The Sustainability of Chinese Growth and the Aggregate Factor Substitution Elasticity

We discuss the sustainability of Chinese high growth relative to growth experience elsewhere, and specifically Soviet Russia in the 1950s to the 1960s by asking if the aggregate technology can eventually similarly constrain high growth performance in the Chinese case as argued by Weitzman in a paper in 1970 discussing the Soviet case. We note in the Chinese case, in contrast to Russia, the declining labor share in GDP over time, which suggests a substitution elasticity above rather than below one. We use time series data on labor’s share in GDP to estimate a substitution elasticity for China, finding that the substitution elasticity is greater than one. We then discuss how sub aggregate high growth can occur when there are three sectors, and large outflows of labor occurring from rural to urban areas over time with implications for the role of factor substitution in future Chinese growth. We argue that high growth in China can be supported in such a framework by a rural to urban labor outflows even if the substitution elasticities in both the urban and rural sectors are less than one. We estimate these two production functions using share data and these indicate substitution elasticities less than one. As such we suggest that aggregate substitution elasticities do not necessarily provide a clear guide as to the sustainability of high Chinese growth.