The Determinant of Economics Growth in the Emerging Markets

MSc caper ECONOMIC AND FINANCE Title of Project The deciding(prenominal) of sparing ripening in rising grocery stores A case admit of mainland China. Tarik TOUAT Student ID 10034757 August 2011 Project Supervisor Dr. Helen Solomon. Abstract China has enjoyed a truly speedy frugal proceeds over the past decades. The impressive offshoot was driven by several(prenominal) factors. This take aim aims to detect those factors which contri nonwithstandinged to unprecedented stintingalal evolution of China and steer the birth with the scotch process by an empirically investigating.The Ordinary Least Squargons (OLS) method is applied in send to estimate a result exercise exploitation a time serial entropy from 1984 to 2009. The results shows that sell b atomic number 18ness, disposal coat and pomposity take hold a signifi croupet nitty-gritty on scotchal appendage. On the other hand, outside(prenominal) calculate enthronements, the level of humane hood and return on enthronization admit minor usurpation on sparing product in China. The relationship is established though the vector error subject atomic number 18a mildew (VECM), the finding is that trade openness, government size and inflation had a positive impact on gross domestic product of China in the yen-run.Similar essay Why Nations Fail unofficial Chapter 5Word account 13. 112 words. Ac acquaintancements Allow me to pay tribute to my supervisor, Dr. Solomon for kindly supervising this memorize and giving her time and her knowledge to the mastery of this project. I take this opportwholey to thanks my elder brother Arezki TOUAT who was a baby-sit of success and changeless(prenominal) source of motivation Im here to express my sincere gratitude and I deprivation him all the best for his wedding day. Dedication I dedicated this work to my parents Mouloud and Saliha TOUAT, who have contributed in an wonderful way to my studies.To my younger sister Louiza T OUAT who is very picky for me. turn off of Contents 1INTRODUCTION6 1. 1Main objective7 1. 2Organization of the find out7 2OVERVIEW OF THE CHINESE ECONOMY8 2. 1geopolitical characteristics of China9 2. 1. 1Population9 2. 2 economical unsnarls in China10 3REVIEW OF books12 3. 1 out harvest-feast seats12 3. 1. 1Basic Economic Growth Model12 3. 1. 2The Harrod-Domar feign13 3. 1. 3Exogenous out harvest-tide Solow seat14 3. 1. 4The augmented Solow-MRW15 3. 1. 5The issue accounting pretence16 3. 2The decisives of egression17 3. 2. 1 impertinent compute enthronement funds17 3. 2. make out Openness19 3. 2. 3Human hood20 3. 2. 4Government size21 3. 2. 5 pomposity22 3. 2. 6 al-Qaida23 3. 2. 7Return on investing (Portfolio investment)24 4DATA AND METHODOLOGY25 4. 1Presentation of the data and statistical analysis25 4. 2Description of the variable26 4. 2. 1gross domestic product per Capita26 4. 2. 2Foreign Direct investiture Net Inflows (% of gross domestic product)27 4. 2. 3Trade openness28 4. 2. 4School enrolment, tertiary29 4. 2. 5General government utmost con heartption expenditure30 4. 2. 6Inflation31 4. 2. 7Portfolio investment, bonds32 4. 2. 8 galvanic indicator intake of goods and services33 4. Descriptive Statistics34 4. 4Methodology35 4. 4. 1Estimation of the oecumenic manakin35 4. 4. 2The hypothesized relationships surrounded by gross domestic product and its determinant36 5MODEL ESTIMATION AND FINDING37 5. 1Testing For Stationary using the Augmented Dickey Fuller Test37 5. 1. 1Results of the stationarity adjudicate. 39 5. 2Estimation of a Short-Run Growth Model for China41 5. 3Results of Robustness Tests44 5. 3. 1Testing for autocorrelation44 5. 3. 2Testing for hetereoskedasticity45 5. 3. 3Testing for non-linear live onal represent46 5. 4Estimating a long-run growth model for China47 5. 4. Testing for Co-integ symmetryn Engle-Granger Approach47 5. 4. 2Results using Engle and Granger Approach49 5. 4. 3Result of Johansen co-integra tion raise. 52 5. 4. 4Vector correction model55 6CONCLUSION59 disputation OF TABLES AND FIGURES TABLES Table 1 publications criticism on contrasted direct investment. 18 Table 2 Literature review on inflation. 22 Table 3 Literature review on return on investment24 Table 4 Descriptive statistic. 34 Table 5 ADF Test Statistics in levels39 Table 6 ADF Test Statistics in 1st difference40 Table 7 Estimation of the general growth model by OLS41Table 8 Estimation of the parsimonious model43 Table 9 compend of the results from turn up for autocorrelation44 Table 10 Summary of the results from test for hetereoskedasticity45 Table 11 Summary of the results from test for non-linear manoeuveral form46 Table 12 Testing the residuals from stationarity. 49 Table 13 Estimation of the Error subject area model 549 Table 14 Selecting the Appropriate recede Length52 Table 15 Determining the snatch of co-integration vector with the Trace test53 Table 16 Determining the come in of co-integrat ion vector with the Maximum Eigenvalue test53Table 17 Unrestricted Johansen54 Table 18 Vector Error Correction Estimates56 FIGURES epitome 1 China nominal GDP per capita26 intention 2 China- Foreign direct investment27 Figure 3 China -Trade openness. 28 Figure 4China- School enrolment, tertiary29 Figure 5 China government final consumption expenditure. 30 Figure 6 Inflation in China31 Figure 7 Portfolio investment32 Figure 8 Infrastructure33 Figure 9 Graphs for stationarity in level. 62 Figure 10 Graphs for stationarity in first difference. 63 LIST OF ACCRONYMS GDP Gross Domestic Product.GNP Gross National Product. FDI Foreign Direct Investment. ROI Return On Investment. BRIC brazil-nut tree, Russia, India and China. WTO human being trade Organization. OECD Organisation for Economic Co-operation and Development US$ United State Dollar CIA Central tidings Agency ADF Augmented Dickey-Fuller. OLS Ordinary Least Square. VAR Vector Auto reverse Model VECM Vector Error Correction Mo del. NLLS Non-linear least squares AR Auto Regressive Models H0 Null supposition H1 The alternative possibility I (0) corpo drift of order 0 (stationary).I (1) Integ estimated of order 1 (stationary). TFP Total Factor Productivity. CHAPTER 1 INTRODUCTION In last decades, we have seen new economic power emerge from low level economic outgrowth to relatively high level of economic growth. Among these emerging economies are Brazil, Russia, India and China (the BRIC). Over the past deuce decades, underdeveloped countries have posted high aims of economic growth. This has transformed them into emerging economies. at that place are m some(prenominal) factors that acted as determinants of this high GDP growth rate of the erstwhile slow growing ontogenesis countries.Chinese economy is the commodiousst of the emerging