Distorted Factor Markets, Government Intervention, and Excess Capital Accumulation: The Case of China


This paper develops a simple growth model that embeds distorted factor markets and government intervention that achieves high economic growth, low consumption, and high investment simultaneously. All of these phenomena are consistent with Chinese macroeconomic data since the 1990s, implying the inefficiency of economic growth.

Share and Cite:

Gu, T. (2014) Distorted Factor Markets, Government Intervention, and Excess Capital Accumulation: The Case of China. Theoretical Economics Letters, 4, 806-814. doi: 10.4236/tel.2014.49102.

Conflicts of Interest

The authors declare no conflicts of interest.


[1] Fleisher, B., Hu, Y.F., Li, H.Z. and Kim, S.H. (2011) Economic Transition, Higher Education and Worker Productivity in China. Journal of Development Economics, 94, 86-94.
[2] Dong, X.Y. and Putterman, L. (1996) China’s Rural Industry and Monopsony: An Exploration. Pacific Economic Review, 1, 59-78. http://dx.doi.org/10.1111/j.1468-0106.1996.tb00174.x
[3] Dong, X.Y. and Putterman, L. (2000) Prereform Industry and State Monopsony in China. Journal of Comparative Economics, 28, 32-60. http://dx.doi.org/10.1006/jcec.1999.1644
[4] Dong, X.Y. and Putterman, L. (2002) China’s State-Owned Enterprises in the First Reform Decade: An Analysis of a Declining Monopsony. Economics of Planning, 35, 109-139.
[5] Fleisher, B. and Wang, X.J. (2004) Skill Differentials, Return to Schooling, and Market Segmentation in a Transition Economy: The Case of Mainland China. Journal of Development Economics, 73, 715-728.
[6] Jefferson, G.H. and Rawski, T.G. (1994) Enterprise Reform in Chinese Industry. Journal of Economic Perspectives, 8, 47-70. http://dx.doi.org/10.1257/jep.8.2.47
[7] Parker, E. (1999) Are Wage Increases in Chinese State Industry Efficient? Productivity in Nanjing’s Machine-Building Industry. Contemporary Economic Policy, 17, 54-67.
[8] Yang, D.T. and Zhou, H. (1999) Rural-Urban Disparity and Sectoral Labor Allocation in China. Journal of Development Studies, 35, 105-133. http://dx.doi.org/10.1080/00220389908422575
[9] NBS (2012) China Statistical Yearbook. China Statistics Press, Beijing.
[10] NBS (2008) Data of Flow of Funds of China: 1992-2004. China Statistical Press, Beijing.
[11] Allen, F., Qian, J. and Qian, M. (2005) Law, Finance, and Economic Growth in China. Journal of Financial Economics, 77, 57-116. http://dx.doi.org/10.1016/j.jfineco.2004.06.010
[12] Barnett, S. and Brooks, R. (2006) What’s Driving Investment in China? IMF Working Paper.
[13] Knight, J. and Ding, S. (2010) Why Does China Invest so Much? Asian Economic Papers, 9, 87-117.
[14] Guariglia, A., Liu, X.X. and Song, L.N. (2011) Internal Finance and Growth: Microeconometric Evidence on Chinese Firms. Journal of Development Economics, 96, 79-94.
[15] Poncet, S., Steingressc, W. and Vandenbussche, H. (2010) Financial Constraints in China: Firm-Level Evidence. China Economic Review, 21, 411-422. http://dx.doi.org/10.1016/j.chieco.2010.03.001
[16] Ding, S., Guariglia, A. and Knight, J. (2010) Does China Overinvest? Evidence from a Panel of Chinese Firms. Discussion Paper Series, Department of Economics, University of Oxford, Oxford.
[17] Yang, J. and Guariglia, A. (2012) Is Investment Inefficiency Caused by Financial Constraints or Agency Costs? Evidence from Chinese Firms. SSRN Discussion Paper.
[18] Blanchard, O. and Shleifer, A. (2001) Federalism with and without Political Centralization: China vs. Russia in Transitional Economics: How Much Progress? IMF Staff Papers, 48, 171-179.
[19] Zhou, L.-A. (2004) The Incentive and Cooperation of Government Officials in the Political Tournaments: An Interpretation of the Prolonged Local Protectionism and Duplicative Investments in China. Economic Research Journal, 6, 33-40.
[20] Zhou, L.-A. (2007) Governing China’s Local Officials: An Analysis of Promotion Tournament Model. Economic Research Journal, 7, 36-50.
[21] Li, H.B. and Zhou, L.A. (2005) Political Turnover and Economic Performance: The Incentive Role of Personnel Control in China. Journal of Public Economics, 89, 1743-1762.
[22] Zhang, J. and Gao, Y. (2007) Term Limits and Rotation of Chinese Governors: Do They Matter to Economic Growth? Economic Research Journal, 11, 91-103.
[23] Chen, S., Sun, Z., Tang, S. and Wu, D. (2011) Government Intervention and Investment Efficiency: Evidence from China. Journal of Corporate Finance, 17, 259-271.
[24] Chen, Y.Y. and Luo, D.L. (2012) Local Governors’ Turnover and Firms’ Investment. Economic Research Journal, 2, 18-30.
[25] Zou, H.F. (1991) Socialist Economic Growth and Political Investment Cycles. European Journal of Political Economy, 7, 141-157. http://dx.doi.org/10.1016/0176-2680(91)90002-K
[26] Gu, T. (2014) The Dynamic Inefficiency of China’s Economic Growth: Causes and Welfare Loss. JCER Economic Journal, 70, 1-31.
[27] Bhaskar, V. and To, T. (1999) Minimum Wages for Ronald McDonald Monopsonies: A Theory of Monopsonistic Competition. Economic Journal, 109, 190-203.
[28] Bhaskar, V. and To, T. (2003) Oligopsony and the Distribution of Wages. European Economic Review, 47, 371-399. http://dx.doi.org/10.1016/S0014-2921(01)00180-5
[29] Barr, T. and Roy, U. (2008) The Effect of Labor Market Monopsony on Economic Growth. Journal of Macroeconomics, 30, 1446-1467. http://dx.doi.org/10.1016/j.jmacro.2008.05.001
[30] Kato, T. and Long, C. (2006) Executive Compensation, Firm Performance, and Corporate Governance in China: Evidence from Firms Listed in the Shanghai and Shenzhen Stock Exchanges. Economic Development and Cultural Change, 54, 945-983. http://dx.doi.org/10.1086/503583
[31] Adithipyangkul, P., Alon, I. and Zhang, T. (2011) Executive Perks: Compensation and Corporate Performance in China. Asia Pacific Journal of Management, 28, 401-425.
[32] Strulik, H. and Trimborn, T. (2010) Anticipated Tax Reforms and Temporary Tax Cuts: A General Equilibrium Analysis. Journal of Economic Dynamics and Control, 34, 2141-2158.
[33] Trimborn, T., Koch, K.-J. and Steger, T.M. (2008) Multi-Dimensional Transitional Dynamics: A Simple Numerical Procedure. Macroeconomic Dynamics, 12, 1-19.

Copyright © 2022 by authors and Scientific Research Publishing Inc.

Creative Commons License

This work and the related PDF file are licensed under a Creative Commons Attribution 4.0 International License.