That model is, to some extent, a policy-induced construct, the result of a deep-rooted bias toward construction and manufacturing as the leading drivers of economic development. Today, China\u2019s proclivity for industrial production is manifested in large-scale manufacturing and infrastructure projects, encouraged by direct and indirect government subsidies. By boosting investment and generating tax revenue for local governments, this approach has a more immediate positive impact on GDP than efforts to develop the service sector.<\/p>\n
The disparity between China’s GDP growth which has averaged nearly 10% annually over the last few decades, and its employment growth, which has amounted to just 1-2% annually. Clearly, industrialization and export expansion alone cannot absorb China\u2019s massive labor force.<\/p>\n
The problem is that rapid labor-productivity growth in the industrial sector \u2013 more than 10% per year over the last two decades \u2013 is reducing the need to hire more workers. The service sector, by contrast, experienced much slower labor-productivity growth (about 5% annually over the same period), meaning that it could be far more effective in generating employment growth. In the United States, about 80% of the total labor force was in the serevice sector in\u00a0 2012.<\/p>\n
Chinese households are missing out on the benefits of economic growth.\u00a0 In order to cap the rise in labor costs, wages were suppressed, growing by only 5% annually over the last 20 years, even as productivity grew at an annual rate of 8.5%. Meanwhile, financial repression lowered the cost of capital. In the last decade, the average real (inflation-adjusted) return on deposits has been near zero. With about 80% of Chinese household savings deposited in banks, this implicit tax on savings has had a major economic impact, reinforcing Chinese households\u2019 tendency to save and thus undermining consumption growth and exacerbating global imbalances.<\/p>\n
In this way, China\u2019s distortionary policies have helped to perpetuate a dysfunctional growth model. Wage suppression, financial repression, and an undervalued exchange rate subsidize exports and production, at the expense of households, which are thus compelled to save, weakening domestic demand.<\/p>\n
Breaking the cycle will not be easy, but there is no other way to address many of the most pressing problems confronting China\u2019s economy. Indeed, the current growth model is also taking a heavy toll on the environment, with pollution threatening the population\u2019s health, especially in urban areas.<\/p>\n
Restructuring the economy is perhaps the most urgent \u2013 and most difficult \u2013 challenge facing China\u2019s leaders today. Given that the current distortions are interlinked, they may need to be addressed simultaneously. China\u2019s gradualist approach may no longer work.<\/p>\n
Keyu Jin writes:\u00a0\u00a0 Most economists have a reason to be worried about China\u2019s economy \u2013 whether it be low consumption and large external surpluses, industrial overcapacity, environmental degradation, or government interventions like capital controls or financial repression. What many fail … Continue reading ![\"China's](\"http:\/\/www.w-t-w.org\/en\/wp-content\/uploads\/2014\/10\/Chinas-Growth.jpg\")
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