China and India are the two most populous countries in the world and have also grown very rapidly in recent years. From 1978 to 2004, GDP in China grew at the astounding rate of 9.3 percent per year while India s GDP grew at a lower but still robust rate of 5.4 percent per year. What were the sources of this growth? Economists Barry Bosworth from the Brookings Institution and Susan Collins from the University of Michigan used growth accounting to answer this question.
Employment in China and India both grew at 2 percent per year over the period, so the remaining differences must be attributed to capital deepening and technological progress. Bosworth and Collins in turn broke capital deepening into two parts: increases in physical capital (buildings, machines, and equipment) and increases in human capital (the knowledge of workers, as measured by their educational attainment). Their analysis revealed that China s more rapid growth was primarily caused by more rapid accumulation of physical capital and more rapid technological progress. The contributions from human capital for each country were similar. Why did China grow faster than India over this 26-year period? Simply put, China invested much more than India in physical capital and was able to increase its technological progress at a more rapid rate.