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Catch‐up industrial policy and economic transition in China
Ist Teil von
World economy, 2021-03, Vol.44 (3), p.602-632
Ort / Verlag
Oxford: Blackwell Publishing Ltd
Erscheinungsjahr
2021
Link zum Volltext
Quelle
Wiley Online Library Journals Frontfile Complete
Beschreibungen/Notizen
This paper studies how catch‐up industrial policies in China affect economic development in a two‐sector neoclassical growth model. To fulfil their aspirations of catching up with the output of the capital‐intensive sector of developed countries, Chinese political leaders adopted industrial policies that subsidise this target sector at the expense of other sectors from 1952 until the economic reform in 1978. The static effect of this industrial policy distorts the allocation of resources across sectors and lowers the aggregate TFP. The dynamic effect discourages the accumulation of capital. We show that although the output of the capital‐intensive sector boosts initially, it will be lower than its first‐best counterpart in the long run if catch‐up aspirations are too strong. Our theoretical predictions are consistent with the experience of the Chinese economy from 1952 to 1978.