China’s economic growth can be considered in several phases and along various dimensions. The first phase goes up to the establishment of the People’s Republic of China in 1949. The second phase covers the impact of China’s industrialization policy on the country’s growth between 1952 and 1978. The author investigates the contributions of various sectors to China’s productivity growth, the resource allocation among the different sectors after 1952, and the sources of China’s growth since 1978, when it began its economic reforms. In the final section, the author examines China’s future economic growth by investigating its potential for increasing its productivity growth and the factors that could prevent China from realizing these goals.

Prior to 1500, China was the world’s leading technological and economic powerhouse, but its growth was slower from 1500 to 1800, during which time China’s growth rate fell behind that of Western Europe. Between the industrial revolution and 1950, China’s per capita GDP declined.

In analyzing China’s growth during 1952–1978, the author notes that it was driven mainly by increases in human capital (because of an increase in the average schooling years) and physical capital rather than by productivity growth. His research demonstrates that, contrary to popular belief, aggregate productivity growth rather than capital accumulation has been the key contributor to China’s economic growth since 1978. The author observes that China’s industrial reform between 1952 and 1978, which contributed to capital accumulation in heavy industries, resulted in a misallocation of resources away from agriculture. This misallocation, in turn, led to reduced productivity in the agricultural sector and, eventually, to famine.

Between 1978 and 2007, productivity increased significantly in the agricultural and private sectors relative to the state sector. During this period, employment declined in the agricultural sector as employees left it for the private sector. The author suggests that productivity growth in the private sector was in part a result of its ability to absorb employees from the agricultural sector. Productivity in the state sector declined between 1978 and 1998 relative to that of the nonstate sector because the state sector was subject to increased central planning. Between 1998 and 2007, China’s government introduced additional market-oriented reforms, such as privatization in the state sector and trade liberalization, which resulted in improved productivity in the state and nonstate sectors.

The author notes that China still has the potential to increase its productivity further and bridge the gap with other countries, such as the United States and other countries in East Asia. But it is imperative that China implement further institutional, policy, and political reforms.

This research would be beneficial to portfolio managers and other investors with exposure to China, as well as to research analysts and emerging market hedge fund strategists interested in understanding the sources of China’s growth and its future growth patterns.

The author uses data from Angus Maddison’s book titled Contours of the World Economy, 1–2030 AD: Essays in Macro-Economic History (2007). To decompose China’s growth for 1952–2007 and compare China’s performance with that of other countries, the author uses purchasing power parity data from the Penn World Table.

He conducts robustness tests by examining China’s growth performance through various subperiods between 1978 and 2007 and decomposes China’s sources of economic growth for the period 1952–1978 using a growth accounting methodology that breaks down China’s per capita GDP growth into growth from labor participation, the capital output ratio, average human capital, and productivity components. The author notes that his methodology does not account for the way China’s one-child policy reduced the cost of migration, which could have indirectly contributed to productivity growth, thereby underestimating the growth contribution of demographic factors.

The author provides an excellent historical analysis of China’s economic growth and the sources of its current growth. He arrives at a conclusion that departs from the widely held view that China’s growth rate since 1978 has been driven by investment. In arguing that China’s productivity growth rate has been the major contributor to China’s growth in this period, the study is groundbreaking. One area of reservation is the accuracy of national statistics about China that the author uses.