Justin YiFu Linjus writes: \u00a0China\u2019s recently finalized 13th five-year plan maps out its economic strategy and ambition for the 2016-2020 period. Among its objectives are a doubling of GDP and average rural and urban household incomes relative to their 2010 levels. These targets would require China\u2019s economy to grow at an average annual rate of at least 6.5% during the next five years. While this pace would be significantly slower than the 9.7% growth the country has averaged since 1979, it is undeniably fast by international standards. And, given that China\u2019s growth has decelerated every quarter since the beginning of 2010, some have questioned whether it is achievable. I believe that it is.<\/p>\n
Economic growth results from increases in labor productivity caused by technological advance and industrial upgrading. High-income countries, already on the cutting edge of productivity, must earn their increases through technological and organizational breakthroughs; as a result, their typical growth rate is about 3%. Developing countries, however, could potentially accelerate productivity growth, and thus GDP growth, by borrowing technology from advanced countries.<\/p>\n
The question for China, after 36 years of catching up, is how much longer it can continue to benefit from this process. Some scholars believe it has reached its limits.<\/p>\n
In the five years after Japan reached that level, its economy grew at an average annual rate of 3.6%. In South Korea, growth fell to 4.8%. In Hong Kong, it slowed to 5.8%. Given that China is projected to cross the same threshold sometime this year, many believe its average annual growth over the next five years will fall well below 7%.<\/p>\n
What this analysis fails to take into account is the fact that advanced countries are not sitting by idly; they are growing and making technological breakthroughs. And that creates opportunities for developing countries to continue to learn.<\/p>\n
Those who predict a slowdown in China are correct to look at its per capita GDP, which is a reflection of a country\u2019s average labor productivity and thus the level of its technical and industrial advancement. But the best indicator of China\u2019s growth potential is not its per capita GDP relative to some arbitrary threshold; it is the difference in per capita GDP between China and the United States, the world\u2019s most advanced economy. And on this measure, China has plenty of room for expansion.<\/p>\n
When Japan crossed the $11,000 threshold in 1972, its per capita GDP was 72% of the US level. When Taiwan crossed it in 1992, its per capita GDP was 48% of America\u2019s. The comparable figure for China today is only about 30%.<\/p>\n
In 2008 China\u2019s per capita GDP was 21% of the US level. By examining how other East Asian economies performed when they were at a similar point compared to the US, we can estimate China\u2019s potential for growth.<\/p>\n
Japan\u2019s per capita GDP was 21% of America\u2019s in 1951, and in the following 20 years it grew at an average rate of 9.2%. In the two decades after Singapore hit that level in 1967, it grew at an average of 8.6%.<\/p>\n
The Chinese economy\u2019s current slowdown is the result of external and cyclical factors, not some natural limit. China has been suffering from the aftereffects of the 2008 financial crisis and plummeting export demand. From 1979 to 2013, annual export growth averaged 16.8%. In 2014, it dropped to 6.1%; in 2015, it dropped further, to -1.8 %.<\/p>\n
This external drag is likely to continue, as politics in developed countries impedes efforts to implement the structural reforms \u2013 such as reducing wages, lowering social benefits, financial deleveraging, and consolidating budget deficits \u2013 needed to revive economic growth. Indeed, like Japan beginning in 1991, much of the developed world risks lost decades.<\/p>\n
To achieve its growth targets, China will have to rely on domestic demand, including investment and consumption. Thankfully, it has strong prospects in both areas. Unlike developed countries, which often struggle to find productive investment opportunities, China can pursue improvements in infrastructure, urbanization efforts, environmental management, and high-tech industries. And, unlike many of its developing-country rivals, China has ample fiscal space, household savings, and foreign-exchange reserves for such investments. The investments will generate jobs, household income, and consumption.<\/p>\n
Even if external conditions do not improve, achieving 6.5% and above annual growth is well within China\u2019s reach. In that case, the country will continue to be the world\u2019s primary economic engine, contributing about 30% of global growth until at least 2020.<\/p>\n","protected":false},"excerpt":{"rendered":"
Justin YiFu Linjus writes: \u00a0China\u2019s recently finalized 13th five-year plan maps out its economic strategy and ambition for the 2016-2020 period. Among its objectives are a doubling of GDP and average rural and urban household incomes relative to their 2010 … Continue reading