Editors' Summary

The brookings panel on economic Activity held its eighty-second conference in Washington, D.C., on September 7 and 8, 2006. This issue of the Brookings Papers includes the papers and discussions presented at the conference. All three papers in this issue explore various aspects of the Chinese economy, which has grown rapidly in recent decades to become one of the world's largest. The first paper analyzes recent productivity growth in China and the prospects for China's economic catch-up with the international productivity frontier. The second paper estimates current rates of return on investment in China to gauge whether the country's high investment rate is sustainable. The third paper examines the state of China's banks and assesses the prospects for successful banking reform.

During the past quarter century of market-based reform, China's economic performance has been extraordinary. In 1978, at the outset of reform, China was the world's tenth-largest economy, with a GDP less than 6 percent that of the United States. By 2005, after two decades of growth averaging about 9 percent a year, it had become the world's fourth-largest economy at current exchange rates, with a GDP roughly one fifth that of the United States. If China's growth advantage continues, in twenty-five years China's economy will rival the U.S. economy in absolute size, although it will still have only a fraction of U.S. income per capita. In the first article of this volume, Gary Jefferson, Albert Hu, and Jian Su examine the rapid productivity growth underlying this performance, both to understand its sources and to inform judgments about its sustainability. They calculate levels and growth rates of productivity by sector, industry, and region and analyze rates of productivity convergence both within China and between China and the advanced economies of the world. This analysis leads them to discuss the institutional reforms they believe are needed to sustain China's rapid productivity growth in the future.

The authors frame their analysis around the difference in productivity between a given industry in China and its counterpart on the international frontier, understood as the corresponding industry in either the United States or Japan, whichever has the higher productivity. The analysis utilizes a data set compiled by China's National Bureau of Statistics containing annual observations on more than 20,000 large and medium-size enterprises (the LME data set) over 1995 to 2004. Although this data set allows direct industry-by-industry comparisons both across regions in China and between China and the frontier, it has the disadvantage of excluding smaller enterprises, which probably leads it to overstate Chinese productivity and may bias estimates of convergence if the importance of small firms changes over time.

The authors first calculate labor productivity for twenty-seven manufacturing industries in each of China's four regions: coastal, northeastern, central, and western. As expected, productivity is found to have increased sharply relative to the frontier between 1995 and 2002, the latest year for which comparable frontier data are available, but it remains well below frontier productivity except in a few coastal industries. In China's leading coastal region, labor productivity for these manufacturing enterprises rose from only one ninth of frontier productivity in 1995 to one quarter in 2002. In 1995 productivity in the coastal region was roughly twice that in the northeastern region and more than three times that in the central and western regions. By 2002 the northeast's productivity gap with the coast had actually increased slightly, but the gaps between the coast and the other two regions had narrowed considerably.

Large productivity differences also exist between Chinese industry and the other sectors of the economy. To examine these differences and how they have changed over time, the authors turn to data disaggregated by province from China's national accounts. They compare output per worker in industry (manufacturing, mining, and construction) with that in agriculture (including forestry and fishing) for the whole country over 1980-2005, and with that in both agriculture and services, disaggregated by region, over 1995-2004. When official employment figures...