Why is China’s GDP growth rate slowing down?
Glenn Luk, B.S. Economics & Computer Science, University of Pennsylvania
In a nutshell, it comes down to some basic arithmetic.
Let’s consider three archetypes of workers:
A subsistence farmer
Highly educated white-collar worker
“Low-income” economies are dominated by the first archetype — poor farmers that aren’t equipped with modern equipment whose productivity levels are largely based on muscle power. These would be countries like Madagascar, Ethiopia and Haiti that have per capita GDPs in the $1,000 to $3,000 range.
The first jump from $2,000 to $10,000 (the mid-points of those ranges) results in annualized growth in per capita GDP of 6.6%. Add in some elevated population growth (due to rapidly declining mortality rates and still-large-sized farming families) and you get to 7.5 to 8.0% GDP growth.
The second jump from $10,000 to $30,000 results in annualized growth in per capita GDP of 4.5%. Population growth typically slows down drastically during this stage, so aggregate GDP grows only slightly faster than per capita metrics at this point.
Directionally, this simple mathematical model actually describes the last four decades of China’s development quite well.
In 1980, per capita GDP was around $300 and the vast majority of the Chinese population were subsistence farmers performing tiring, back-breaking work. The first economic reforms were focused on the agricultural sector — removing price controls on many categories of agricultural products and allowing farmers more freedom to make their own economic decisions. This resulted in a burst of productivity gains, which led subsequently to a gradually increasing pool of excess labor.
Up until this point, China’s economic development very much mirrored that of other East Asian export bloc countries/economies like Japan, South Korea and Taiwan. But ten years ago, its path hit a major bump and the Chinese economy had to veer off in a different direction.
That bump, of course, was the Global Financial Crisis — which absolutely crushed China’s export sector. In response, Chinese policymakers rapidly shifted economic priorities to credit-fueled capital-intensive activities like infrastructure and real-estate development. This helped soak up the millions of suddenly unemployed export-sector workers and smooth out the drop in economic activity. Nevertheless, growth rates still declined sharply compared with the prior period: over the past decade, growth rates averaged around 7–8% per annum.
Then five years ago, with worries about increasing levels of indebtedness in the system (largely stemming from the above-mentioned credit binge), Chinese policymakers began shifting the growth focus to consumption and the services sector. Growth rates have slowed even further and will continue to slow — I expect somewhere in the neighborhood of 5% average growth rate for the next decade.
But if they can achieve this, the simple arithmetic says that China will officially be an “advanced” or “high income” economy sometime between 2025 and 2030.
Sitting on the couch with three generations of this one Chinese family, you could catch a glimpse of each phase of the development of China’s modern economy and get some idea of its trajectory in the coming decade.