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views or policies of the Asian
Development Bank Institute (ADBI), the Asian Development Bank (ADB), its Board of Directors, or the governments they represent.
ADBI does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequences of their
use. Terminology used may not necessarily be consistent with ADB official terms.

Factors Affecting the Outlook for
Medium- to Long-term Growth in
the PRC
Justin Yifu Lin
Peking University

Guanghua Wan

Director of Research, ADBI

Peter J. Morgan, PhD

Senior Consultant for Research, ADBI
ADBI Annual Conference on
“Global Uncertainty, Macroeconomic Shocks, and Growth in Asia”
3 December 2015
ADBI, Tokyo

Outline
1.
2.
3.

4.
5.
6.

Introduction
Literature survey
Growth comparisons with other more
advanced Asian economies
Supply-side factors (growth accounting)
Demand-side factors
Conclusions

2

1. Introduction

PRC has remarkable growth record


Average annual real GDP growth rate of 9.8% over the period
1978-2014
Decade-average growth rates show no significant slowdown
Per capita GDP reached US$13,224 in PPP terms in 2014

Key issue is what growth rate can be sustained
in the medium- to long-term

Natural tendency to slow after reaching high middle-income
status due to convergence
Growth has slowed in the last 3 years to 7.6%, not clear to what
extent this is simply cyclical
Export growth, one of the previous main drivers, has slowed
significantly

3

2. Literature survey

Global studies

Ferriera et al. (2010) find structural breaks in TFP for 77
countries over 1950 – 2000. Slumps in growth of TFP in
developed countries mainly associated with external factors, in
particular oil shocks, whereas those of developing countries
relate mainly to country-specific sources.
Eichengreen et al. (2012) find that declines in TFP contribute
around 85% of the explanation of output growth rate slowdowns.
Eichengreen et al. (2012) find that a growth slowdown typically
occurs when per capita income reaches US$16,740 in 2005
PPPs, or reaches 58% of that of the lead country, or when
manufacturing employment accounts for at least 23% of total
employment.
Eichengreen et al. (2015) find the determinants of TFP: lower
levels of educational attainment, excessive investment, higher
manufacturing employment shares, higher manufacturing valueadded, weak political systems and lower energy prices.
4

2. Literature survey (2)

PRC studies

Bosworth and Collins (2008) : main source of growth was
industrial sector in the PRC but service sector in India. They
found high TFP growth in the PRC.
Lee and Hong (2010): main sources of GDP growth during 19812007 were capital in the first two decades and TFP in the third.
Forecast that PRC growth to slow to 5%-6% in 2021-30 decade.
Brandt and Zhu (2010) use a dynamic three-sector model to
differentiate the contributions from state and non-state
components within the non-agricultural sector to TFP and labor
productivity growth in the PRC.
Dekle and Vandenbroucke (2011) highlight the key role of
reducing the government size (measured by taxes) as a driving
force for China’s structural transformation.
Zhu (2012) argues that after the economic reforms the major
growth factor came from productivity growth arising mainly from
economic reforms rather than capital investment.
5

2. Literature survey (3)

Data issues

GDP deflators: The PRC’s implicit GDP deflators criticized by
Ren (1995), Young (2003) and Maddison (2007) for
underestimating inflation, and thus contributing to an
overestimate of real GDP growth.
Wu (2014) finds that both the PRC’s GDP growth and TFP
growth are overestimated using official data.
Employment data: Major break in employment data beginning
in 1990. Second, official data may underestimate the rate of
decline in the primary sector labor force (Rawski and Mead 1998,
Chen 1992), mainly due to incompleteness of labor surveys
(Brandt and Zhu 2010).
Labor productivity: Wu (2011) notes that the labor productivity
estimate for the “non-material services” sector grew at an
unprecedented rate of 6.1% per year during 1978-2008.
Definitions of fixed asset investment and capital stock. Wu
(2011) notes that there are various problems with the data on
gross fixed capital formation, including inclusion of unfinished
projects.
6

3. Growth comparisons with other more
advanced Asian economies

Comparator economies: Japan, Korea, Singapore,
Taipei,China

All had export-driven growth models
Achieved long periods of high growth

Basis for comparison: The 20-year growth record from
the point (benchmark year) at which the ratio of per
capita or per worker GDP to that of the US was the same
as that for the PRC in 2011 (latest year of Penn World
Tables)

Focus on relative income level key to rate of economic
convergence
Per worker GDP is better measure, since adjusts for
demographic shifts
Especially relevant since PRC labor force growth is about zero

