Economic Reform and Productivity Convergence in China

This paper examines effects of the formation of physical and human capital on the growth of labour productivity, Total Factor Productivity (TFP) and wages in China, incorporating the market reform factors such as ownership shifts, population policy, openness and fiscal expenditures on education. We find that Chinese economic miracle is mainly pushed by the (physical) capital service rather than formation of human capital. The physical capital inputs contribute even more after 1994 as the returns to education decrease with the education expansion and increasing tuition fees. The traditional four economic regions of China show different growth patterns. The capital inputs mostly help the labour productivity growth in the West region and the wages growth in the Interior region, while human capital formation contributes to the TFP in all four regions. Moreover, provinces within each region present strong evidence of convergence of economic growth. The convergence is most prominent in the provinces within the Northeast and Coastal regions for labour productivity and TFP growth, suggesting fast technology spill-over within these regions.