Can investments sustain China’s economic growth?

Abstract

The ability of China to maintain a growth rate between 7 and 10 % for the past 30 years has been a formidable feat, bringing itself to the international limelight. It has come to notice that investments played a large role in China’s economic growth. This paper aims to find out the sustainability of investments in maintaining China’s growth with the use of a simple accounting growth model, the Cobb Douglas function.

Using economic data from 1980 to 2008, we attempt to find the total factor productivity, returns to physical capital, human capital and labor from the coefficients of the Cobb Douglas production function. The returns to physical capital and total factor productivity would be of particular interest as it can determine the efficiency of investments in China.

Our empirical findings show that the returns to investment is productive as a 1% increase in investment bringing about a 1.02% increase in GDP and the accumulation of physical capital is bringing about productivity growth, with the total factor productivity estimated to be around 5. This shows the sustainability of investments in China’s economic growth and we believe that continued investment in physical capital is still very much feasible and thus can continue to fuel China’s economic growth.