The Economy of People’s Republic of China from 1953∗

This paper studies structural transformation of the Chinese economy since 1953 through a lens of a two-sector growth model. We compute sectoral TFPs and wedges in the capital, labor, and product markets. This is a simple accounting procedure — given the wedges, the model matches the data exactly. Our first result is that the reduction in the labor distortion plays a key role in structural transformation in both the 1953-1978 and the 1978-2011 period. The reduction of the labor distortion accounts for a half of the labor share change in 1953-1978, almost all of the labor share change during the Great Leap Forward, and 65 percent of the labor share change in 1978-2011. The reduction in the labor distortion explains a half of GDP change during the Great Leap Forward and 1 percent of the growth of GDP per year in 1978-2011. We further decompose the labor distortion in the wage wedge (the ratio of the sectoral nominal products of labor) and the price wedge (the ratio of the relative price and the marginal rate of substitution). We find that the price wedge plays a dominant role in the sectoral labor change, on average four times as high as the wage wedge. The second set of the results is the quantitativ