economies. Actually, China passed Japan and become the back uply largest economy in the macrocosm later United States of America. Subhash Chandra Jain (2006) defi nes emerging economy as nations with social or business activity in the process of rapid growth and industrialization. Based on data from Dow Jones classification (2010) there are most 35 emerging markets in the world with the economies of China and India considered to be the largest. China is leading the pack of emerging economies. Their economic growth has been propelled by many factors.The economic magnificence of China and its continued success in posting high economic growth rates makes it an steml case for studying the determinants of economic growth in emerging economies. China has all the characteristics of an emerging economy. It appears the many challenges that all the emerging economies continuously face and which act as the biggest barriers to their economic growth. It is in this spirit we have undertaken this study to agree whether there is assure of relationship between most factors and economic growth in china.This dissertation presents the knowledge gap to be filled, look into questions and objectives alongside the hypotheses of the study. Furthermore, it as well shows to what extend the study is relevant for China, highlights the scope and the organization of the study. More itemally, the study aims to critique the literature on the theoretical foundation of growth examining the variant model of economic growth. Review and describing nearly previous studies on some determinants and the relationship with economic growth. Main objectiveThe key objective of the research is to assess the impact of different factors that contributed to the unprecedented economic growth of China over the past few decades and follow whether those factors can be viewed as a determinant of economic growth. Organization of the study This study is organized as follows Chapter two will give an overview of the Chinese economic and list of the major waves of tidys. The deuce-ace chapter will be in two sections, the first section deals with the definition of growth and stands a review of the growth theories by illustrating patterns of some leading economists on the issue of growth.Among the models studied, we have those Harrod-Domar, Solow, and Mankin. The second section of chapter channelise deals with selected reviews on some indicators that have likely slowed or promoted growth. In chapter four presents the data and describes the method of analysis adopted to estimate the determinants of growth in China. The presentation and interpretation of the results are presented in Chapter five. This is followed by Chapter six, the conclusion. CHAPTER 2 OVERVIEW OF THE CHINESE ECONOMY concord to central Intelligence agency (CIA), China is the second largest economy aft(prenominal) the United States.The state of matter has experienced a specially strong economic growth since the 1980s. However, the state remains relatively poor in purchasing power parity, an estimated per capita GDP IN 2010 TO 7,400 $ per capita. Led by the commie Par ty since 1949, China has led since the late 1970s the power to call a socialist market economy. The public sector continues to hold an important place in economic life but private companies are playing an increasing role and the country is highly integrated into the global economic remains. Since 2001, China is a member of the World Trade Organization.While agriculture still occupies much of the labor fierceness (in 2010, 39. 5% of Chinese labor), it contributed only 9. 6% of GDP in 2010. Industry, however, takes a prominent place, employing astir(predicate) 27% of the working macrocosm and is the areas most prolific in China with a business of almost one-half of national GDP, According to the state administration of foreign exchanges, nearly 47% of GDP come from a huge surplus ca utilize by industrial exports. This has allowed the country to build up foreign exchange militia that reached approximately 2,450 officially billion in June 2010.According to some analysts, China wil l by 2020 be the second largest industrial and commercial in the world, just behind the United States, ahead of Japan and the richest states in Europe. Geopolitical characteristics of China China is located in eastern Asia, west of the East China Sea, Korea Bay, Yellow Sea, and south-central China Sea. The country is bordered by fourteen other nations. With a total area of about 9,596,960 square kilometers (3,705,407 square miles), the country is slightly smaller than the United States. China is administratively divided into cardinal provinces, five autonomous (self-governing) regions, and four municipalities.Population Since the proclamation of the Peoples Republic, the country experienced collar censuses of state and there were 582. 6 million people in 1953, 1 billion in 1982 and 1. 14 billion in 1990. According to China demographics web site (2001), in 2005, estimated population is 1. 31 billion people (about 21 % of the world population). Since the early 1970s, the Chinese a uthorities launched a policy of birth control, with the aim of stabilizing the population at 1. 2 billion people in 2000. Since the 1982 census, the rate of population growth has decreased dramatically.The Chinese population reached in July 2011, 1. 4 Billion. According to Chinas official statistics, the rate of growth culture of about 2 to 3% per course of study during the first phase of demographic transition (2. 6% in 1969), fell to 1. 1% per course of instruction between 1990 and 1995. It is estimated at 1. 02% for 1995-2000 and 0. 7% for the occlusive 2002-2020. The birth rate fell from 45% o in 1953 to 21% o in 1990, reaching 13. 10% o in 2005. At the same time, the deathrate rate was reduced from 22. 5% to 6. 90%. This low mortality is due to the catamenia youth population. In 2005, 25. % of Chinas populations were under 15 years, 67. 6% between 15 and 65 and 7. 6% (2005), alone, more than 65 years. The potent population is 51. 50%. Economic reforms in China The econom ic reform called Socialism with Chinese characteristics started in 1978 by reformists within the Communist Party of China led by Deng Xiaoping. 