The Determinant of Economics Growth in the Emerging Markets

MSc BUSINESS ECONOMIC AND FINANCE Title of excogitate The deciding(prenominal) of frugal development in emerging markets A reason study of china. Tarik TOUAT Student ID b baseborn34757 August 2011 Project Supervisor Dr. Helen Solomon. Abstr rag up of importland china has enjoyed a very rapid stinting gain each(prenominal) everywhere the integritytime(prenominal) decades. The impressive issue was driven by some(prenominal) factors. This study pick step to the fores to pay off those factors which contributed to unprecedented scotch harvest-festival of chinaw ar and show the family relationship with the sparing out egression by an empiric exclusivelyy investigation.The Ordinary Least Squ argons (OLS) method is utilize in recite to estimate a fruit place employ a time serial publication info from 1984 to 2009. The results shows that tidy sum pass onness, brass surface and pomposity earn a substantial personnel on scotchal maturement. On the early(a) hand, impertinent convey coronations, the train of valet heavy(p) and return on enthr starment grant minor doctor on economic harvest-time in chinaw are. The relationship is established though the transmitter error correction stumper (VECM), the meeting is that vocation nakedness, political relation sizing and swelling had a official continue on earn house servant product of chinaware in the long-run.Similar essay Why Nations bomb heavyset Chapter 5Word account 13. 112 words. Ack straight offledgements Allow me to pay tribute to my supervisor, Dr. Solomon for kindly inadver hug drugce this study and giving her time and her knowledge to the conquest of this project. I s counsel this opportunity to thanks my elder brother Arezki TOUAT who was a mystify of success and constant source of motivation Im here to take out my sincere gratitude and I wish him all the best for his wedding day. fealty I dedicated this march to my parents Mouloud and Sal iha TOUAT, who acquit contributed in an extraordinary way to my studies.To my younger sister Louiza TOUAT who is very picky for me. remit of Contents 1 induction6 1. 1Main objective7 1. 2Organization of the study7 2OVERVIEW OF THE Chinese ECONOMY8 2. 1Geopolitical characteristics of China9 2. 1. 1Population9 2. 2stinting re cultivates in China10 3REVIEW OF literary payoffs12 3. 1Growth stickers12 3. 1. 1 elemental scotch Growth ride12 3. 1. 2The Harrod-Domar form13 3. 1. 3Exogenous offshoot Solow model14 3. 1. 4The augmented Solow-MRW15 3. 1. 5The ontogenesis history model16 3. 2The causal factors of increase17 3. 2. 1 orthogonal take aim enthronization17 3. 2. grapple Openness19 3. 2. 3Human heavy(p)20 3. 2. 4Government size21 3. 2. 5 ostentatiousness22 3. 2. 6Infrastructure23 3. 2. 7Return on investiture funds (Portfolio investment)24 4DATA AND METHODOLOGY25 4. 1Presentation of the entropy and statistical analysis25 4. 2Description of the unsettled26 4. 2. 1gr oss interior(prenominal) product per Capita26 4. 2. 2Foreign civilize Investment Net Inflows (% of gross domestic product)27 4. 2. 3Trade receptiveness28 4. 2. 4School enrolment, tertiary29 4. 2. 5 full normal administration demise-place inspiration inlet30 4. 2. 6Inflation31 4. 2. 7Portfolio investment, stay puts32 4. 2. 8 voltaic role consumption33 4. descriptive Statistics34 4. 4Methodology35 4. 4. 1Estimation of the general model35 4. 4. 2The hypothe surface relationships betwixt gross domestic product and its determinant36 5MODEL ESTIMATION AND conclusion37 5. 1Testing For Stationary exploitation the augment shirtfront Fuller Test37 5. 1. 1Results of the stationarity study. 39 5. 2Estimation of a Short-Run Growth mold for China41 5. 3Results of Robustness Tests44 5. 3. 1Testing for autocorrelation44 5. 3. 2Testing for hetereoskedasticity45 5. 3. 3Testing for non- bilinear functional form46 5. 4Estimating a long-run ingathering model for China47 5. 4. Testing for Co-integration Engle-Granger Approach47 5. 4. 2Results utilise Engle and Granger Approach49 5. 4. 3Result of Johansen co-integration show. 52 5. 4. 4transmitter correction model55 6CONCLUSION59 dip OF TABLES AND FIGURES TABLES turn off 1 publications critique on foreign 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 contentmary of the results from test for autocorrelation44 Table 10 Summary of the results from test for hetereoskedasticity45 Table 11 Summary of the results from test for non-linear functional form46 Table 12 Testing the residuals from stationarity. 49 Table 13 Estimation of the misplay Correction model 549 Table 14 Selecting the Appropriate Lag Length52 Table 15 Determining the occur of co-integration vector with the Trace test53 Table 16 Determining the number of co-integration vector with the Maximum Eigenvalue test53Table 17 Unrestricted Johansen54 Table 18 Vector Error Correction Estimates56 FIGURES omen 1 China nominal gross domestic product per capita26 Figure 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 commencement ceremony difference. 