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Feb 01

Where does the growth come from?

It clearly comes from two sources. The first is very

high accumulation of capital. The investment rate in China

is between 40 and 45% of output, a very high number. For comparison, the investment rate

in the USA is only 17%. More capital means higher productivity, and higher output.

Using high capital, producers provide unemployed people more job and with it, there exist high production.

GDP will increase with respect to this cycle.

High capitalMore jobMore productionHigh GDP

Surely, it is also about consumption but increasing society’s welfare, first firms, governments have to increase production and employment rates.

The second is very fast technological progress. The strategy followed by the Chinese

government has been to encourage foreign firms to come and produce in China. As foreign firms are typically much more productive than Chinese firms, this

has increased

productivity and output. Another aspect of the strategy has been to encourage joint ventures between foreign and Chinese firms; making Chinese firms work

with and learn from

foreign firms has made them much more productive. When described in this way, achieving

high productivity and high output growth appears easy, with easy recipes that every poor

country could and should follow.