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Catch-Up Industrial Policy and Economic Transition in China

2020-05-04

Content introduction:

No. E2020004

Catch-Up Industrial Policy and Economic Transition in China

 

Justin Yifu Lin, Wei Wang, Venite Zhaoyang Xu

February 23, 2020

 

 

Abstract:
This paper studies how catch-up industrial policies in China affect economic development in a two-sector neoclassical growth model. To fulfill their aspirations of catching up with the output of the capital-intensive sector of developed countries, Chinese political leaders adopted industrial policies that subsidize 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.

 

Keywords:

Catch-up industrial policy; Misallocation; Ramsey allocation problem; Economic development.

 

JEL Codes: O11; O23; O25; O41; E62

 

The series of New Structural Economics Working Papers aims to encourage academic scholars and students from all over the world to conduct academic research in the field of new structural economics. Excellent papers are selected irregularly and are offered academic suggestions and recommendation, but the published working papers are not intended to represent official communication from INSE.