China’s Economic Growth Through 2025:
What We Know Today about
China’s Economic Growth Tomorrow
Carsten A. Holz
Hong Kong University of Science & Technology
1 September 2009
1
Official real GDP growth 1978-2008
16
14
12
10
est.
8
6
4
2
Annual real GDP grow th in %
0
1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
2
Literature
a. China as next superpower
b. China collapse/ pessimist view
c. Firm/industry-level growth studies
d. Economic growth in the past
e. Economic growth in the future
3
Literature
a. China as next superpower
-> China is rising
-> may pose a threat to the U.S.
Geoffrey Murray (1998): The Next Superpower
Emma Broomfield (2003): literature review
Bill Geertz (2000): The China Threat (2000)
Timperlake/ William/ Triplett (2002): Red Dragon Rising: Communist
China’s Military Threat to America
Business Week (2004): … the devastation Chinese competitors are
inflicting on U.S. industries, from kitchenware and car tires to
electronic circuit boards…
4
b. China collapse/ pessimist view
(1) economic arguments
Lester Brown (1995): Who Will Feed China
Nicholas Lardy (1998): China’s Unfinished Economic Revolution
Gordon Chang (2000): Coming Collapse of China
(2) political arguments
Ross Terrill (2003): The New Chinese Empire and What It Means for the
United States
> a crash looms because the Leninist core of the regime is unchanged…<
> illusory nature of the market in most of the Chinese economy <
5
c. Firm/industry-level growth studies
Jefferson et al. (2000): TFP
Colin Carter and Scott Rozelle (2001): major force in world food
markets?
Allen Douglas (2002): 4 industries, imminent emergence of Chinese
world-class brands
Ming Zeng and Peter Williamson (2003, 2008): “The Hidden Dragons”
6
d. Economic growth in the past
(1) Transition literature
Wing Thye Woo (1994, 1999)
Qian Yingyi (2000, 2003)
(2) Development view: Justin Lin et al. (2003): comparative-advantage
following strategy
(3) Aggregate production function framework
Alwyn Young (2000)
Gregory Chow and Kui-Wai Li (2002)
Wang Yan and Yao Yudong (2003)
Wu Yanrui (2004)
Dwight Perkins and Thomas Rawski (2008)
7
e. Economic growth in the future
World Bank (1997): closed-economy model
Gregory Chow and Kui-Wai Li (2002): aggreg. prod. fcn.
Gregory Chow (2002): aggregate production function
Paul Samuelson (2004):
positive labor productivity shock in China may lead to
a permanent loss in per capita income in the U.S.
8
Outline
1. Extrapolating Past Economic Growth Into the Future
2. Development Theories and Asian Precedents
3. Growth Accounting
+
Human Capital Formation
9
1. Extrapolating Past Economic Growth Into the Future
a.) GDP, 2006:
China:
U.S.:
USD 2.6 trillion (20.9 trillion RMB)
USD 13.2 trillion
Because prices in China are ¼ of prices in the U.S., in purchasing power
terms China’s GDP is 4 times larger, i.e., equivalent to USD 10 trillion.
b.) If past average growth rates of the U.S. and China continue
in the future, when will China’s GDP exceed that of the U.S.?
1.
2.
3.
4.
5.
6.
Price adjustment?
Exchange rate adjustment?
U.S. price level = 3.86 * PRC price level
+ 3% annual RMB appreciation
U.S. price level = 3 * PRC price level
+ 3% annual RMB appreciation
No price adjustment
+ 3% annual RMB appreciation
Aggreg.
Per capita GDP
GDP National Coast 5 prov.
2011
