The Role of the Agricultural and Industrial Sectors in China’s Economic Growth: Are They Twin Brothers?

China’s GDP has been increasing rapidly since its reform and opening up in 1978. Real GDP increased from 1,306.2 billion yuan in 1978 to 12,067.3 billion in 2004, at an average annual rate of 8.9 per cent.¹ The average growth rate of per capita real GDP was 7.7 per cent over the same period. Figure 1 shows China’s real GDP in the agricultural and non-agricultural (or industrial) sectors over the 1978–2004 period. While real GDP levels in both the agricultural and industrial sectors have increased steadily over the years, the industrial GDP has increased faster than the agricultural GDP. The real GDP in the agricultural sector grew from 367 billion yuan in 1978 to 1,831 billion yuan in 2004, at an average annual rate of 6.4 per cent. The real GDP in the industrial sector grew from 939.1 billion yuan in 1978 to 10,236.4 billion yuan in 2004, at an average annual rate of 9.6 per cent.

The real GDP growth rates in the two sectors are negatively correlated (see Table 1). China’s real GDP growth rates were 7.8 per cent and 11.2 per cent for the industrial and the agricultural sectors, respectively, from 1978 to 1984. However, the real GDP growth rate for the agricultural sector averaged only 4.8 per cent from 1990 to 1999, much slower than the real GDP growth rate of 11.4 per cent for the industrial sector. Since 2000, China’s real GDP growth rate in the industrial sector has decreased and averaged at about

Figure 1.

China’s Real GDP in the Agricultural and Non-agricultural Sectors, 1978–2004

Table 1.

Average Annual Growth in Real GDP for Different Time Periods

Time Period	Industrial Real GDP Growth Rate (%)	Agricultural Real GDP Growth Rate (%)	Correlation Coefficient Between the Two Series
1978–1984	7.76	11.16	–0.015
1985–1989	9.85	5.24	–0.015
1990–1999	11.41	4.81	–0.391
2000–2004	8.14	5.77	–0.319
1978–2004	9.62	6.38	–0.252
(entire period)

Source: China Statistical Yearbook 2005.

8.1 per cent, while that in the agricultural sector increased slightly and averaged 5.8 per cent. There are two reasons behind the recovery in the agricultural sector in recent years. First, improving farmer’s incomes and narrowing the urban-rural income gaps have been top priorities for the Chinese government since 2000. This represents a fundamental shift in Chinese agricultural policies. The government has increased subsidies to grain growers to boost grain production, while it has reduced agricultural taxes to increase farmers’ income. Second, agricultural imports and exports have increased rapidly since China’s entry into the World Trade Organization (WTO) in 2001. Trade stimulates economic growth since it promotes specialisation in production and encourages more efficient use of resources.

The rapid economic growth in China has generated many empirical studies aimed at explaining this performance. However, the results of previous studies are mixed and the empirical evidence with respect to factors driving the rapid economic growth is insufficient. For example, Kwan and Kwok argued that exports contributed to the Chinese rapid economic growth while Berthelemy and Demurger found that exports were not a significant determinant for GDP growth in China.² One particular problem with many of the previous studies of China’s economic growth is that some important potential determinants of growth such as technology and foreign direct investment (FDI) have been ignored.³ China has received a large amount of FDI, and technology levels have risen dramatically in the country since 1978. The results based on the previous studies are likely biased and inconclusive due to the lack of these important factors.

The objective of this study is to answer the following questions regarding China’s economic growth in both the agricultural and industrial sectors: (1) what are the determinants of agricultural and...