1978-1984 The reform has started with the improvement of the micro-economic focal designate (agriculture and urban industry), these reforms were implanted by Deng Xiaoping. The main objective was to encourage farmers, business leaders and employees to gain economic productivity.Effective action has been taken, by allowing farmers to keep the lands output after paying a share to the state. This move increase agricultural production, increased the living meters of hundreds of millions of farmers (Brandt 2008). In rural areas, the system of collective ownership has been replaced by the home responsibility. In cities, the main objective of the reform was to increase the autonomy of attempts. To this end, a number of experiments to improve the wariness system were conducted. Some of them, after the initial demonstration of their success, h ave extended to the whole country.The creation of union enterp springs with foreign upper-case permitter is now possible. Deng Xiaoping launched the reform of the so-called open door, opening China to the outside. Foreign investment is now desired, and their home is concentrated to a set of areas open to foreign trade. Five special economic zones are for foreign companies from 1979 (including the cities of Guangzhou and Shanghai as puff up as the zone of Shenzhen, near Hong Kong), and reposition zones. These special economic zones were experimental laboratories for China, allowing it to gradually open up to foreign trade techniques. 1984-1991The key point of the second period was the decentralization of state control besides impended by Deng Xiaoping, leaving local provincial leaders to experiment with ways to increase economic growth and privatize the state sector (Brandt 2008). The reform has created favorable conditions for effort with a partial autonomy of management, wh ich had the opinion of creating a supply and demand of resources of goods and services. That have achieved positive results such as foreign trade and the financing system were introduced to create favorable conditions for enterprise reform. 1993- 2005After the death of Deng Xiaoping in 1997, the radical reforms were continued by the Prime Minister Zhu Ronji who came to power in 1998. He had a goal to integrate his country in the World trade Organization (WTO), hence the importance that preceded the entry into WTO. Zhu Ronji has introduced a new program, including the reform of state enterprises, privatization of public housing, the legitimation and expansion of the private sector, reform of relations with foreign investors, reducing by half the bureaucracy, the acceleration of the fight against corruption and the creation of a viable unemployment insurance scheme and pension.The reform of state enterprises is central to these policies whose characteristic is to be highly interdepe ndent. Indeed, the Chinese government has military serviceed them to escape their social welfare function, to observe the principles of the market, to increase the competitiveness by upgrading their management system After accession to the WTO, China has continued this wave of reforms to modernize its economy and metamorphosed with the rules of the WTO. CHAPTER 3 REVIEW OF LITERATURE Growth models Explanatory theories of growth are relatively recent in the history of economic thought.These theories have led to highlight the role of technical progress in growth. In the long run, only the technical progress leads to a more productive economy. However, each of these growth theories have weaknesses because they are able to amply explain the determinants of growth in any granted economy. With this in mind that many economists have given their vision of growth. Basic Economic Growth Model The main factors of production under a staple fiber economic growth model are the stock of capit al and labor force. The output is a function of capital and labor. At national level, an aggregate production function can be represented by the formulaY=F(K,L). (1) Where Y is output, K is capital and L is labor. Increased production (Y) depends on the increase in capital stock (K) done investment and depreciation, and increased labor supply (L) by the population growth. The amount of capital investment depends on savings and is calculated by multiplying the average savings rate in a country by domestic production. Labor supply is based on demographics. The Harrod-Domar model The Harrod-Domar model is the first formal economic model of growth. This model has opened the way for modern models of growth, particularly in the Solow model.The Harrod-Domar model is intended to extend over a long period of Keynes General Theory, which cover only the short term. As the General Theory, the Harrod-Domar model aims to highlight the un durable nature of economic growth and the need for state i ntervention. In the Harrod-Domar model, there is no guarantee that an economy is on a stable growth path. This model was presented by Roy Forbes Harrod (1939) in the book Toward a dynamic economics and Evsey Domar in 1947 in an article entitled Expansion and Employment published in American Economic Review.The model focuses on two critical aspects of the growth process saving and the efficiency with which capital is use in investment. This model can provide accurate short term predictions of growth and has been used extensively in ontogeny countries to determine the required investment rate or financing gap to be covered in order to achieve a target growth rate. The Harrod-Domar model is simple with relatively small data requirements and the equivalence is easy to use. However, the model only remains in equilibrium with full employment of twain(prenominal) labor force and capital tock causing inaccurate longer term economic predictions and fails to account for proficient change and productivity gains considered intrinsic for long-term growth and development. The equation in the Harrod-Domar model is Y = K/v (2) Where v is a constant found by dividing capital (K) by investment (Y), v is the capital-output ratio. This ratio is primarily a bill of the productivity of capital or investment. Exogenous growth Solow model The Solow model is one of the main models of the theory of economic growth. authentic by Robert Solow (1956), it is a model of neoclassical economics. The model is based on a production function with two factors labor and capital. Production thus results alone from the combination of setting a certain amount of capital (means of production) and work (labor). The Solow model is based on the assumption that production function with the property of diminishing returns where each additional increment in capital per worker results in less output. It is also off-key that the factors of production are used payoffively by all countries.By assuming that the population has a growth rate that Solow called natural (not influenced by the economy), the model derived three predictions 1. Increase the amount of capital (i. e. investing) increases growth with more capital, labor productivity increases (Called apparent). 2. Poor countries have a growth rate higher than rich countries. Indeed, they have accumulated less capital, and therefore they knew of diminishing returns lower. 