advantage is sometimes called ‘advantage of backwardness’, see Lin (Citation2003b).
11 Refer to the law of diminishing returns to capital proposed by Romer (Citation1986).
12 It should be noted that consensus was not reached on the role of FDI at the beginning of the reform due to ideological concerns. See Liu (Citation2010).
13 China extremely lacked management talent in early 1980s. Please refer to Ma (Citation1984), pp. 226–31.
14 TVEs were generally owned by the collective, so de jure, they were under public ownership.
15 Deng Xiaoping's tour to South China in early 1992 is widely recognized as a landmark in China's reform and opening up process.
16 China in the 1990s also provided a laboratory for economists to test the efficiency differences of producers with different ownerships.
17 Such as telecommunications, petroleum, electricity, banking, railway, airlines, etc.
18 Deng Xiaoping had some famous sayings to describe China's reform and opening up, such as ‘To cross the river by groping stones’, and ‘A good cat is judged by whether it can catch mouse, not by the color of its hair’.
19 By September 2010, this figure reached $1 trillion. Source: Macao Daily, 7 November 2010, p. A10.
20 By the end of June 2011, number of FIEs operating in China has reached 445 900. Source: People's Daily, 10 August 2011, p. 10.
21 Source: Official website of the National Bureau of Statistics of China, http://www.stats.gov.cn/tjfx/ztfx/jnggkf30n/t20081028_402512576.htm.
22 Mr. Chen Guang, who was the party secretary of Zhucheng city of Shandong province, was promoted because he successfully privatized local public enterprises in mid‐1990s. He got famous in China because of his efforts to privatize local SOEs.
23 In response to the anonymous referee's questions, we believe this empirical model is compatible with long run growth, provided that China is no longer a closed economy. So the share of private sector in the economy, and the share of FDI in total fixed investment may change, but will not drop to zero. The inputs are necessary since they are based on economic theory, and the very high R‐squared of the regression also confirms this.
24 It is somewhat simplistic and arbitrary to assume a 5% depreciation rate of capital stock and a 5% wastage rate in capital formation throughout the data period and across all provinces. It would be more accurate to calculate these rates for different years and different regions, but available data do not permit such practices. An alternative way is to do some sensitivity analyses by varying the depreciation rate and wastage rate. We conducted these analyses and found that the results are robust. That may be because the large size of investments in China, which makes any small proportional change in depreciation and wastage not significantly sensitive to regression results. In Zhang et al. (Citation2004), they just assumed a zero wastage rate.
25 All these data can be directly obtained from NBS (Citation2010).
26 Sometimes the ratio Export/GDP is used, see Yao and Wei (Citation2007).
27 GDP = C + I + G + NX introduced in macroeconomics is an identity, not a causation.
28 Of course, we can put the variable of Export to check its correlation (not causation) with GDP. We tried that, but find that there is no statistically significant relationship between Export/GDP and GDP.
29 In fact, secondary education has already been popularized across China, so the variation of secondary schooling across different regions of China is much lower than that of higher education schooling.
30 Source: Guangming Daily, 31 October 2010.
31 Source: Xinhua Telecom Daily, 27 October 2010, front page.
32 This method of conversion is, of course, not perfect as the relative capacity of different transportation means may not be the same in different provinces and in different years. But possible conversion errors may be small as highways account for a predominant proportion of the total transportation volume. So the conversion should be a close proximate of the total transportation capacity of each province.
33 We used two methods to test panel unit roots, one is Levin–Lin–Chu (LLC), the other is Im–Pesaran–Shin (IPS).
34 To save space, we do not present the panel unit root test results here.
35 In the literature, some authors used a Generalized Method of Moments (GMM) approach (Yao and Wei, Citation2007), which was proposed by Arellano and Bond (Citation1991). GMM has an advantage of reducing multicollinearity among explanatory variables and endogeneity between the dependent and explanatory variables. But the estimator is designed for datasets with many panels and few periods, which is not the case of our datasets. In our model, FDI and privatization are both defined in ratios, which would have greatly reduced the problems of multicolliearity and endogeneity. So we declined to use GMM approach in our regression.