Running head: ECONOMIC GROWTH IN CHINA
BUSN5620 Current Economic Analysis
July 19, 2014
The Chinese economy has been growing at a rapid pace for over thirty years. Most of this growth has come from higher labor productivity, while growth of employment has diminished along with a slower rate of increase in the working-age population. This paper looks at the challenges that China will face over the next two decades in maintaining its rapid pace of economic growth, especially as working-age population growth slows further and then begins to decline. Key questions include whether China will be able to continue to devote nearly half of its GDP to investment, ...view middle of the document...
The real question is by how much and over what period is Chinese economic growth likely to slow further. The purpose of this paper is to try to provide some perspective on this question by looking at some of the supply-side factors that influence the rate of Chinese GDP growth.
The GDP growth rate is the sum of the growth in employment and the growth in output per employee. China faces challenges in both of these categories. The rate of working-age population growth has fallen from 2½ percent in 1979 to less than one percent in 2011, and is expected to turn negative before 2020. With nearly 80 percent of the working-age population already employed, there is not much room for employment growth to exceed working-age population growth. Thus, in all likelihood, virtually all of the increase in Chinese GDP over the next couple of decades will have to come from increased output per worker, or labor productivity.
Productivity gains are in fact already providing the bulk of Chinese economic growth. As illustrated in figure 1, the contribution of employment growth to overall GDP growth (the blue bars) has fallen considerably over the past three decades. Productivity growth (the combination of the red and green bars) has so far risen to offset the decline. Most of the productivity gain has come from increases in efficiency within sectors, the red bars. However, a substantial shift of employment from the lower productivity primary (mainly agriculture) sector to the higher-productivity secondary (mainly manufacturing) and tertiary (services) sectors also has contributed to aggregate productivity growth, as measured by the green bars.
Rates of Investment
There may be limits to the extent to which each of these factors can continue to contribute to productivity growth. Within-sector productivity growth has been facilitated by very high rates of investment that may be...