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Abstract: Market-oriented economic transition since 1978 has led to remarkable economic development in China. In this study, we use the National Economic Research Institute (NERI) Index of Marketization and a panel data model to investigate the quantitative contributions of marketization to China's total factor productivity (TFP) and economic growth. Our results indicate that marketization contributed 1.45 percentage points on average to China's annual economic growth rate during the period from 1997 to 2007 and accounted for 39.2 percent of the increase in TFP. Marketization significantly improved resource allocation. However, economic transition in China has not yet been completed and sustainability of future growth will depend on further market-oriented reforms.
Keywords: marketization, economic transition, growth, Total Factor Productivity
JEL: C23, O43, O53, P20
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1. Introduction
In 2010, as a result of 30 years of economic expansion China overtook Japan to become the world's second largest economy, outranked only by the United States. Rapid economic development has lifted hundreds of millions of people from poverty as well as improved living standards.
China's market-oriented reforms have played a pivotal role in making these achievements possible. Yet, to date there still lacks quantitative study on contribution of marketization to economic growth and productivity changes, due to the lack of a general indicator to measure the achievement of market-oriented reform. This process is a systematic transformation of the country's overall economic, social and legal systems other than only a few regulational changes. Due to limited information, previous empirical studies often employed one or a few proxy variables, such as the development of the private economy and economic openness, to represent the process of marketization. These studies, while meaningful, are insufficient to reflect the full impact of market-oriented reform on economic development. In order to measure such impact, a better indicator is needed.
This paper employs the NERI Index of Marketization, which was developed by the National Economic Research Institute of China Reform Foundation, to measure the impact of market-oriented reform on economic development at the provincial level. Our findings indicate that between 1997 and 2007, marketoriented reform contributed an average of 1 .45 percentage points to annual economic growth rate. The process of marketization significantly improved resource allocation, which contributed 39 percent...