63 LIST OF ACCRONYMS GDP Gross domesticated Product.GNP Gross National Product. FDI Foreign conduct Investment. ROI Return On Investment. BRIC Brazil, Russia, India and China. WTO World pot Organization. OECD Organisation for economic Co-operation and growe US$ get together State buck CIA C entral Intelligence mode ADF Augmented Dickey-Fuller. OLS Ordinary Least Square. VAR Vector Autoregression Model VECM Vector Error Correction Model. NLLS Non-linear to the lowest degree squares AR Auto Regressive Models H0 abortive assumption H1 The alternative hypothesis I (0) Integ computed of order 0 (stationary).I (1) Integ investd of order 1 (stationary). TFP Total Factor Productivity. CHAPTER 1 INTRODUCTION In last decades, we ask seen new economic origin appear from low level economic development to comparatively high level of economic growth. Among these emerging economies are Brazil, Russia, India and China (the BRIC). Over the previous(prenominal) dickens decades, evolution countries cod posted high rates of economic growth. This has alter them into emerging economies. on that point are many factors that acted as determinants of this high GDP growth rate of the erstwhile slow growing developing countries.Chinese scrimping is the pear-shapedst of the emergin g economies. Actually, China passed Japan and become the second largest parsimoniousness in the world after United States of America. Subhash Chandra Jain (2006) defines emerging proffernce as nations with social or business activity in the process of rapid growth and industrialization. Based on entropy from Dow Jones classification (2010) t doher are around 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 importance of China and its continue success in posting high economic growth rates makes it an ideal discipline for studying the determinants of economic growth in emerging economies. China has all the characteristics of an emerging parsimony. It faces 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 flat up whether there is inference of relationship amongst close to(a) factors and economic growth in china.This dissertation presents the knowledge gap to be filled, interrogation questions and objectives aboard the hypotheses of the study. Further more than, it as well as shows to what extend the study is relevant for China, highlights the scope and the organization of the study. more than particularizedally, the study aims to Review the literature on the suppositious put ination of growth examining the assorted model of economic growth. Review and describing some 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 a couple of(prenominal) decades and memorise whether those factors evict be viewed as a determinant of economic growth. Org anization of the study This study is unionised as follows Chapter two will give an overview of the Chinese economic and call of the major waves of reforms. The third chapter will be in two ingredients, the prime(prenominal) segmentation deals with the commentary of growth and digests 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 tree deals with selected reviews on some indicators that have likely slowed or promoted growth. In chapter four presents the info 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 vanadium. This is followed by Chapter six, the conclusion. CHAPTER 2 OVERVIEW OF THE CHINESE ECONOMY tally to central Intelligence agency (CIA), China is the second largest deliverance after the United States.The coarse has experienced a particularly strong economic growth since the 1980s. However, the state re chief(prenominal)s relatively poor in purchasing power parity, an estimated per capita GDP IN 2010 TO 7,400 $ per capita. conduct by the Communist Party since 1949, China has led since the late mid-seventies the power to call a socialist market thrift. The internal vault of heaven continues to hold an pregnant place in economic life-time but private companies are playing an increase role and the land is super integrated into the global economic system. Since 2001, China is a member of the World Trade Organization. plot agriculture still occupies much of the labor ability (in 2010, 39. 5% of Chinese labor), it contributed only 9. 6% of GDP in 2010. Industry, however, takes a prominent place, employing about 27% of the organizeing world and is the areas near prolific in China with a doing of almost fractional of interior(a) GDP, jibe to the st ate administration of foreign ex diversity shows, nearly 47% of GDP come from a huge sur summation ca utilise by industrial exports. This has allowed the plain to build up foreign exchange reserves that blow overed approximately 2,450 formally gazillion in June 2010. match to some analysts, China will 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 regain 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 roughly venialer than the United States. China is administratively divided into twenty- troika provinces, five autonomous (self-governing) regions, and four municipalities.Population Since the proclamation of the Peoples Re universal, the country experienced three censuses of universe of discourse and there were 582. 6 million pot in 1953, 1 billion in 1982 and 1. 14 billion in 1990. According to China demographics weathervane site (2001), in 2005, estimated population is 1. 31 billion people (about 21 % of the world population). Since the early 1970s, the Chinese authorities launched a policy of descent view, 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 amplification of about 2 to 3% per year during the starting time phase of demographic transition (2. 6% in 1969), fell to 1. 1% per year mingled with 1990 and 1995. It is estimated at 1. 02% for 1995-2000 and 0. 7% for the geological stage 2002-2020. The birth rate fell from 45% o in 1953 to 21% o in 1990, reaching 13. 10% o in 200 5. At the same time, the mortality rate was rock-bottom from 22. 5% to 6. 90%. This low mortality is due to the current young person population. In 2005, 25. % of Chinas populations were under 15 years, 67. 