Can the Augmented Solow Model Explain China's Economic Growth? A Cross-Country Panel Data Analysis
China’s economy grew at an average annual real growth rate of 9 percent over the last three decades. Despite the vast empirical literature on testing the neoclassical model of economic growth using data on various groups of countries, very few cross-country regressions include China and none of them particularly focuses on the explanation of China’s remarkable economic growth. We attempt to fill this gap by utilizing panel data on 146 countries over the period 1980-2000 to examine the extent to which the growth difference between China and other countries can be explained by the augmented Solow model. The estimates are based on system GMM estimation which allows for unobserved country-specific effects, measurement error, and endogeneity problems of regressors. We find that, in spite of the restrictive assumptions involved, the Solow model augmented by both human capital and structural change provides a fairly good account of international variation in economic growth. In particular, physical capital investment, changes in the structure of employment, conditional convergence, and population growth are the main sources of the growth difference between China and many other countries.
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