3. callable to diminishing returns of inputs, economies will reach a point where any increase in factors of production no longer results in increased production. This corresponds to the steady state.Solow noted, however, that this third prediction is unrealistic in fact, the savings never reach this stage because of technical progress which increases the productivity of factors. In other words, long-term growth comes from scientific progress. However, this technological progress is exogenous to the model. The model implies that the growth of income per capi ta cannot be sustained without continued technological progress. Whereas, Harrod-Domar model have identified capital accumulation as major source of development. Clearly the difference stems from different assumptions of the production function.In the Solow model, over time poor and rich countries incomes should converge. The Solow growth model takes the rate of saving population growth and technological e. g, improved machinery, computers etc progresses are exogenous. There are two inputs capital and labor, which are pay their marginal products. By assuming a Cobb-Douglas production functional which is generally used to represent the relationship of an output to inputs, the model is as follow Y (t) = K (t) ? A(t)L(t) 1- ? (3) 0 ? 1 Y is output, K is capital, L is labor, and A is a parameter which might influence growth.The augmented Solow-MRW This model was introduced by Mankiw et al (1992), in their article A Contribution to the Empiric of Economic Growth, Mankiw, Romer, and We il (1992), have augmented the standard Solow model by adding Human capital to the production function. Therefore, the inputs of the model would include a function of stocks of capital, labour, human capital and productivity. According to Cobb-Douglas production function in (4), production at time t in country i is given by Yi (t) = Ki (t) ? Hi (t) ? Ai (t)Li (t) 1- ? ? (4) Where ? , ? ? O,1 ? + ? ? O,1,and t denotes time.This implies that the production function exhibits constant returns to scale in its three factors physical capital (K), human capital (H), and productivity-augmented labor (AL). Specifically, it is a Cobb-Douglas production function. All markets ( two input and output markets) are assumed to be perfectly competitive. All firms are assumed to be identical. The economy can then be described by a representative agent. The growth accounting model The theoretical poser of the Solow growth model describes the sources of economic growth, and the consequences for long-run growth of changes in the economic environment and in economic policy.However, some economists have built up an alternative framework which examines economic growth in freer framework without necessarily being bound to adopt in introduce the conclusions of our economic theories. This framework is called growth accounting which gives us a different perspective on the sources of economic growth. The model starts wilt a production function which shows that output Y is as a some particular time t as a function of the economys stock of capital Kt, its labour force Lt, and the economys total factor productivity At. The Cobb-Douglas form of the production function is Y = F (A, K, L) (5)Since A captures not only efficiency gains but also the authorize effect of errors and omissions from economic data, the residual A is sometimes referred to as a measure of our ignorance about the growth process. The determinants of growth To study the impact of determinants on economic growth in China, it is necessary to present the theoretical foundations cardinal the role of each determinant is expected to play in an economy, especially in the early stages of growth. We can distinguish several types of determinants for growth natural resources, external environment, population, innovation, investment, knowledge, consistency of development.In this section, we will see a replete(p) range of studies done to investigate the relationship between the different determinant and growth. Foreign direct investment According to the IMF and OECD definitions, direct investment reflects the aim of obtaining a lasting interest by a nonmigratory entity of one economy (direct investor) in an enterprise that is resident in another economy (the direct investment enterprise). The lasting interest implies the existence of a long-term relationship between the direct investor and the direct investment enterprise and a pregnant degree of influence on the management of the latter.Direct investment invo lves both the initial transaction establishing the relationship between the investor and the enterprise and all subsequent capital transactions between them and among connected enterprises, both incorporated and unincorporated. It should be noted that capital transactions which do not give rise to any settlement, e. g. an interchange of shares. FDI is expected to increase employment, enhancing labor productivity, exports, lowers rental rate of capital and thus be a source of growth and productivity gains.It is also a vehicle for technology transfer, which is crucial for take-off and convalescence pathways to production to more high-tech. In contrast, it can also discourage competition and even corrupt the development path of a country. Numerous empirical studies have analyzed the impact of FDI on economic growth with divergent results. While some studies argue that FDI has a positive effects on economic growth in host countries, others against thinking that FDI is not a necessary condition or sufficient for growth. The undermentioned table provides some empirical studies on the impact of FDI on economic growth.Attention will be pinched to the latest studies. Table 1 Literature review on foreign direct investment informant savour Size andTime Period EconometricMethod and Tests Empirical Evidences Basu & Guariglia(2007). 119 developingcountries1970 1999. GeneralizedMethods ofMoments (GMM) FDI enhances both educational inequalities and economic growth in developing countries. However, itreduces the share of agriculture sector in GDP. Johnson(2006). 90 developed anddevelopingcountries1980 2002. OLS regression FDI inflows accelerate economic growth in developing countries. But it is not valid for developed countries. Hyun(2006). 59 developingcountries1984 1995. OLS regression FDI has positive effect on economic growth but lagged FDI values have no positive effects on on-going economic growth. Durham(2004). 80 countries1979 1998. Extreme BoundAn alysis(SensitivityAnalysis) There is no direct positive effect of current and lagged values of FDI and portfolio investment on economicgrowth. Carkovic & Levine(2002). 72 developed anddevelopingcountries1960 1995. OLS regression and GMM FDI alone has no statistically significant affect on economic growth. Obwona(2001) Uganda1975 1991. 