A recent study done by the Federal Reserve highlights factors that could dramatically slow the growth of the Chinese economy in the future. China’s economy has grown by around 10 percent over the past decade, propelling the country into a global super power. However many experts predict that by 2030 growth will be closer to 6.5 percent or in the worst case slow to under 1 percent a year.
The growth of the working age population is expecting to begin declining in 2020 and the laws of diminishing marginal returns will start inhibiting growth as the country gets closer to its natural employment rate. Also the amount of workers shifting from less productive jobs like agriculture to more productive work in factories is undoubtably going to decline in coming years.
While this is bad news for the Chinese there are many ways China can avoid this decline. As long as they keep investing in technology they can continue to increase productivity indefinitely.
http://www.reuters.com/article/2013/03/26/us-usa-fed-china-idUSBRE92P14T20130326
I’m not at all surprised to hear this. The fact that the Chinese economy has grown at around 10 percent consistently for this long is stunning in and of itself. Two to three percent annual growth in GDP is considered ‘good.’ It will be interesting to see how the economy handles the population bubble as The Children of Mao begin to retire. I imagine that is a factor in the worst case scenario prediction.
The lowered future expectations make sense for China who has had enormous growth over the past couple decades. Just like a company cannot keep a high growth percentage for years once it hits maturity, China will continue to growth but at a diminishing rate. The country is already having problems with overpopulation and pollution and are beginning to regulate against both. Once the country gets to that natural employment rate and stable populations in its cities will the growth begin to slow.
I think it is inevitable that the economy will grow at a slower rate than it has within the past few decades. China experienced significant overhaul within a lot of their methods of production and became more efficient (as we saw with agriculture and the motor industry). By opening up the economy and focusing on technology, China was bound to grow at a rapid rate. The question is not if the growth rate will slow, more-so by how much. China will have to put significant focus into creating a stable economy by investing in technology and education in order to maintain a high rate. It will be interesting to see if China uses the knowledge from joint-ventures in order to successfully build domestic industry. If the country continues to act primarily as a location for manufacturing, it is likely that the growth rate will drop at a significant rate. Educating the younger generation in order to shift up the potential GDP will be an important factor in regards to China’s future growth rate.
A predicted range from 1 to 6.5% doesn’t seem to be a particularly specific prediction. Given the timescale involved, I would not be surprised by any particular prediction, as a significant portion of macroeconomic decisions that may contribute to this outcome have yet to be made. As we learned today, how China manipulates its saturated capital market and the ensuing outcomes are likely to affect its long-run future. Additional factors such as economic recession management and further liberalization of the market (especially in relation to finance, banking and the exchange rate) are also significant on this scale.
As the above commenters have explained, the slowed growth is not a surprise. What concern me most is the nation’s healthcare reform considering the huge aging population, and how the healthcare budget plays out in the overall economy. If the government can not handle this issue smartly, a disastrous outcome can leave millions of old people uncared for.
Predictions are hard, especially predictions about the future. We know that fast growth will eventually fall as it will empty out the countryside, as K/LF rises at diminishing rates, and as the easy part of “catch up” and fast productivity fall. Take our basic framework: Y/L = A (K/L)α and take logs. Using lowercase italic, we get y – l = a + αk – αl. Then take the derivative, remembering that d(log x) = dx/x = growth rate of x gx. So we get gY/L = gA + α [gK – gL].
Falling LF doesn’t necessarily hurt the growth of per capita income, but falling K and falling A both do. In the OECD, productivity growth gA is good, a robust upper bound for a developed country. Diminishing returns to capital and capital growth mean that might be 2%. Add in (through the mid-2020s) continued shifts of the LF and you get a period that will still be stronger than the OECD, but falling towards 4% after 2030, and lower after 2040. Remember though that over a decade, 7% growth means a doubling.