2035 2024
2021
2009
2026 2019
2017
2015
2040 2027
2023
2012
2029 2021
2019
2033
2057 2041
2036
2024
2041 2031
2028
Past average growth rates are those of 1978-2005. Base year for projections is 2005.
10
2. Development Theories and Asian Precedents
a. Structural change: Shifting labor from low-productivity
agriculture to higher productivity industry or services
Value added per laborer (yuan RMB)
60000
50000
Primary sector
Secondary sector
40000
Tertiary sector
30000
20000
10000
0
1978
1982
1986
1990
1994
1998
2002
2006
11
Growth rate of real GDP per laborer (in %)
The more laborers shift out of agriculture in a given year, the
higher is labor productivity (and GDP) growth in that year.
China
Taiw an
Korea
-0.035
-0.030
-0.025
-0.020
-0.015
-0.010
14
Japan
13
Korea
12
11
Taiw an
10
China
9
8
7
6
5
4
3
2
1 Japan
0
-0.005 -10.000 0.005 0.010
-2
-3
-4
Annual absolute change in share of agriculture in employment
12
Each data point = 1 year. Jap. 1956-05, Korea 1971-05, Taiwan 1967-05, China 1979-05.
How many more laborers can China shift out of agriculture?
Share of agriculture in economy-wide employment
Share of agriculture in employment
0.8
0.7
Japan
Korea
Taiw an
China
0.6
0.5
0.4
0.3
0.2
0.1
0.0
1953 1957 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005
13
Growth rate of real GDP per laborer (in %)
b. Catching up: the lower labor productivity relative to the
U.S., the higher labor productivity growth
14
13
12
11 China
10
9
8
7
6
5
4 Korea
3
2
1
0
-1 0.0 0.1
-2
-3
Japan
Korea
Taiw an
China
Taiw an
Japan
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
1.1
1.2
1.3
1.4
GDP per laborer (in USD) per U.S. GDP per laborer (in USD)
Japan 1960-2005, Korea 1971-2005, Taiwan 1967-2005, China 1979-2005.
14
c. Relative factor price equalization:
the lower the price of labor relative to the price of capital,
in comparison to the U.S., the higher employment growth
Growth rate of real GDP per laborer (in %)
(//structural change -> switch to higher labor productivity sectors)
14
13
Japan
12
Korea
11
China
Taiw an
10
9
China
8
7
Taiw an
6
Japan
5
4
Korea
3
2
1
0
-1 0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
-2
-3
-4
-5
Relative w age rates, divided by relative investment prices (PWT)
Japan 1960-2004, Korea 1971-2004, Taiwan 1967-2004, China 1979-2003.
0.8
15
3. Growth Accounting (+ Human Capital Formation)
a. Production function estimation
b. Assume constant labor share
Labor share ≡ labor remuneration / GDP = constant
a≡
w * L
/ GDP = constant
Real GDP growth = real wage growth + labor growth
c. Decompose income components of GDP
16
Income shares in GDP
0.55
0.50
0.45
0.40
Labor compensation
Depreciation
0.35
Net taxes on production
Operating surplus
0.30
0.25
0.20
0.15
0.10
0.05
0.00
1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
17
c. Decompose income components of GDP
(i) Definitional identity
GDP  labor remuneration + depreciation
+ net taxes on production + operating surplus
Pt Yt  wt Lt   t K t   t Pt Yt  st K t
price
tax rate
return on capital
output quantity
wage rate labor quantity
depreciation rate capital
18
(ii) Explaining economic growth in China 1978-2002
growth in real
net GDP 78-02
labor growth
real capital growth
real wage growth
depr. rate growth
surplus r. gr.
labor share
depr. share
surplus share
Yˆt

