We analyze China's rapid economic development in the context of the dualistic development theory. Over the period 1965–2009, we find that China's economic growth is mainly attributable to the development of the non-agricultural (industrial and service) sector, driven by rapid labor migration and capital accumulation. We find that the sectoral reallocation of labor plays a significant role in promoting China's economic growth. Further, we find that the marginal productivity of agricultural labor stopped stagnating in 1978, which indicates that China entered quickly into phase two of economic development with the initiation of market reforms. Moreover, by 2009, the marginal productivity of labor has likely exceeded the institutional wage, as defined by the initially low average labor productivity, indicating that China may be now in the process of entering phase three of economic development.

The authors are grateful to the participants of the Asian Economic Panel meeting in New York on 24–25 March 2011, particularly Professors Wing Thye Woo, Jeffery D. Sachs, Mary-Françoise Renard, Fang Cai, Yunwing Sung, and Premachandra Athukorala, for their helpful comments. The authors also thank the Earth Institute at Columbia University and the Asian Economic Papers panel for their kind sponsorships.

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