Investment-driven growth has long been regarded as a key development strategy in China. This paper investigates empirically the validity of this view. Post-1990 data analyses and macroeconometric model simulations show that market demand has become a regular force in driving investment since reforms, that non-demand-driven investment growth contributes to increasing capital-output ratio far more than output growth, that government investment exerts a pivotal role in amplifying investment cycles, albeit effective in promoting employment, and that delayed and rising consumption from current investment surge can help sustain the impact of growth even with constant-returns-to-scale in the long-run GDP.Key words: Investment, growth, impulse response function, cointegration, Granger non-causality JEL classifications: E22, E62, R34, O23, P41 * Contacting author; email: d.qin@qmul.ac.uk .
1By three methods we may learn wisdom: first, by reflection, which is noblest; second, imitation, which is easiest; and third by experience, which is the bitterest.
Confucius
I. Another East Asian 'Miracle'?The spectacular growth of China over the last two decades apparently adds significant force to the East Asian 'Miracle'. 1 During the period 1990 -2003, China's growth has been averaging 9.3% in terms of GDP per annum while the accompanying rate in gross fixed capital formation (GFCF) is 14% and the rate of the total investment in fixed assets (TIFA) is 15%. 2 Today, GFCF accounts for over 40% of nominal GDP, as compared to less than 30% in the early 1980s, see Table 1.1. These records have definitely outperformed those of Japan and the US and many other Newly Industrialized Asian Economies (NIAEs), see In 2004, the startling acceleration of the TIFA -43.2% growth in the 1 st quarter and 33.3% in the 2 nd quarter 3 before settling down to 27.6% for the full year -has led the Chinese government to curtail fixed assets investment out of the grave concern that the rising investment would overheat the economy. The rapid investment expansion has caused severe shortage in energy and raw material supplies, pushed imports to grow faster than exports, and accelerated inflation. The investment price index rose to 5.6% and the 1 The East Asian 'Miracle' refers to the myth that the engine driving economic growth is essentially capital accumulation instead of total factor productivity growth, see e.g. (Young 1995) and (Senhadji 2000). 2 The TIFA is more often used than the GFCF in China, as it is published monthly and more timely than GFCF. Both GFCF and TIFA are deflated by the price index of fixed assets from the China Statistical Yearbook 2004 for the period [1991][1992][1993][1994][1995][1996][1997][1998][1999][2000][2001][2002][2003]. The price index of raw materials and energy is used for 1990 as the price index of fixed assets is unavailable that year. 3 All the statistics quoted are y-o-y rates. The view that the Chinese economy is an investment-driven economy is a legacy from the old regime of a centrally planned economy (CP...