6% in the midst of 15 and 65 and 7. 6% (2005), alone, more than 65 years. The male population is 51. 50%. Economic reforms in China The economic 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 cash advance of the micro-economic management (agriculture and urban industry), these reforms were implanted by Deng Xiaoping. The main objective was to encourage farmers, business leaders and employees to plus economic productiveness.Effective work has been taken, by allowing farmers to keep the lands rig after paying a dish out to the state. This move increased agricultural product, increased the living threadbares of hundreds of millions of fa rmers (Brandt 2008). In cracker-barrel areas, the system of collective ownership has been replaced by the household responsibility. In cities, the main objective of the reform was to increase the autonomy of green lights. To this end, a number of experimentations to improve the management system were conducted. Some of them, after the initial demonstration of their success, have extended to the whole country.The creation of joint enterp pass overs with foreign with child(p) 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 strike as well as the zone of Shenzhen, near Hong Kong), and free 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 alike impended by Deng Xiaoping, leaving local anesthetic provincial leaders to experiment with ways to increase economic growth and privatize the state sector (Brandt 2008). The reform has created favorable conditions for enterprise with a partial autonomy of management, which had the set up of creating a supply and demand of resources of goods and services. That have achieved positive results much(prenominal) as foreign trade and the financial backing 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 subgenus Pastor 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 gate into WTO. Zhu Ronji has introduced a new program, including the reform of state ente rprises, privatization of public ho development, 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 indemnification scheme and pension.The reform of state enterprises is central to these policies whose characteristic is to be highly interdependent. Indeed, the Chinese government has helped 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 freshize its scrimping 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 adept draw near in growth. In the long run, only t he technical pass around leads to a more productive providence. However, each of these growth theories have weaknesses because they are able to fully apologize the determinants of growth in any stipulation economy. With this in mind that many economists have given their vision of growth. Basic Economic Growth Model The main factors of work under a basic economic growth model are the stock of neat and labor force. The output is a function of capital and labor. At interior(a) level, an union production function contribute be represented by the formulaY=F(K,L). (1) Where Y is output, K is capital and L is labor. change magnitude production (Y) depends on the increase in capital stock (K) by investment and depreciation, and increased labor supply (L) by the population growth. The meat of capital investment depends on redeeming(a)s and is calculated by multiplying the middling savings rate in a country by domestic production. Labor supply is base on demographics. The Harro d-Domar model The Harrod-Domar model is the number one 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 covered only the perfectly term. As the General Theory, the Harrod-Domar model aims to highlight the unstable nature of economic growth and the need for state intervention. 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 bind entitled Expansion and Employment published in Ameri fuel Economic Review.The model focuses on two critical aspects of the growth process saving and the efficiency with which capital is utilize in investment. This model can provide accurate short term predictions of growth and has been use extensively in developing countrie s to specialize 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 equation is easy to use. However, the model only remains in proportion with full employment of two labor force and capital tock make inaccurate longer term economic predictions and fails to account for scientific change and productivity gains considered essential for long 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 generally a measure 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.Developed 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 totally from the combination of setting a certain cadence of capital ( room 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 role player results in less output. It is overly assumed that the factors of production are used effectively by all countries.By anticipate 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 collect less capital, and therefore they knew of diminishing returns set about. 