2 Stage LeastSquares FDI has a positive effect on economic growth in Uganda. Berthelemy & Demurger(2000). 24 Chineseprovinces1985 1996. GMM FDI plays an important role in the economic growth of Chinese provinces. witness Endogenous Determination of FDI Growth and Economic Growth The OECD Case (2008). The latest empirical literature has provided more-or-less lucid findings affirming a significant positive link between FDI and GDP. Trade Openness Another major determinant of growth is trades openness it has been used in the empirical literature to investigate the relationship between openness and growth.First, the most basic measure of openn ess is the simple trade shares, which is exports plus imports divided by GDP. A large number of studies used trade shares in GDP and have provided that open economies increased their GDP faster than closed economies. This has led to the conclusion that trade openness has a positive relationship with Growth as reviewed in Dollar (1992), Sachs and Warner (1995), Edwards, (1998), Dollar and Kraay (2000). On the other hand, Levine and Renelt (1992) Rodriguez and Rodrik (1999) Vamvakidis (2002) have criticized the robustness of these findings especially on methodological and measurement grounds.Openness affects economic growth through several channels such as evolution of comparative advantage, technology transfer and diffusion of knowledge, increasing scale economies and exposure to competition. However, a recent study from Halit Yanikkaya (2002) in his paper Trade openness and economic growth a cross-country empirical investigation, have investigates the relationship between a wide va riety of trade openness measures and growth. He used two types of openness measures. The first group was various measures of trade volumes ( provided population densities).Trade shares, export shares, and import shares in GDP were found to be significantly and positively correlated with growth. Another key finding in his study was that the growth effects of trade with developed countries are not considerably different from trade with developing countries. Furthermore, population densities also positively affect growth through increasing trade volumes. Hence, the regression results for trade volumes provide substantial support for the hypothesis that trade promotes growth through channels such as technology transfers, scale economies. Human capitalThe role of Human capital for economic growth has been well documented in the economic literature which has long recognized that the quality of labor factor plays an essential role in the growth process. Indeed, the classical economist Adam Smith has highlighted the importance of the quality of the hands in the competitiveness and economic growth in the long term. Adam Smith (1776) also showed that the riches of individuals and nations depends on the skills levels of workers. The specialization of labor implies that there are different types of tasks that each individual does what he is alcified. The printing of division of labor also highlights the growth potential of the product linked to the improvement of the organization or production method. This improvement is made possible by dynamic entrepreneurs and skilled workers and the ability or reservation to perform specific tasks. The major recent contributions to the empirical, show that the growth of human capital was an important division of economic growth, therefore, it had a legitimate place in the aggregate production function Solow (1956) et Swan (1956), Mankiw, Romer & Weil(1 992).Furthermore, a large number of other studies have found evidence suggest ing that educated population is key determinant of economic growth (see Barro, 1991 Mankiw et al, 1992 Barro and Sala-i-Marin, 1995 Brunetti et al, 1998, Hanushek and Kimko, 2000). Government size The size of the government can affect the economic growth through many channels, such as expenditure, the efficiency of resource allocation, taxation and the budget balance on several economic issues.The recent economic literature seems to point a negative relationship between government size (General government final consumption expenditure) and economic growth (Guseh, 1997 Dalagamas, 2000). In the empirical study of Yesim (2005), relatively small sizes of government are detrimental to economic growth, while medium sized government affects it positively. According to Barro (1991), government size may have a negative impact on economic growth due to government inefficiencies, excess burden of taxation and distortion of the incentives systems.However, gibe to Ghali (1998), it may also hav e positive effects on growth due to beneficial externalities such as the development of a legal, administrative and economic infrastructure and interventions to offset market failures. Inflation Mankiw (2002) defined inflation as a rise in the general level of prices of goods and services in an economy over a period of time. Inflation reflects an erosion in the purchasing power of money. A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index finger (normally the Consumer Price Index) over time.A number of empirical studies have been devoted to the link between economic growth and inflation. These studies have objective to determine the empirical relationship between growth and inflation, the following table provide some empirical studies on the impact of Inflation on economic growth. Attention will be drawn to the latest studies. Table 2 Literature review on inflation Author prove Size andTime Period EconometricMethod an d Tests Empirical Evidences Khan & Senhadji (2001). 140 developed anddeveloping countriesduring the period 1960-98. Non-linear least squares (NLLS). Inflation has a negative effect on growth. The threshold is lower for industrialized countries than it is for developing countries. Atish & Phillips (1998). 145 countries during the period 1960-96. variable regression analysis. Negative relationshipbetween inflation and growth that is statistically significant. Michael Sarel (1995) 87 countries, during the period 1970 90. OLS regression A specific numerical target for policy keep inflation below the structural break. Joao Ricardo Faria and Francisco Galrao Carneiro (2001). Monthly inflation rateof Brazil and real output for the period 1980 -95. The Blanchard and Quay (1989) decomposition. The results indicated that in the short-run, there is a negative impact of inflation on output. Robert J. Barro (1995). 100 countries from 1960 to 1990 Based on an extended view of the n eoclassical growth model. The impact effects from an increase in average inflation by 10 percentage pointsper year are a decrease of the growth rate of real per capita GDP by 0. 