The Need To Reform China’s Growth Model

Malhar Nabar and Papa N’Diaye are refreshingly plain-spoken in their analysis of China’s growth model and how it must change. They start their new IMF Working Paper, “Enhancing China’s Medium-Term Growth Prospects: The Path to a High-Income Economy,” with the straightforward question, will China successfully transition from a middle- to a high-income economy? It is a critical question, for China and the rest of the world, and one this Bystander has addressed before.

Nabar and N’Diaye’s starting point for their answer is that China’s growth has become too reliant on credit and investment, and that that model has started to experience diminishing returns (see chart below, from their paper). There is a limit to which the economy can grow by relying on capital accumulation and the absorption of surplus rural labour. History suggests that fast growing economies that fail to adapt that model of industrial development ultimately end up in a crisis.

Components of China's GDP growthThe new leadership recognizes that, and has been steadfast in its espousal of the need for economic liberalisation even in the face of a slowing economy on which the global economy is acting as a further drag. But, as the authors acknowledge, not only are certain market, financial and service-sector reforms needed, along with hukou reform, but also their skillful implementation. Not an easy task politically on either score.

The costs of not adapting the growth model are high. The authors estimate that without policy change annual GDP growth could fall to 4% and per capita GDP would stay at one-quarter of the U.S.’s level until 2030. In those circumstances China would fail to scale the Great Wall that separates developing economies that have driven on to become rich countries from those that faltered along the way.

In China’s case, faltering would have dire consequences for the Party’s authority to rule. But by accelerating its reforms, the authors says, China could easily follow the development trajectories of Japan and South Korea.

Convergence of Japan, South Korea and China's per capita GDP with that of the U.S.

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2 Comments

October 4, 2013 · 2:30 pm

2 responses to “The Need To Reform China’s Growth Model

  1. Acquired Merger

    Chris Devonshire-Ellis over at China Briefing also came to the same conclusion, and cites taxes and labor costs compared with Asia as the reason needed for change. His take on it is here: http://www.china-briefing.com/news/2013/10/04/the-rough-guide-to-the-cost-of-business-in-china-compared-to-asia.html

  2. Ash Parker

    Reading both, good arguments. Lets hope China gets it right. Devonshire-Ellis’s comparisons with Asia make chilling reading for China and make it interesting for emerging Asia. Not sure how this will all pan out, apart from “hedge China” I guess.

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