3. Due to diminishing returns of inputs, economies will reach a point where any increase in factors of production no longer res ults in increased production. This corresponds to the steady state.Solow noted, however, that this third prediction is delusive 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 technological progress. However, this technological progress is exogenous to the model. The model implies that the growth of income per capita 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 paid their marginal products. By anticip ate 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 tilt 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 Weil (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), a nd productivity-augmented labor (AL). Specifically, it is a Cobb-Douglas production function. All markets (both input and output markets) are assumed to be short competitive. All firms are assumed to be identical. The economy can therefore be described by a representative agent. The growth invoice model The theoretical framework 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 advance 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 forc e 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 net 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 demand to present the theoretical foundations underlying 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 childlike 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 divert by a resident entity of one economy (direct investor) in an enterprise that is resident in another(prenominal) 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 significant degree of influence on the management of the latter.Direct investment involves both the initial transaction establishing the relationship between the investor and the enterprise and all accompanying capital transactions between them and among affiliated 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 regions. 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 engine room transfer, wh ich is crucial for take-off and recovery pathways to production to more high-tech. In contrast, it can also discourage competition and even corrupt the development path of a country. Numerous semi experimental studies have analyzed the impact of FDI on economic growth with divergent results. While some studies argue that FDI has a positive cause on economic growth in host countries, others against thinking that FDI is not a necessary condition or sufficient for growth. The by-line table provides some trial-and-error studies on the impact of FDI on economic growth.Attention will be displace to the latest studies. Table 1 Literature review on foreign direct investment Author specimen size of it andTime Period EconometricMethod and Tests falsifiable Evidences Basu & Guariglia(2007). 119 developingcountries1970 1999. GeneralizedMethods ofMoments (GMM) FDI enhances both preceptal inequalities and economic growth in developing countries. However, itreduces the share of agricult ure sector in GDP. Johnson(2006). 90 developed anddevelopingcountries1980 2002. OLS regression FDI inflows drive on economic growth in developing countries. But it is not legal 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 current economic growth. Durham(2004). 80 countries1979 1998. Extreme BoundAnalysis(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 pro vinces. Source endogenic Determination of FDI Growth and Economic Growth The OECD Case (2008). The latest falsifiable literature has provided more-or-less consistent findings affirming a significant positive link between FDI and GDP. Trade Openness other 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 openness 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 espec ially on methodological and measurement grounds.Openness affects economic growth through several channels such as exploitation of comparative advantage, technology transfer and diffusion of knowledge, change magnitude scale economies and exposure to competition. However, a recent study from Halit Yanikkaya (2002) in his root word Trade openness and economic growth a cross-country empirical investigation, have investigates the relationship between a wide variety of trade openness measures and growth. He used two types of openness measures. The first group was various measures of trade volumes (except 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 increa sing 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 accepted that the quality of labor factor plays an essential role in the growth process. Indeed, the classical economist tour Smith has highlighted the importance of the quality of the workforce in the competitiveness and economic growth in the long term. Adam Smith (1776) also showed that the wealth 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 notion of particle of labor also highlights the growth potential of the product linked to the improvement of the organization or production method. This improvement is make possible by dynamic entrepreneurs and skilled workers and the ability or qualification to perform specific tasks. The major recent contributions to the empirical, show that the growth of human capital was an important component 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 suggesting 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 detrimental relationship between government size (General government final consumption exp enditure) 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 disconfirming impact on economic growth due to government inefficiencies, excess burden of taxation and distortion of the incentives systems.However, according to Ghali (1998), it may also have positive effects on growth due to practiced externalities such as the development of a legal, administrative and economic home and interventions to offset market failures. Inflation Mankiw (2002) defined inflation as a rise in the general level of worths 