Growing Like China

This is a nice paper. Illustrating two things:

  1. Why China grows with high investment and high rate of return to investment
  2. Why China grows with an ever increasing saving – loan level (current account surplus)

This is explained in a neoclassic growth model, but with financial friction (and contractual imperfection). Small firms are more productive but have to self-finance, while state owned enterprises have good access to finance but are less productive.

One thing I do not quite understand here in the conclusion: some commentators have tried to explain the puzzle by attributing it to government manipulation of the exchange rate that holds the value of the Chinese currency artificially low. This argument is controversial, as it attributes a long-standing imbalance to a nominal rigidity, without explaining why the peg of nominal interest rate did not trigger an adjustment of real exchange rate pressure.

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