Discussion

Thomas Philippon opened the general discussion by commenting on the benefits of competition among localities in China. He referred to the findings of Joel Mokyr (A Culture of Growth: The Origins of the Modern Economy [Princeton, NJ: Princeton University Press, 2018]) on the link between political fragmentation and growth in Europe. Philippon recalled that, focusing on the period from 1500 to 1700, Mokyr found that political fragmentation preventedmonarchs from impeding innovation. He pointed out that political fragmentation is particularly beneficial when combined with cultural unity, free trade, and absence of war. Philippon noted that China shares these three characteristics and that competition among localities seems to foster innovation, just like political fragmentation did in Europe a few centuries ago. Frederic Mishkin spoke next. He noted that China experienced an important rural exodus. This reallocation of labor potentially increased productivity, he argued, by reassigning it from unproductive activities in the countryside to productive, capital-intensive ones in cities. Mishkin asked the authors to which extent reallocation could explain China’s growth over the past decades. The authors argued that the evidence suggests that labor reallocation played a minor role, at least over the past two decades. In particular, they pointed out that real wages grew 6% to 7% on average over an extended period of time, which does not fit the labor reallocation narrative. The authors emphasized the role of capital misallocation instead, referring to existing work of theirs. In Chong-En Bai, Chang-Tai Hsieh, and Zheng Michael Song (“The Long Shadow of China’s Fiscal Expansion,” Brookings Papers on Economic Activity 47, no. 2 [2016]: 129–81), they found that capital misallocation has increased over the past 10 years. Part of this misallocation is imputed to the response to the Great Recession, they argued. Local governments circumvented institutional constraints on borrowing by setting