How Fast Has China Grown?

Summary of working paper 7856
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From 1986 to 1998, China's GDP averaged 6.2 percent per year, 3 percent less than the officially reported figures of 9.2 percent.

For policymakers, or even casual observers, few facts shape impressions about a country's well-being more than bedrock statistics on economic growth. This has been especially true in regards to conventional perceptions about modern day China. While there may be much debate about the country's human rights record and environmental policies, almost unquestioned in the mainstream is the notion that economic reforms in China have produced awesome growth rates.

Indeed, NBER Research Associate Alwyn Young notes that if you look at China's official reports, between 1978 and 1998 gross domestic product or GDP per capita grew at an astounding 8 percent annually, "a performance which makes China the most rapidly growing economy in the world during this period." But his study, Gold into Base Metals: Productivity Growth in the People's Republic of China During the Reform Period (NBER Working Paper No. 7856), is an apt reminder that economic statistics can be highly malleable objects.

Adopting a relatively conservative approach -- he relies solely on official Chinese government data -- Young argues that, upon closer examination, what appears to be phenomenal turns out to be relatively "mundane." Accepting all the numbers the statisticians of the People's Republic produce, but making systematic adjustments using their own data, he shows that "one can...reduce the growth rate during the reform period to levels previously experienced by other rapidly growing economies," so that "... once one takes into account rising labor force participation, the transfer of labor out of agriculture and improvements in educational attainment," labor productivity growth in the non-agricultural economy is only 2.6 percent. That's a commendable performance, notes Young, "but by no means extraordinary," and a far cry from the officially touted 8 percent growth of GDP per capita.

In making his adjustments, Young errs on the side of caution. He seeks to make corrections only when there is good cause to believe official government estimates are biased and when there exist alternative government statistics that provide the tools to affect a revision. For example, he points out that at the root of national income statistics are reports filed by local officials whose tendency to "overstate the growth of output, while understating investment and births" is something that's been "well documented, by none other than the Chinese themselves." But in attempting to correct for this, Young is careful to rely on official statistics, and well-developed ones at that.

In this case, he sticks to the government's own well established -- but surprisingly little-used -- price indexes to correct what he believes to be a systematic understatement of inflation, an understatement that has the practical effect of making growth rates seem much more impressive than they actually are. Substituting these indexes for the official inflation rate formula -- which relies heavily on local reporting -- Young recalculates growth rates and finds that from 1986 to 1998, they averaged 6.2 percent per year, "3 percent less than the officially reported figures of 9.2 percent." In other words, China's stellar growth rates may be more the product of a statistical assessment that prefers one set of official numbers to another, as opposed to actual economic performance. Most interesting, Young's reworking of the numbers offers evidence that in the political unrest that rocked China in 1989, economic instability was a more significant factor than previously noted. He finds that while the government was reporting 4 percent growth, if they had blended their own price indexes into the mix, they would have reported that GDP actually fell by 5.2 percent.

As for what to read into his revisions of Chinese economic history, Young offers that there are opposing interpretations, and that both can be viewed as valid. He notes that even if labor productivity grew at only 2.6 percent a year, "when contrasted with the experience of other reforming economies, sustained 2.6 percent labor productivity growth can be seen as nothing short of miraculous."

On the other hand, given that the estimates presented in this paper are by no means the lowest possible, and given the presumed inefficiency of central planning, one might have expected greater gains in a ''successfully'' reforming economy, Young writes. "In this regard, moderate productivity growth might be seen as reflecting enduring problems, such as the failure to reform state enterprises and the inefficiencies introduced by local government intervention in industrial production and trade."

To the extent that reforms have produced greater efficiencies, Young asserts that they have come through the "easiest" but also the "greatest" of the reforms' achievements: the elimination of policies that "kept the peasantry tied up in agriculture." While Young restricted his data deconstruction exercise to productivity growth outside of agriculture, he believes the role played by agriculture in the success of the East Asian economies deserves more attention. "Despite the popular academic emphasis on industry and exports," concludes Young, "a deeper understanding of the success of the world's most rapidly growing economies may lie in that most fundamental of development topics: agriculture, land and the peasant."

-- Matthew Davis