7

Growth record of comparator Asian
economies
Average 20-year growth rates after the benchmark year
Real GDP (national price)
Economy
Japan
Korea
Singapore
Taipei,China

Total factor productivity

Per capita

Per worker

Per capita

Per worker

1958

1951

1958

1951

8.0%

8.2%

3.9%

4.6%

1981

1970

1981

1970

6.9%

5.8%

1.7%

2.0%

1967

1960

1967

1960

6.9%

5.0%

0.7%

1.8%

1972

1961

1972

1961

6.5%

6.0%

0.9%

1.5%

Note: Year indicates starting (benchmark) year of 20-year growth rate estimate.
Benchmark year is when the ratio of the GDP per head measure to the US level
(in PPP terms) was the same as for the PRC in 2011.
Source: Penn World Tables (Feenstra, Inklaar and Timmer 2013), authors' estimates.

8

Implications

Japan’s growth experience was most favorable, but is it
a relevant comparator?

Adjusting for Japan’s postwar rebuilding experience,
growth range for comparator economies for the 20 years
after the benchmark year was:

Japan in 1951 was not an emerging economy
Low level of per capita GDP reflected destruction of capital stock
during WWII
Trend growth rate falls to around 4% in counter-factual case of
no war
Germany showed a very similar pattern

Per worker GDP: 4%-6% per year
TFP growth: 1%-2% per year

Implication: Beating this record is not easy, and will
require special factors
9

Japan’s growth record exaggerated by
post-war reconstruction

Note: GK$ = Geary-Khamis dollars.
Source: The Maddison-Project, http://www.ggdc.net/maddison/maddison-project/home.htm,
2013 version, authors’ estimates.

10

4. Supply-side factors (growth
accounting)

Numerous estimates in the literature of the contribution
to PRC GDP growth from major input factors



Most of growth due to capital deepening and TFP
growth, but wide disagreement about the mix
Optimistic estimates


Adjustments of deflators
Definition of capital stock (no official one)
Labor force quantity and quality

Bosworth and Collins (2008), Perkins and Rawski (2008), Brandt
and Zhu (2010), Lee and Hong (2010) and Zhu (2012)
TFP growth high in the range of 3%-4% (~40% of total contrib.)
Capital deepening moderate

Pessimistic estimates


Young (2003) and Wu (2011)
TFP growth low in range of -0.3% - 1.7% (0%-20% contrib)
Greater capital deepening

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Estimated contributions to PRC growth
during post-reform period
Estimates of contribution to PRC real GDP growth by factor

Study
Period
Young (2003) - official data
1978-1998
Young (2003) - alternate data 1978-1998
Bosworth & Collins (2008)
1978-2004
Perkins and Rawski (2008)
1978-2005
Brandt and Zhu (2010)
1978-2007
Lee and Hong (2010)
1981-2007
Wu (2011) - official data
1978-2008
Wu (2011) - alternate data
1978-2009
Zhu (2012)
1978-2007

Output
measure
GDP/L (NA)
GDP/L (NA)
GDP/L
GDP
GDP/L
GDP
GDP
GDP
GDP/P

Annual growth rate, %
Output per
Output
worker
10.1
6.1
8.6
3.6
9.3
7.3
9.5
7.6
-7.6
9.4
7.7
9.2
8.2
7.2
5.2
-8.1

Contribution to output growth, pctg. pts.
Physical
Total factor
Labor Education productivity
capital
3.1
N/A
-3.0
2.2
N/A
-1.4
3.2
N/A
0.3
3.6
4.2
1.0
0.6
3.8
-3.9
3.7
N/A
3.8
1.0
0.5
4.1
5.2
0.5
0.3
3.1
6.1
0.4
0.3
0.3
0.0
0.6
1.2
6.3

Note: N/A means not applicable. '--' means not available. L = employment and P = population. NA = non-agricultural.
Sources: Bosworth and Collins (2008), Lee and Hong (2010), Perkins and Rawski (2008), Wu (2011), Young (2003), Zhu (2012), authors' estimates.

12

Key issue is credibility and sustainability
of high rates of TFP growth

No other relatively advanced Asian economy
approached PRC’s record of TFP growth
Zhu (2012) argues that waves of economic reforms since
1978 were main factor behind high TFP growth

1st phase: 1978-1988, estimates that agricultural reforms
contributed 2 percentage points to total TFP growth, about half
the total
2nd phase: Liberalization in the non-state non-agricultural
sector, including collectives, which also benefited from price
liberalization
3rd phase: Reform of state-owned enterprises, which led to a
substantial reduction of employment in those firms beginning in
1995 with a concomitant rise in TFP
4th phase: Privatization and trade liberalization, including WTO
accession in 2001, which boosted productivity growth in both the
state and nonstate sectors

Region with highest TFP growth is E. Europe and former
Soviet republics, indicating importance of reforms!
13

What are future potential sources of high
TFP growth in the PRC?