2-0. 3% points per year. Ghosh and phillips(1998). 145 countries, over the 1960-96 period. Panel regression. At very low ratesof inflation (around 2 -3 percent a year or lower), inflation and growth arepositively correlated. From the table 2, we can conclude that most of the findings of the empirical studies have provided an evidence of a negative relationship between inflation and growth. However, Tobin (1972) suggests that inflation can have a positive relationship to economic growth. This is because inflation can cause individuals to substitute out of money and into interest earning assets, which leads to greater capital intensity and promotes economic growth.In other words, an increase in inflation can result in higher output this effect is known as the Tobin effect. Infrastructure In a broad sense , the concept of infrastructure services virtually associated with roads, highways, railways, ports and airports, telecommunications networks, the national distribution networks of gas, electricity and water, i. e. all investments that develop and facilitate the movement of people, goods and production (Barro, 1990). A large empirical literature to examine the effects of public infrastructure on the growth of nations but also on local growth, especially scale of American States.Beyond the pioneering work of Ratner (1983) on the productive infrastructure, has been the work of Ashauer (1989) which showed a positive effect of public capital on output or productivity companies. Although recently affirm by Munnell (1990), this proposal continues to generate various methodological criticisms mainly because many economists believe that the marginal productivity of infrastructure implied by the estimates is excessively high. Return on investment (Portfolio investment)The definition of por tfolio investment is the acquisition of fiscal assets (which includes stock, bonds, deposits, and currencies) from one country in another country. In contrast to foreign direct investment, which is the acquisition of authoritative interest in foreign firms and businesses, portfolio investment is foreign investment into the stock markets. Most economists consider foreign direct investment more useful than portfolio investment since this last one is generally regarded as temporal role and can leave the foreign country at the first sign of troubleThe table below shows some empirical studies on the impact of portfolio investment on Economic Growth in Developing and Developed Economies and their findings. Table 3 Literature review on return on investment Author Sample Size andTime Period Empirical Evidences Butkiewicz and Yanikkaya (2008). 114 developed and developing countries over the period going from 1970 to 1997. The study reveals that the countries which procure important volu mes of direct investment flowing and portfolio investment will carry out a rapid growth. Rodrik (1998) and Klein and Olivei (2008). 100 developed and developing countries 1975-89 and 1986-95. The study reveals that country which does not impose a restriction on capital flows is lucky more to carry out a rapid growth than that closed. Chambet and Gibson (2008). 25 emerging markets from 1995 to 2004. Portfolio equity flows have positive effects on output growth. The literature contains a large number of variables, other than the variables we have listed in this chapter, which might have a significant impact on economic growth. CHAPTER 4 DATA AND METHODOLOGYPresentation of the data and statistical analysis Measuring the impact of several aggregates on economic growth in China will be done using an econometric model estimated in the section methodological analysis. It will also test the veracity of the assumptions made in the literature review. The general idea is that from the da ta on the various activities in China over a short and a long period, it is highlighted, through statistical and econometric techniques the relationship between economic performances achieved in the last decades and performance the boilers suit economy in China.Before evaluating the regression results, the the variables will be used in the econometric model to determine the sources of economic growth in China will be explained. The variable used to measure economic performance is Gross Domestic Product (GDP) per capita. GDP per capita it represents all the wealth created in an economy during a year. It gives the best measure of activity level. Therefore, the dependent variables used in the model is GDP per capita (current US $). There are seven independent variables used in the model * Foreign direct investment, net inflows (% of GDP). * Trade openness (% of GDP). School readjustment, tertiary (% gross). * General government final consumption expenditure (% of GDP). * Inflation, GD P deflator (annual %). * Portfolio investment, bonds (PPG + PNG) (NFL, current US$). The data used for this study is annual data from 1984 to 2009 and was obtained from the World Bank. This relatively long period has the advantage of lending itself to a range of econometric tests yielding robust results. It also allows us to show the effects of new reforms to the Chinese economy that have introduced a new management system to help increase the productivity in the 80s.The raw data table is presented in Annex 1 and the pound form in Annex 2, more detailed description of these data will be done in the next section 4. 2. Description of the variable The explanatory variables were selected from theory outlined in literature review. We grouped the variables that are likely to have a material effect on the endogenous variable. GDP per Capita The World Bank national accounts data (2011) define the gross domestic product as the sum of gross value added by all resident producers in the econo my plus any product taxes and minus any subsidies not included in the value of the products.GDP per capita is gross domestic product divided by midyear population. 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 84 86 88 90 92 94 96 98 00 02 04 06 08 Figure 1 China nominal GDP per capita Since the introduction of the economic reforms, the GDP has experienced significant growth since the 1980s, it has send off a record almost USD 4000 Trillion in the year 2009, providing further evidence of the growth potential of the Chinese market. This growth continued despite the many attempts by the central government to cool down the economy after pressure from the international community.Foreign Direct Investment Net Inflows (% of GDP) According to the World Bank, foreign direct investment are the net inflows of investment to germinate a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. It is the sum of equity capital, reinvestment of earnings, other long-term capital, and short-term capital as shown in the balance of payments Figure 2 China- Foreign direct investment The Foreign direct investment net inflows (% of GDP) in China was reported at 3. 