Academic journal article Brookings Papers on Economic Activity

The Sources and Sustainability of China's Economic Growth

Academic journal article Brookings Papers on Economic Activity

The Sources and Sustainability of China's Economic Growth

Article excerpt

IN 1978, AT THE outset of its economic reform, China was the world's tenth-largest economy, with a GDP of about $150 billion, or less than 6 percent of U.S. GDP at the time. By 2005, however, China's economy, at $2.2 trillion, had grown to become the fourth largest in the world, behind only the United States at $12.5 trillion, Japan at $4.5 trillion, and Germany at $2.8 trillion. The above figures, which come from the World Bank, evaluate GDP at current exchange rates and do not take account of differences in the purchasing power of currencies. When measured instead at purchasing power parity (PPP), China is already the world's second-largest economy, with almost $9 trillion in output, nearly three quarters that of the United States. It has been suggested that, at current growth rates, China's GDP stated in PPP terms could exceed that of the United States as early as 2010. (1)

When China' s GDP converted at current exchange rates does match that of the United States, assuming that China's population remains four times the U.S. population, Chinese income per capita will then be but one quarter that of the United States. By comparison, the purchasing power of the average Chinese resident will substantially exceed one quarter that of the average U.S. resident, perhaps rising to the vicinity of one half.

What changes will have to occur within China's productive sectors for China's GDP to match and ultimately surpass that of the United States? Today even China's coastal industry, the country's most technologically advanced region and sector, lags substantially behind the world technology frontier. Meanwhile a well-known feature of China's rapid economic transformation is the unequal advance, in terms of technological change and productivity, of different regions and sectors across this large and populous country. The regions and sectors that lag behind China's coastal industry also exhibit large disparities in productivity among themselves.

These large international and internal productivity gaps represent both advantages and disadvantages for China's ability to sustain high rates of GDP growth. The key advantage is that both the international gap and the internal gaps continue to provide multiple channels through which catch-up can proceed. A well-known disadvantage of the internal gaps is that the accompanying large differences in income threaten social stability. A further disadvantage of large internal productivity differences, to the extent they prove persistent, is that much of the burden of China's catch-up with the United States will fall on coastal industry. That is, if productivities in the regions and sectors outside China's coastal industry remain far below one quarter that of the United States, then coastal industry will have to achieve productivity levels well above one quarter that of the United States. Coastal industry will have to continue as the locomotive pulling the rest of the economy forward. Indeed, if China is to meet its ambitious goal of output parity with the United States, productivity in coastal industry may have to closely approach or even exceed U.S. productivity. Yet the history of other successful developing countries suggests that, as it does so, China's productivity growth is likely to slow substantially, in turn slowing the country's overall economic growth.

A number of questions emerge from this overview and frame the analysis in this paper: Within China, how much does China's coastal industry lag behind the global frontier? How much do China's other regions and sectors lag behind coastal industry? Is there evidence of catch-up or convergence of these regions and sectors with coastal industry? If so, what are the sources of such change? If instead there are growing disparities, what are the causes? To what extent can one expect that, as China's coastal industry closes in on the global technology frontier, the productivity growth of China's own technology frontier will slow? …

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