China’s Declining Growth Rate

Published on Author paldinoj15

In their paper, “The People’s Republic of China’s Potential Growth Rate,” Felipe et al. (2014) examine China’s declining growth rate, and it’s impact on policymakers going forward. This paper explores a number of policy alternatives as the PRC works to stabilize their growth rate coming out of 40 years of extreme growth. Looking ahead to the 13th Five-Year-Plan, Felipe et al. develop three possible scenarios for the PRC’s future growth prospects. The first scenario examines the effects of temporary impacts stemming from the Great Recession, which will allow the potential growth rate to return to over 10%. This will put upward pressure on unemployment and call for increased aggregate demand. The second scenario considers the effects of the Great Recession to be permanent, where the potential growth rate declines below the actual growth rate resulting in inflationary pressures. The third scenario considers a situation in which the potential growth rate approaches the actual growth rate as the economy becomes more services-based.

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Ultimately, Felipe et al. offer a number of policy implications for the PRC’s 13th Five-Year-Plan. They suggest that the 7% growth rate target of the 12th-Five-Year-Plan (which may also be the target for the 13th) is too low, as they estimate the natural growth rate (the rate that keeps the unemployment rate constant and inflation stable) to be 9.2%. Also, the recent decline in the growth rate may be due to the Great Recession, and its impact on exports. As these effects unwind, and economies around the globe recover, this effect may only be temporary. Finally, this paper asserts that the trend of the PRC becoming a more services-based economy will dominate in the medium- to long-term. This structural transformation of the economy may lead to a reduction in the natural growth rate during the 13th-Five-Year-Plan, moving it down to the desired rate of 7%-7.5%. In closing, the PRC’s dramatic growth over the past 40 years represents an exception, and Felipe et al. argue that it isn’t if, but when and how (hard and fast or slow and gradual), China’s growth rate will decline.

Source: Felipe, Jesus, Lanzafame, Matteo, & Zhuang Juzhong (2014). The People’s Republic of China’s Potential Growth Rate: The Long-Run Constraints. Asian Development Bank. Working Paper No. 418.

One Response to China’s Declining Growth Rate

  1. Theirs is an interesting argument. What assumptions do they make? One is that they do not disaggregate the economy, and in particular they do not incorporate migration. If the Lewis model is correct then at some point migration should lead to an acceleration in wages, as “surplus” labor is extinguished and so the supply of urban labor will increase only if wages rise enough to “pull” additional workers from the countryside. In that case, their NAIRU (non-accelerating inflation rate of unemployment) calculations will be very wrong. Likewise their assumption of high productivity as underemployed rural workers become fully employed urban workers will prove wide of the mark. Both mean they overestimate China’s growth potential.

    The other piece of their analysis is balance-of-payments constraints. For many developing countries that is quite important (cf. Argentina), in that the ability to export constrains the ability to import crucial intermediate inputs to production such as petroleum. Their claim is that on this dimension China is NOT typical of developing countries.