Factor Reallocation Effect and Productivity in China's Economic Growth, 1985-2007

How to accurately calculate China's factor reallocation effect and objectively assess its impact on economic and productivity growth is an unsolved problem. This study has two objectives: to identify the trend of productivity growth and to quantify the contribution of sectoral factor reallocation to aggregate productivity growth rate since the 1980s. This is accomplished by estimating a Cobb-Douglas production function and decomposing aggregate productivity growth using official Chinese data. Based on the panel data of six main sectors making up the entire economy and fourteen individual industries constituting the entire manufacturing sector, the results show that productivity, especially total factor productivity, has been disappointing in recent years after rapid growth in the early post-reform period. The factor reallocation effect is trivial in the economic reform era, indicating growth potential in the mid-industrialization stage. In the long run, therefore, policymakers must adjust China's economic programs to foster sustained productivity growth and to improve factor flows among economic sectors.