Much of the low-hanging fruit has already been picked
But TFP level of PRC still relatively low
Potential sources of high growth


Capital market reforms: Hsieh and Klenow (2009) estimate a
potential TFP gain of 30 percent for the PRC's manufacturing
sector if distortions are reduced to the U.S. level
Reduction of regional differentials: Brandt, Tombe and Zhu
(2012) estimated potential TFP gain in nonagricultural economy
of at least 20 percent from eliminating cross-provincial dispersion
in returns to labor and eliminating within-province differences in
returns to capital between state and the nonstate sectors
Education: Continued rapid gains in average schooling
Innovation: Government policy increasingly supporting
innovation, but fruits difficult to measure so far
Together, these gains could potentially add 2 percentage points
per year to TFP growth over the coming 20 years

But achieving such reforms would be a major challenge

14

TFP level in PRC still relatively low

Source: Penn World Tables, (Feenstra, Inklaar and Timmer 2013), authors' estimates.

15

5. Demand-side factors

Growth outlook depends on potential for three main
sectors: Exports, fixed capital investment and household
consumption
Exports

Fixed capital investment

Signs of slowdown
PRC share of world trade already large, pointing to constraints
on growth potential
Slowdown of exports would have a negative impact
So key is to find alternative sources of growth

Household consumption

Growth under-performed to date
Potential for GDP share to rise

16

Export and fixed capital investment
shares of GDP appear to have peaked

Note: Figures in real terms.
Source: CEIC Data. Available at: ceicdata.com

17

Real growth of both exports and fixed
capital investment has slowed

Source: CEIC Data. Available at: ceicdata.com

18

PRC share of world trade high compared
with that of comparator economies
World trade share (periods based on real GDP per capita, national
price)
Economy
Japan
Korea
Singapore
Taipei,China
PRC

Reference Year

After 10 years

After 20 years

1958

1968

1978

N/A

5.9%

5.8%

1981

1991

2001

1.2%

2.2%

2.5%

1967

1977

1987

0.6%

0.8%

1.3%

1972

1982

1992

N/A

N/A

2.3%

1994

2004

2014

3.0%

6.7%

14.1%

Note: N/A = not available. PRC = People's Republic of China
Source: UN Comtrade statistics, available at: http://comtrade.un.org/db/

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Factors that could boost
domestic demand growth
• Fixed capital investment
• Urbanization-related investment: Urbanization rate in the PRC around
54%, still lower than those of advanced economies
• Infrastructure investment: Urbanization will require further investment
in public transportation, such as subways, and public utilities like water
supply.
• Industrial upgrading: Overall technological level of the industrial sector
in the PRC still regarded as mid-level. Plenty of room for the industrial
sector to shift toward higher-value-added sectors.
• Environmental improvement: Investment in cleaner production
technologies and purification facilities.

• Household consumption
• Reform of hukou family registration system: Promote migration to
higher-paying jobs, greater access to social services
• Strengthening of provision of social services: Stronger social
security programs can reduce need for precautionary savings
20

6. Conclusions
• The PRC posted a remarkable growth performance in the 36 years
since the economic reform period began in 1978, averaging close to
10% real growth of real GDP and 8% per year of per worker GDP
• At the PRC’s current relative level of economic development, the
experience of comparator Asian economies points to per worker
GDP growth of 4%-6% and TFP growth of 1%-2%
• The most remarkable aspect of the PRC’s growth has been high
rates of TFP growth, 3%-4% per year according most estimates.
• This high growth rate can in part be attributed to waves of economic
reforms that increased economic efficiency
• Possible sources of future TFP growth are capital market reforms,
lowering of intra-regional productivity differentials, education gains and
policy support for innovation
• Achieving such continued high growth will be a major challenge

• Export growth has slowed markedly, and a return to previous high
rates of growth seems unlikely, and this is likely to have a negative
impact on fixed asset investment as well

21

6. Conclusions (2)
• Future potential sources of growth for fixed asset investment
include:



Urbanization
Infrastructure investment
Industrial upgrading
Environmental improvement

• Future potential sources of growth for household consumption
include:
• Reform of the hukou system
• Strengthening of provision of social services

• A business-as-usual scenario suggests a ceiling of about 6%
growth. 7% growth may be possible to achieve, but will require
considerable reform efforts

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Thank you
Asian Development Bank Institute
www.adbi.org

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