Shift of Driving Force for China’s Industrial Growth during 1979-2012- A Trend toward Worsening Efficiency

Jiang Feitao, Wu Peng  and Li Xiaoping
Institute of Industrial Economics, Chinese Academy of Social Sciences (CASS), Beijing, China
Institute of Economics, CASS
Institute of Quantitative and Technical Economics, CASS

Abstract:  The driving force for China’s industrial growth has shifted from the synergy of efficiency and factor input to the dominance of capital input alone. With the boundary of 2003, the contribution of capital to the growth of China’s industrial economy increased from the annual average of 34.07% to 89.28% while the contribution of TFP dived from the annual average of 47.34% to -4.08%. Meanwhile, TFP growth rates dropped from the annual average of 4.6% to -0.05% and marginal capital output ratio went down from 0.61 in 2002 to 0.28 in 2012. This indicates that the investment-driven pattern of China’s industrial growth has been confronted with severe inefficiency. Further research suggests that the tendency of worsening industrial growth efficiency already became significant prior to the global financial crisis of 2008 and the eruption of the global financial crisis is not the fundamental reason for the worsening of efficiency and only exacerbated its tendency. The current government-led and investment-driven pattern of industrial growth is the root cause of such efficiency deterioration. Therefore, in order to achieve the transition towards innovation- and efficiency-driven growth pattern, the key is to make an appropriate distinction in the relationship between market and government, i.e., the government must create a perfect institutional system where the market plays a decisive role and take proactive initiative to promote technology innovation and transfer on the basis of respecting market mechanism and the intent of market entities.

Keywords: industrial economy, growth mechanism, transformation of development pattern

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