Academic journal article Asian Development Review

Understanding the Slowing Growth Rate of the People's Republic of China

Academic journal article Asian Development Review

Understanding the Slowing Growth Rate of the People's Republic of China

Article excerpt

I. Introduction

It has become increasingly accepted within the People's Republic of China (PRC) and outside that the PRC's slowing growth rate is a long-term phenomenon, not a temporary or cyclical downturn. The future rate of growth can fluctuate from year to year depending on world economic conditions and on the PRC's domestic policies-notably whether the government calls for a fiscal and monetary stimulus or not-but there are compelling reasons for believing that the long-term trend in the growth rate is sloping downward. The PRC's gross domestic product (GDP) may well grow at 5% or 6% for the next 1 to 2 decades and possibly a point or two faster than that for the next few years. If there is a fiscal stimulus comparable to what occurred during 2009-2010, the rate could be even higher but with likely long-term effects that would be negative.

The slowdown in growth at purchasing power parity (PPP) per capita GDP of between $10,000 and $16,000 is normal and most high-income countries existing today experienced such a decline when per capita GDP reached this level (Figure 1). The causes of this decline involve structural changes such as the end of a rural labor surplus, that can be readily shifted to higher productivity urban occupations, and the gradual shift away from manufacturing to services. To some degree, it is also the case that middle-income countries can no longer simply copy what the highincome countries did when they were at the middle-income level and must depend increasingly on their own innovative capacity with its inevitable mistakes and dead ends.

In the PRC's case this slowdown is occurring at a time when the country has a very unusual GDP structure on the expenditure side that complicates what the country needs to do to maintain healthy development in the near and more distant future. Put succinctly, the household consumption rate as a share of GDP is much too low, and the investment rate is too high. The data and how they compare with other economies in East Asia are presented in Figures 2 and 3. There have been challenges to the reliability of these estimates, and it is likely that the official Chinese figure for household consumption as a share of GDP is in reality somewhat lower than it would be if such things as the implicit share of housing in consumption were properly measured. Adjusting for these possible biases, however, still leaves the household consumption share unusually low.

Another way to view this structure is to realize that the low household consumption share virtually requires that the investment share be excessive. An unusually high investment rate in turn will typically mean that the marginal rate of return on investment and overall total factor productivity (TFP) will be lower than it would be if the investment share were smaller. There is reason to believe that is the case in the PRC at present and may well be the case in the years ahead. In contrast, the PRC in the 1980s and through the first years of the 21st century maintained a high rate of TFP growth and avoided a declining rate of return on investment in part because of large shortages in transport and housing resulting from 2 decades of neglect of these sectors before 1978. Later in this essay, we shall deal with the nature of these high transport and housing investment requirements and why their absence in the future will not justify a similarly high rate of investment in the decade or two ahead.

II. The Low Household Consumption Share in GDP

The PRC began the reform period in 1978 with consumption already accounting for a low share of GDP, and that share has fallen steadily since. The initially low consumption level was partly because most investment went into heavy industry in urban areas, while restrictions on rural-to-urban migration prevented a large majority of the population from sharing in the income generated by that investment. Meanwhile, urban wages were held down by the potential availability of low-cost surplus labor in the countryside. …

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