China's catch-up to the US economy: decomposing TFP through investment-specific technology and human capital

We implement a neoclassical growth model that incorporates investment-specific technology (IST) modifying capital investment in the law of motion of capital and bifurcates productivity into human capital and total factor productivity (TFP) in the production function. We focus on the role of changes in the quality-adjusted price of investment goods on China's growth by comparing the effects of IST and human capital on the decomposition of US and Chinese productivity. The results show that both human capital and IST play an important role in the decomposition of US TFP. For China, human capital accounts for an increasingly higher portion of Chinese TFP for the period 1952-2009; however, IST contributes to the explanation of TFP only after the 1979 reforms. The analysis is extended by considering the impact of IST in the consumer's investment decision and by projecting both countries' GDP while modelling unbalanced Chinese growth using catch-up. Our model predicts that the Chinese economy will surpass the US economy in 2024.