The sustainability of China’s growth under extractive institutions

Sammanfattning: This thesis investigates whether or not the Chinese growth is sustainable in the longer term. The two major economies China and India share several common features in terms of e.g. growth and size, as well as fundamental differences regarding factors such as institutions and politics. There is a possibility that India, a democratic country, possibly, in the longer time horizon will overtake China as the major future economic power of the world, due to the advantage of India’s, in relative terms, stronger and more well-established institutions, a more politically stable and innovation-friendly atmosphere etc. In order to analyze the sustainability of China’s growth, a multisectoral Schumpeterian growth model with technology transfers is applied to empirical data for the two countries, where India acts as a frame of reference. The hypothesis is that China’s growth will not be sustainable in the longer term, due to its extractive institutions. Furthermore, the thesis also analyzes whether there are any tendencies for India to outgrow China. The theoretical simulations show tendencies for China to slightly fall behind the technological frontier and the simulations of the levels of steady state for China and India, indicate that there seem to be a tendency for India to catch up with China around 1990. The following conclusion can thus be made: if China does not transform its institutions and, at the same time, the present Indian development continues, there is a possibility that China is not able to sustain its growth acceleration and for India to continue to grow and eventually overtake China’s position as the major future economic power.