Overreliance on Net Export and Investment Impedes China’s Structural Transformation: Estimation and Analysis Based on a Multi-Sector Growth Model

Qu Shenning (渠慎宁), Li Pengfei (李鹏飞) and Lyu Tie (吕铁)
Institute of Industrial Economics (IIE), Chinese Academy of Social Sciences (CASS), Beijing, China

Abstract: Since reform and opening-up in 1978, changes in China’s industrial structure have generally followed the pattern of “Kuznets facts” but still exhibits some unique characteristics, which led us to raise the following three questions regarding China’s structural transformation: (1) Why did the share of China’s agricultural and manufacturing employment reduce/increase intermittently rather than continuously? (2) Why did the share of China’s agricultural employment increase during certain periods? When the share of manufacturing employment reduced, why did the workforce reversely flow into agriculture rather than move to the service sector? (3) Why did growth in the share of China’s service sector employment decelerate before reaching its peak? Why did the share of employment in the industrial sector suddenly increase after an abrupt decline? This paper creates a multisector economic growth model that contains non-homothetic preferences and differentiated productivity, and incorporates the “two drivers” therein for a demand-side estimation and analysis. The result shows that China’s economic growth model driven by net export and investment is a critical factor for explaining the three questions regarding its structural transformation. This paper believes that only by implementing supply-side structural reforms, reducing the dependence on net export and investment, and achieving sustainable endogenous economic growth will China be able to expedite its industrial restructuring.

Keywords: structural transformation, net export and investment, multi-sector economic
growth model, supply-side structural reforms.

JEL Classification Codes: C14, L16
DOI:1 0.19602/j .chinaeconomist.2019.5.04

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