wˆ t
a ( ) 
Pt

t
a Lˆt

t

d ˆt

t


t
e sˆt
Kˆ t
 (d  e ) ( )
Pt

t

t
814%  0.5981*495% + 0.5981*60% + 0.1370*16% + 0.2649*(-50%) + 0.4019*1185%
=
296%
+ 36%
+ 2%
- 13%
+ 476% = 797%
-> so small that can ignore in future
Mean shares 1978-2002
19
(iii) Estimate economic growth in China 2000-25
From 1978-02 estimations know that
can use growth in net GDP as a proxy for growth in GDP
can drop two irrelevant items on the right-hand side to yield
Growth in net GDP =
labor share * growth in real wage rate +
labor share * growth in quantity of labor +
(depr. + surplus share) * growth rate of real capital
Already know future values
Use previous-year values
Need
20
Estimate economic growth in China 2000-25
--- based on cointegration equations 1978-02
“Dependent” variable
Regression number
Constant
C. Average years of schooling
minus 5
D. Average years of schooling
minus 5, squared
E. Share of laborers with primary
school education
F. Share of laborers with upper
middle school education
G. Share of laborers with college
level education or above
H. Number of laborers
All variables in levels
A. Wage
B. Capital
I
II
4387.96
4144.38
3126.44
(23.1977)
-1.3593
(-5.0228)
-39066.18
(-4.0676)
152080.0
(18.8042)
2
1%, 5%
OK
None
-13973.42
(-2.5510)
238.63
(2.3934)
2
1%, 1%
OK
H:D(10)
A: 97/ 1/ 2
F: 34/ 66/ 0
G: 1/ 78/ 21
A: 66/ 12/ 22
F: 16/ 81/ 3
G: 19/ 60/ 21
23
B: 87/ 11/ 2
D: 19/ 77/ 5
H: 83/ 1/ 17
B: 25/ 70/ 5
D: 23/ 72/ 5
H: 33/ 45/ 22
22
Trend
Lag length of the VEC
Trace, maximum eigenvalue test
Normality (10% level)
Granger causality “Y: X (Z%)”
Variance decomposition
period 3
Variance decomposition
period 10
Number of observations
All variables in natural logarithms
A. Wage
B. Capital
III
IV
6.2426
7.6163
0.7171
0.2829
(12.8369)
(3.1779)
1
1%, 1%
C 1%, E 10%
A: E(0.1)
C: E(5)
A: 82/ 3/ 15
C: 0/ 94/ 6
D: 0/ 61/ 38
A: 65/ 4/ 31
C: 11/ 89/ 10
E: 13/ 60/ 27
24
0.0946
(15.2316)
2
5%, 5%
OK
B:I(1)
B: 87/ 13
C: 8/ 92
B: 29/ 71
C: 6/ 94
22
21
Growth Forecasts (average annual growth rates in %)
Individual variables
Wage Capital Wage Capital
(I)
(II)
(III)
(IV)
Labor
2000-05
2005-10
2010-15
2015-20
2020-25
4.15
8.18
7.76
6.36
4.63
6.98
6.37
5.63
5.40
4.14
5.18
6.29
7.81
11.79
14.22
10.91
10.85
10.75
10.71
10.54
0.83
0.71
0.20
-0.80
-0.62
2000-25
6.20
5.70
9.01
10.75
0.06
Cumulative:
2000-25
350.04
299.69
763.49 1184.75
1.58
- - -> GDP
Income
Assume labor
decomposition
share constant
I+II
III+IV
I
III
5.80
8.09
5.01
6.05
7.84
8.83
8.95
7.05
7.06
9.42
7.98
8.03
5.50
10.85
5.51 10.90
4.06
12.02
3.98 13.51
6.05
9.83
333.77
942.78
6.27
9.07
357.15 777.14
22
+ Human capital = quality of labor
Share of Education Level by Age Group, 2000 (in %)
Year 2000 Census
80
60
40
%
20
No school/ lit. class
0
Primary school
Secondary school
40-49
Tertiary level
65+
60-64
30-39
20-29
50-60
23
Tertiary Level New Enrollment, China and U.S.
6.0
5.5
5.0
China: BA + Associate degree
0.55
U.S.: Freshmen (2- and 4-year programs)
0.50
China: MA + PhD --- right scale
0.45
4.0
0.40
3.5
0.35
3.0
0.30
2.5
0.25
2.0
0.20
1.5
0.15
1.0
0.10
0.5
0.05
0.0
1978
0.00
1982
1986
1990
1994
1998
2002
million
million
4.5
0.60
2006
24
Tertiary Level Graduates, China and U.S.
4.8
4.4
4.0
3.6
million
3.2
China: BA + Associate degree
U.S.: BA + Associate & Professional degree
China: MA + PhD
U.S.: MA + PhD
2.8
2.4
2.0
1.6
1.2
0.8
0.4
0.0
1978
1982
1986
1990
1994
1998
2002
2006
25
Summary
1. In purchasing power terms, China will be as large as the U.S. by
2010. Per capita, it will take longer, except for the most
developed provinces.
2. China fits standard development patterns, such as of structural
change, and appears to be at a stage of development at which
Japan/ Korea/ Taiwan were thirty years ago.
3. Economic growth is likely to continue at current rates through