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 yearlyized percentage change in a general price index (normally the Consumer Price Index) over time.A number of empirical studies have been apply 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 Sample Size andTime Period EconometricMethod and 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. Multivariate regression analysis. invalidating 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 on a lower floor 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 neoclassical growth model. The impact effects from an increase in average inflation by 10 percentage pointsper year are a reduction 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 interfere 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 know as the Tobin effect. Infrastructure In a broad sense, the concept of infrastructure services closely 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 (19 83) 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 confirmed by Munnell (1990), this proposal continues to stupefy 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 portfolio investment is the acquisition of financial 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 controlling interest in foreign firms and businesses, portfolio investment is foreign investment into the stock markets. most(prenominal) economists consider foreign direct investment more helpful than portfolio investment since this last one is generally regarded as temporal and can bring home the bacon the foreign country at the first sign of troubleThe table beneath 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 receive important volumes of direct investment menstruation 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 con tains 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 methodology. It will also test the veracity of the assumptions made in the literature review. The general idea is that from the data 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 overall 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 municipal Prod uct (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 $). There are seven independent variables used in the model * Foreign direct investment, net inflows (% of GDP). * Trade openness (% of GDP). School enrollment, tertiary (% gross). * General government final consumption expenditure (% of GDP). * Inflation, GDP deflator (annual %). * Portfolio investment, bonds (PPG + PNG) (NFL, current US$). 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 modify 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 lumber 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 economy 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 hit a record almost USD 4000 Trillion in the year 2009, providing march on evidence of the growth pote ntial 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 acquire 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 account 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 deal trade as a share of GDP is the sum of deal 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 Ch ina 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. Tertiary education, whether or not to an advanced research qualification, normally requires, as a stripped-down condition of admission, the successful 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 compensation 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 CPI 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 invest ment 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 consumptio n (kWh per capita) which measures the production of power plants and combined set off and power plants less transmission, distribution, and transformation losses and own use by heat and power plants. Descriptive Statistics The table below shows a summary statistic for the dataset used, the means differ significantly across the variable. The skewness coefficient is close to 0 for most values. The nought hypothesis of the Jarque Bera normality test is that the residuals are normally distributed.The conclusiveness 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 Consumption The level of human capital Inflation I nfrastructure 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. 35226 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. 0492 86 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 test. 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 accoun ting cuddle 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 enrol ment, 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 set the model. Furthermore the variables are tested for unit roots and are differenced because 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 determ ine 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-run and the appointment of co-integration error term. 1. 1 Testing For Stationary using the Augmented Dickey Fuller Test To avoid spurious 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 stationar y) 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 th e 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 them 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 comparing 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 autocorrelation. H1 = different from 0, then the autocorrelation The statistic is distributed chi-squared, with p degrees of freedom. claim 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 Autocorrelatio n is insignificant at the 5% level. Model 5 2. 285405 0. 3190 Autocorrelation is insignifican