Sectoral Distribution of Capital Formation and Output Growth: The Cases of China and India
Dr. Li Tan, Dr. Wei Ge

Abstract

This paper provides a two-sector perspective for analyzing the effects of sectoral investment pattern on output growth. The two sectors are transformation and transaction. China and India are used as the empirical cases. We find that the rate differentials in real GDP growth between China and India tend to be positively correlated with the relative share of total investment that take place in the transformation sector, due to the effects of returns to scale and externalities. While emphasising the importance of sectoral distribution of capital formation at an early developmental stage, the study also highlights the role of the transaction sector in a longer term.

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