around 2015. For the years after 2015, the projections are more
uncertain, with, in a lower-bound scenario, real growth falling to
about 4% per year.
26
Implications
1. Demography I: population size
2.5 x EU, 4 x US, 10 x Japan
or
1.5 x (EU+US+J)
Large population => large domestic market =>
Economies of scale = low cost
Competition = pressure to innovate
=>
What does that mean for mass production in the West?
Where is the competitive edge of the West Vs. China?
China following East Asian development patterns
-> population size will make it the largest market in the world
=>
Implications for firms worldwide?:
Design? Marketing? Production location?
27
2. Demography II: pool of talent
If talent is randomly distributed among the world population,
and if China’s education system is able to identify the brightest students,
then China has a larger pool of talent to draw from than any other
country in the world.
Why not important earlier?
How long will it take to make full use of this pool of talent?
=> Implications for future innovation capacities in comparison to the West?
Current comparative advantage:
Current comparative disadvantage:
Always comparative disadvantage:
labor quantity.
scarcity of technology; capital?
scarcity of land.
=> Specialization worldwide?
28
3. Growth I: China
Rising living standards
Coastal provinces approaching income level of middle-income countries
=> What does that mean for China?
Poverty alleviation -> middle class -> democratization?
Consumption waves
Environmental pollution
=> What does that mean for the world?
Market for Western goods
Energy / natural resources
Tourism
New world currency
Income?, Employment / job security
29
4. Growth II: China -> World
China’s exports are moving up the product ladder.
=> The “China price” affects ever new product markets
Transmission of growth to other Asian countries
(2/3 of China’s imports originate in Asia).
=> China as growth locomotive for South East Asia
Leader-follower effect with India
The world five / ten / twenty years from now?
China produces and consumes:
manufacturing hub predominantly for the domestic market
Opportunities for foreign firms (sell domestically, not only abroad)
30
5. New and different “superpower:”
large element of foreign-directedness
Extensive foreign ownership of assets in China
=> Who “controls” the Chinese economy?
Our pensions depend on China
More than half of China’s exports are from foreign-invested firms
=> Are we importing from China, or from ourselves?
Large degree of openness to foreign economic norms/ standards
=> Are we still dealing with a foreign country?
Integration into international markets and production chains
=> Support for free trade / economic policies of market economies
31
cont.
What’s the meaning of being Chinese?
=>Most profs at HKUST look “Chinese,” but they are U.S. Americans.
Where are the loyalties? What is the meaning of nationality?
If “China” and the “West” become increasingly indistinguishable,
what are the political / civil rights / human rights implications?
Direct use of economic power by China’s leaders to pursue their goals
worldwide:
Ex.: “CCP” Politburo running firms in the U.S. / Europe?
Ex.: use of forex reserves to buy support of individual countries / politicians
32
Paper (with less on implications) is published as
“China’s Economic Growth 1978-2025: What We Know Today
about China’s Economic Growth Tomorrow” in World
Development 36, no. 10 (Oct. 2008): 1665-91.
Appendices: http://ihome.ust.hk/~socholz
Labor calculations (1978-02 / projections through 2005)
are in separate manuscript at http://ihome.ust.hk/~socholz.
Physical capital 1978-03: published in the
China Economic Review 17, no. 2 (2006): 142-85.
33