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Distortions, Growth Catch-up, and Sustainable Growth
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TitleDistortions, Growth Catch-up, and Sustainable Growth  
AuthorZhang Xiaojing, Li Cheng and Li Yu  
OrganizationChinese Academy of Social Sciences;;; 
Key Wordsdistortions, growth catch-up, goverment and market, sustainable growth 
Abstract distortion is departure from the allocation of economic resources from the state in which each agent maximizes his/her own welfare. Distortions can be generally divided into endogenous distortion (ie, market imperfections) and policy-imposed distortion. In this sense, all economies have distortions, especially in developing economies. The relationship between distortion and development is non-linear, thus favorable distortion would be possible under certain conditions. Both international experience and Chinese evidence suggest that distortions have a positive effect on total factor productivity in the early stages of development, but with the increase in income levels, this role is diminishing gradually. Especially in the phase of middle and high income, the negative effects of distortions are significant and become an important factor leading to the middle income trap. Therefore, reducing and correcting distortions is the key to achieving sustainable growth. Regarding China , it is necessary to eliminate the distortions in a clear way and let the market play the decisive role in resource allocation. Otherwise, in the “growth catch-up” slogan, the policy-imposed distortion will occur frequently, and the direction of market-oriented reform will become blur and swing. Mitigating distortions is largely a process of exploring the borderline of government and market, which is a major challenge for all economies. And finding a perfect mix of and a delicate balance between government and market is precisely the institutional goal for the human kind. 
Serial NumberWP1331 
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