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Abstract
This study develops an analytical framework to account for sources of rapid economic
growth in China. The traditional Solow approach includes only two sources, i.e. increased use
of inputs and technical change. We expanded the approach to include a third source of
economic growth—structural change. The empirical results show that structural change has
contributed to growth significantly by reallocating resources from low productivity to high
productivity sectors, especially by moving labor from agricultural production to rural
enterprises. We also found that the returns to capital investment in both agricultural
production and rural enterprises are much higher than those in urban sectors, indicating
underinvestment in rural areas. On the other hand, labor productivity in the agricultural sector
remains low, a result of the still large surpluses of labor in the sector. Therefore, the further
development of rural enterprises and increase in labor flow among sectors and across regions
are key to improvements in overall economic efficiency.