China’s rapid growth potential not yet exhausted

By Justin Lin Yifu Source:Global Times Published: 2014-12-18 17:43:01

Innovation, upgrading needed to harness country’s advantaged position

Illustration: Chen Xia/GT

There was a forecast made 20 years ago in my coauthored book The China Miracle: Development Strategy and Economic Reform that if China continues to put forward reforms, it may surpass the US to become the world's largest economy in 2015 in terms of purchasing power parity. At that time, most scholars didn't believe such a prediction. Yet, 20 years later, data from the World Bank and the International Monetary Fund show that this forecast has already come true.

However, China's huge population means the country's per capita GDP remains relatively low compared with the US. In this sense, China still needs to maintain relatively fast growth so as to catch up with developed countries in terms of per capita GDP.

When I finished my tenure with the World Bank in 2012, I made another assertion that the Chinese economy still has the potential to expand at 8 percent annually for another 20 years starting from 2008. This claim faced a lot of questions and doubts from domestic scholars. They alleged that since reform and opening-up, China had already maintained average annual growth of 9.8 percent for 35 years, which has never happened in history; as such, economic growth will slow down.

In fact, China's economic growth has been declining since the beginning of 2010, falling to 7.3 percent in the third quarter of this year. And the downward pressure remains great. Such a development seems to confirm the above-mentioned views.

However, I believe the slowing economy of the past few years has been mainly the product of external factors rather than the country's own declining economic potential or problems with its internal economic structure. While the economy relaxed its growth pace from 10.4 percent in 2010 to 7.7 percent in 2013, other emerging economies such as India - whose economic growth was 10.1 percent, 7.0 percent, 5.3 percent and 4.9 percent in 2010, 2011, 2012 and 2013 respectively - all recorded sharp slowdowns in growth during the same period. The same declining trend has also been seen in high-income Asian countries like Singapore, which saw growth slow from 14.8 percent in 2010 to 5.0 percent, 1.3 percent and 3.7 percent in 2011, 2012 and 2013 respectively. Therefore, it can only be external international factors that weighed down these countries' economies at the same time - although China performed much better compared with the rest.

Disregarding external shocks, how much growth potential does China's economy still have? To get a better understanding of the future, we need to take a closer look at the nature of economic growth and the decisive factor behind rapid growth.

The nature of economic growth is increasing per capita GDP, which is based on rising levels of labor productivity. Meanwhile, continued technological innovation and industrial upgrading is the decisive factor behind rapid growth in the modern economy. Yet, compared with developed countries, which had to rely on their own research and development starting with the industrial revolution of the 18th century, developing countries are able to imitate, introduce and integrate existing technologies at relatively lower costs. This is the so-called latercomer advantage.

Theoretically speaking, if a developing country can make use of this advantage to achieve technological innovation and industrial upgrading, its economic growth could be faster than developed countries. According to research by the Commission on Growth and Development led by Nobel laureate Michael Spence, after World War II, by using the latercomer advantage, 13 economies achieved annual GDP growth of 7 percent or more for 25 years or longer, more than double the growth rates of developed countries.

The latercomer advantage was a major reason behind the fast growth of China, which became one of the 13 economies after 1979. Whether the country still has the potential for further rapid growth depends on how much of the latercomer advantage it can still harness.

Per capita GDP, which represents a country's labor productivity and technological prowess, can be used to measure the extent of its latercomer advantage. The per capita GDP gap between China and developed countries reflects, among other things, a gap in technological achievement. According to data from the late British economist Angus Maddison, in 2008, China's per capita GDP reached $6,725 in 1990 Geary-Khamis dollars, about 21 percent of per capita GDP in the US, which was roughly the gap between the US and Japan in 1951, Singapore in 1967, and South Korea in 1977. Given the same gap, Japan, Singapore and South Korea saw economic growth soar to 9.2 percent, 8.6 percent and 7.6 percent over the following 20 years by harnessing their latercomer advantage. In this sense, China should also have the potential for 8 percent annual growth from 2008 to 2028.

Of course, to transform the growth potential to actual growth, China needs to continuously carry out technological innovation and industrial upgrading according to its comparative advantages to make full use of latercomer advantage.

The author is former chief economist and senior vice president of the World Bank. The article is translated from the Reference News.


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