Growing Like China

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American Economic Review, 101 (1), 2011, pages 202-242


We construct a growth model consistent with China's economic transition: high output growth, sustained returns on capital, reallocation within the manufacturing sector, and a large trade surplus. Entrepreneurial firms use more productive technologies, but due to financial imperfections they must finance investments through internal savings. State-owned firms have low productivity but survive because of better access to credit markets. High-productivity firms outgrow low-productivity firms if entrepreneurs have sufficiently high savings. The downsizing of financially integrated firms forces domestic savings to be invested abroad, generating a foreign surplus. A calibrated version of the theory accounts quantitatively for China's economic transition.

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By Zheng Song, Kjetil Storesletten and Fabrizio Zilibotti
Published June 22, 2011 2:55 PM - Last modified June 9, 2017 8:12 AM