A debate is in progress over the impacts of domestic economic fundamentals on China’s growth prospects. The declining growth potential and certain policies with respect to technological development loom large in these discussions, even as the ongoing China-US trade dispute adds uncertainty to globalization and the world economy. One major benefit of the reform and opening-up of China has been the technology and knowledge spillover from leading economies. Further openness is necessary for China to use this knowledge to catch up as the aging of the population increasingly works against the country’s potential GDP growth.
China has successfully transformed itself from one of the world’s least developed economies in 1978 (GDP per capita at less than $200) to an upper middle-income economy in 2018 (GDP per capita stands at $10,000). Growth theories and empirical evidence show that real per capita income in open economies follows the law of relative convergence, which is, open economies in the same stage of development tend to exhibit similar patterns of per capita income convergence. Specifically, the lower the initial relative per capita income of an open economy, the higher is the average growth rate of per capita income in the following decades.
According to projections of a collaborative study by the National School of Development at Peking University and the Brookings Institution, although China’s projected GDP growth will continue to decline gradually, its GDP is expected to surpass that of the United States by around 2030, with its GDP per capita relative to the US approaching 40 percent.
However, the growth trajectory in reaching the middle-income level and the growth trajectory for achieving high-income status differ significantly, viewed from the perspectives of key growth drivers and the internal and external constraints on growth. The study shows that openness, especially trade openness is a precondition for developing countries to catch up with advanced economies. Opening up gives developing countries the opportunity to access the technology spillover from the leading economies through economic cooperation and exchanges. And that access is vital for poor countries to take off. On the other hand, it is also important for developing countries to improve intellectual property protection, which will help create the sort of institutional environment conducive to innovation and technology transfer.
Its aging population is increasingly becoming a constraint on China’s sustainable economic growth. According to UN projections, since the aging of the population was already well under way several years ago, the absolute total population in China will start to decrease in 2030 in the medium fertility rate scenario. An aging population increases the burden on the pension and social security system while at the same time impeding the accumulation of human capital. Because of China’s low fertility rate and no noticeably strong desire of couples to have a second child, it is time for China to completely eliminate its current birth control policy and consider implementing a subsidy for the second and later child.
Urbanization and the accumulation of human capital are important to enhance a developing country’s ability to catch up and cannot be accomplished separately. Urban areas are the centers of intellectual interchange and the recipients of technological inflows. Human capital is vital to the ability to adopt and absorb appropriate technology.
In developing economies, a high fraction of the population is usually in rural areas, which inhibits the accumulation of human capital since agriculture tends to be a low-skilled sector. For example, at the very beginning of China’s opening-up, 82 percent of the population was concentrated in rural areas, and at that time, the human capital of China was less than half (49.3 percent) that of the US and just 55 percent that of Japan.
Until now, there is still much room in these two areas for China to catch up. In the process of opening-up, cities will become centers for attracting skilled labors and technology. Improvements in the educational system, better available in cities, contribute to the growth of human capital, which in turn, promotes the process of urbanization.
Looking forward, it is crucial for China to further open its markets to avoid the middle-income trap and join the ranks of high-income countries in the coming decades. Reforms to state-owned enterprises and financial markets are among the most concerned for private capital and foreign investors. Protections for both the intellectual property rights and domestic private property should strengthened. Since significant differences in market structure and institutional mechanisms still exist between China and the advanced economies, it is quite important for China to follow the international market rules and practices as it further opens up its domestic market and expands into markets abroad.
Greater urbanization and the accumulation of human capital cannot be accomplished separately. Population quality and population agglomeration are both essential to developing countries in that they contribute to learning by doing and innovation. Urbanization is the process of migration of rural people to cities and is endogenously determined by economic transition and development. Therefore, although there are barriers to and costs associated with migration, migration boosts human capital accumulation and provides the seedbed for the agglomeration effects of information and knowledge to take shape during the process of urbanization.
In the process of catching up, China should improve internal mobility in order to coordinate the relationship between the process of urbanization and human capital accumulation. In the short run, measures should be taken to improve the system for educating migrant workers’ children in the city. In the medium- to long-term, the government should strive to reduce the income gap between urban and rural areas, which in turn will promote the movement and reallocation of educational resources across provinces and between cities and rural areas.
The author is an associate research fellow of National School of Development at Peking University.
From: China Daily