42 in 2008.This series shows net inflows (new investment inflows less disinvestment) in the reporting economy from foreign investors, and is divided by GDP. Chinas economy is the second largest in the world after that of the United States. Trade openness 20 30 40 50 60 70 80 84 86 88 90 92 94 96 98 00 02 04 06 08 Figure 3 China -Trade openness. As can be seen in the graph, the trade openness in China is more open than it was 20 years ago, and that was due to the economic openness which increases in trade (as part of the reforms). The trade openness (% of GDP) in China was reported at 59. 0 in 2008, according to the World Bank Merchandise trade as a share of GDP is the sum of merchandise exports and imports divided by the value of GDP, all in current U. S. dollars. Chinas economy is the second largest in the world after that of the United States. School enrolment, tertiary 0 5 10 15 20 25 84 86 88 90 92 94 96 98 00 02 04 06 08 Figure 4 China- School enrolment, tertiary The school enrolment, tertiary, have known an import increase since the reform, Between 1996 and 2009, enrollment in higher education increased from approximate 5% to almost 25% of GDP per capita.Chinese universities form more and more engineers and scientists each year. This shows that China is on the road to a knowledge-based economy. The Gross enrolment ratio is the ratio of total enrolment, regardless of age, to the population of the age group that officially corresponds to the level of education shown. 3rd education, whether or not to an advanced research qualification, normally requires, as a minimum condition of admission, the victorious completion of education at the secondary level. General government final consumption expenditure 13. 0 13. 5 14. 0 14. 5 15. 0 15. 5 16. 0 84 86 88 90 92 94 96 8 00 02 04 06 08 Figure 5 China government final consumption expenditure. The General government final consumption expenditure (% of GDP) in China was reported at 13. 5 % in 2007, it has hit almost 16% in the year 2001. According to the World Bank. General government final consumption expenditure (formerly general government consumption) includes all government current expenditures for purchases of goods and services (including recompense of employees). It also includes most expenditure on national defense and security, but excludes government military expenditures that are part of government capital formation.Inflation Inflation rate refers to a general rise in prices measured against a standard level of purchasing power. The most well known measures of Inflation are the consumer price index which measures consumer prices, and the GDP deflator, which measures inflation in the whole of the domestic economy. -4 0 4 8 12 16 20 24 84 86 88 90 92 94 96 98 00 02 04 06 08 Figure 6 Inflation in China Chinas average inflation rate of 2% over the past ten years has been unusually low for a developing country The inflation rate in China was last reported at 5. 5 % in 2011 and its highest historical rate of 22% in 1994 and a low record of -2. 0 % in 1999. Portfolio investment, bonds -3,000,000,000 -2,000,000,000 -1,000,000,000 0 1,000,000,000 2,000,000,000 3,000,000,000 4,000,000,000 5,000,000,000 84 86 88 90 92 94 96 98 00 02 04 06 08 Figure 7 Portfolio investment The Portfolio investment bonds (PPG + PNG) (NFL US dollar) in China was reported at approximate -2 billion in 2008, its highest hit was reported almost 5 billion in the years 2005 According to the World Bank, bonds are securities issued with a fixed rate of interest for a period of more than one year.They include net flows through cross-border public and publicly guaranteed and private nonguaranteed bond issues. Data are in current U. S. dollars. Electric power consumption 0 400 800 1,200 1,600 2,000 2,400 2,800 84 86 88 90 92 94 96 98 00 02 04 06 08 Figure 8 Infrastructure China has been spending heavily in physical Infrastructure since the 90s and that due to economic policy to improve the economic growth owing to its economic expansion. Figure 8 shows that the consumption of electricity has increased during the last 20 years. In 2009, it has hit a record of electric power consumption of 2400 kWh per capita.We measure infrastructure by looking at the Electric power consumption (kWh per capita) which measures the production of power plants and combined heat and power plants less transmission, distribution, and transformation losings and own use by heat and power plants. Descriptive Statistics The table below shows a drumhead statistic for the dataset used, the means differ significantly across the variable. The skewness coefficient is close to 0 for most values. The null hypothesis of the Jarque Bera normality test is that the res iduals are normally distributed.The decision rule is to accept this hypothesis if the statistic of Jarque Bera (JB) is less than 5. 99. Here, the JB statistic is less than 5. 99 for all the series which means we cannot reject the null there is no evidence of non-normally distributed residuals, except for Foreign direct investment which shows JB higher that 5. 99. Table 4 Descriptive statistic ForeignDirectInvestmentNet inflows GrowthDomesticProduct Government Final phthisis The level of human capital Inflation Infrastructure Trade openness Return on investment Mean 0. 020258 0. 047137 -0. 0028 0. 04396 -0. 01937 0. 03529 0. 1491 -0. 62059 Median -0. 0042 0. 041494 -0. 00224 0. 037303 -0. 0022 0. 033887 0. 01207 0. 108995 Maximum 0. 374106 0. 109831 0. 037975 0. 108951 0. 650219 0. 065986 0. 108611 18. 08911 Minimum -0. 31887 -0. 04897 -0. 04678 -0. 01321 -0. 68278 0. 00866 -0. 10326 -18. 5564 Std. Dev. 0. 138935 0. 038244 0. 019386 0. 038065 0. 338516 0. 014811 0. 045317 10. 3522 6 Skewness 0. 67502 -0. 30828 -0. 19908 0. 194607 -0. 13538 0. 431179 -0. 24933 -0. 07282 Kurtosis 5. 047 3. 28519 2. 723548 1. 917252 2. 50906 2. 477846 3. 399615 2. 832023 Jarque-Bera 6. 63353 0. 480719 0. 244745 1. 378992 0. 327435 1. 058651 0. 425367 0. 051484 Probability 0. 043645 0. 786345 0. 884819 0. 501829 0. 848982 0. 589002 0. 808412 0. 974587 Sum 0. 506443 1. 17842 -0. 06988 1. 098993 -0. 4842 0. 882238 0. 372743 -15. 5147 Sum Sq. Dev. 0. 463268 0. 035102 0. 00902 0. 034775 2. 750233 0. 005265 0. 049286 2572. 062 Observations 25 25 25 25 25 25 25 25 Methodology The objective of this study is to determine the impact of different factors that contributed to the unprecedented economic growth of China over the past few decades.In order to control for the problems of misspecification caused by the application of classical linear regression methods, recent developments in time series econometrics will be used such as the Error Correction Models and Johansen co-integration tes t. In this section, we explain the methodology that is the basis for estimating the appropriate model for the Chinese economy. The impact of different factors that contributed to the unprecedented economic growth of China over the past few decades and determine whether those factors can be viewed as a determinant of economic growth.Estimation of the general model The literature review has identified some models and we chose a variant of the model presented by Robert Solow (1957). Indeed, the standard growth accounting approach seems appropriate which is decomposed into stocks of capital, labor, human capital and productivity. The model that we suggest to use is based on a functional form of Cobb Douglas GDP=F( FDI, OPEN, HUMCAP , GOVSIZE, INFL, ROI) (5) The dependent variable is the growth rate of real gross domestic product per capita.All the independents variables are derived from the neoclassical theory of growth mentioned in the literature reviews in chapter tree. The empirical model used to examine the determinants of growth in China is shown in equation (6) below ? LGDP=? + ? 1 ? LFDI + ? 2 ? LOPEN + ? 3 ? LHUMCAP + ? 5 ? LGOVSIZE + ? 7 ? LINFL + ? 4 ? LROI +?. (6) Where The ? is the intercept and ? the error term. The variables used for the construction of the models are LGDP = Log of real gross domestic product per capita. LFDI = Log of foreign direct investment, net inflows (% of GDP). LOPEN = Log of trade openness (% of GDP).LHUMCAP = Log of the level of human capital (School enrolment, tertiary (% gross). LGOVSIZE = Log of general government final consumption expenditure (% of GDP). LINFL = Log of inflation, GDP deflator (annual %). LROI = Log of return on investment (long-term US interest rate) Portfolio investment, bonds). We have taken the logs of the variables in order to linearise the model. Furthermore the variables are tested for unit roots and are differenced accordingly to achieve stationarity. The results showed that most of the variables were I (1). The hypothesized relationships between GDP and its determinantIn the following table, we present the relationship between GDP and some of its determinant according to the literature reviews. Determinant of growth Relation with Growth Domestic Product Foreign direct investment + Trade openness + The level of human capital + General government final consumption +/- Inflation - Return on investment + CHAPTER 5 MODEL ESTIMATION AND FINDING This chapter presents the methods and estimation techniques used to determine the long-run and short-run growth for China. The empirical testing of this estimation will be done by following these tests Determine whether the series are stationary or not by using the ADF test. * Estimating the OLS model with general equation. * Testing for Co integration using Engle and Granger technique and the Johansen cointegration test to see if the determinants of growth apply in the long run. * Estimating a VECM to examine the dynamics in the short-r un and the adjustment of co-integration error term. 1. 1 Testing For Stationary using the Augmented Dickey Fuller Test To avoid false regressions, it is necessary to study the characteristics of the series to see if they are stationary or not.Equation tests for unit roots using the Simple Dickey-Fuller test. Yt=pYt-1 + ut (7) Yt will be stationary of the estimated value of p is less than 1. Yt will not be stationary of the estimated value of p is more or equal to 1. Therefore, we check for H0 p= 1 (Yt is not stationary) H1 p 1 (Yt is stationary) A more convenient version of this test is to transform the model (by subtracting Yt-1 on both sides) and obtain the following Yt=pYt-1 + ut (7) Where ? = p- 1. We can hence estimate equation (7) and test for ? as follows H0 ? = 0 (Yt is not stationary) H1 ? lt 0 (Yt is stationary) In equation (7) which is derived from equation (6), we are assuming that there are no constant and time trend (deterministic trend). There are 2 more versions of the Dickey-Fuller tests for unit roots shown in equations (8) and (9) In testing for unit roots, equation (8) includes a constant and equation (9) includes both a constant and a time trend. ?Yt=? 1 + ? Yt-1 + ut (8) ?Yt=? 1 + ? 2t+ ? Yt-1 + ut (9) In equations (8) and (9), the DF test is still testing whether ? = 0. Generally, we look at the plot of the variable and decide which of equations to use.However, equations (7), (8) and (9) may suffer from autocorrelation and the test-statistics may be invalid. To solve the autocorrelation problem, we keep adding lags of the dependent variables (? Yt) until the problem disappears. The optimal number of lags are given by the SIC or AIC, but EViews will determine that automatically. This is called the Augmented Dickey Fuller (ADF) test. Using model (4), for example, the ADF model ?Yt=? 1 + ? 2t+ ? Yt-1 + ? Yt-1 + ? Yt-2 + + ut (10) If the variables are found to be non-stationary, we transform them by differencing the variables to make th em stationaryFor instance, let denote ? Yt = Dt . If Yt is not stationary, we take the first difference of Yt (? Yt ), and if we find that ? Yt is stationary, we say that Yt is integrated of order 1. However, if its not the case, we take the first difference of Dt (? Dt ), , If ? Dt is stationary, we say that Yt is integrated or order 2 or I(2). First all, before we undertake the test for stationary its useful to visualize the variables on a graph to see whether we need a constant or time trend or both in the ADF test. (See groupe figures 9. ). We have found that all the variables need a constant.Results of the stationarity test. The decision is made by analyze ADF to critical value If ADF CV, then we accept the null hypothesis of non-stationarity of the variable and whether ADF ? 2(p) one rejects the null hypothesis of no autocorrelation of order p. If LMA(p) ? 2(p) one cannot reject the null hypothesis of no autocorrelation of order p. Or equivalently, H0 = 0 there is no autoco rrelation. H1 = different from 0, then the autocorrelation The statistic is distributed chi-squared, with p degrees of freedom. Accept H0 if the p-value of the Breusch-Godfrey statistic is greater than 0. 05.Table 9 Summary of the results from test for autocorrelation Models Obs. * R-squared Prob. Chi-Squared Observation Model 2 0. 189117 0. 9098 Autocorrelation is insignificant at the 5% level. Model 3 0. 267317 0. 8749 Autocorrelation is insignificant at the 5% level. Model 4 0. 308434 0. 8571 Autocorrelation is insignificant at the 5% level. Model 5 2. 285405 0. 3190 Autocorrelation is insignifican