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Know the Future from Studying the Past: Estimation of the Potential Growth Rate and of the Tendency for Structural Change in the Chinese Economy for the Next 20 Years

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End of Hyper Growth in China?

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Abstract

This study estimates the potential growth rate of China’s economy for the next 20 years and predicts the tendency for its structural change. Although economists cannot make an exact calculation of the growth rate of an economy in the future, a rough estimation of the growth potential of China can still be done by using the logic of the “convergence hypothesis” and the experience of other economies that have a similar growth model or development stage. The intuition behind this idea is that the potential growth rate of an economy depends on the relative difference between its per capita income and that of developed countries or frontier countries. The lower the per capita income of a country is, the higher its potential growth rate can be.

第九章 鉴往知来:中国经济未来20年的潜在增长率与结构变动趋势的估测

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Notes

  1. 1.

    Subramanian (2011) made this estimation with the equation and multinational data and predicted that China’s average annual growth of per capita GDP from 2010 to 2030 would be 6.9 %, or 5.5 % after being converted on the basis of PPP.

  2. 2.

    Unless specifically stated, all “per capita GDPs” mentioned hereafter refer to the per capita GDP in US dollars in 2005 converted on the basis of PPP; the “per capital GDP growth rates” are calculated on such a basis.

  3. 3.

    According to Penn World Table 7.1, China’s PPP index (purchasing power parity over GDP, in national currency units per US$) started to show a continuously rising tendency from the beginning of the 1980s. For example, it was 0.79 in 1982, 1.30 in 1990, 2.84 in 2000, and 3.37 in 2010. Therefore, when converted according to PPP, the growth rate will decrease. The reason for this might be the calculation of the actual exchange rate needs so as to take the prices of non-tradable goods into account, such as Housing and other non-tradable service. To the economies with relatively faster economic growth, the relative price of the non-tradable goods (in comparison with tradable sectors) would rise even faster.

  4. 4.

    Note that the conversion with constant price involves the selection of the base year. Different base years can result in different proportions of the three industries in the same year. Therefore, we need here to use directly the proportions of the added value at current prices to ensure the consistence of different years.

  5. 5.

    At present, version PWT 8.0 has been published. When using this version, we find that the growth rate of per capita GDP of Japan in 1970 was as high as over 30 % while that of China in 2008 was only 3.3 %. These figures show a large difference from version 7.1 and those before it and from the versions of the WDI database. This is mainly because a very large adjustment has been made to the measuring method of the price index in version 8.0. In order to keep the consistency of statistical criteria as much as possible so as to enable the comparison with the research results before this, we use version 7.1 here.

  6. 6.

    It can be seen from Fig. 9.1 that the per capita GDP of South Korea was very low (less than 12 % of the USA’s) before 1965. Because it was in the early stages of economic takeoff, its growth rate was also very low. It only achieved growth above 5 % in 1955 and 1957. A similar situation also occurred in Taiwan. Before 1965, its per capita GDP was less than 15 % of the USA’s. And the growth rate of its per capita GDP never reached 5 % from 1955 to 1962.

  7. 7.

    Only Singapore exceeded the USA in per capita GDP around 2005.

  8. 8.

    The time in the subscript in the following equation does not represent a time sequence.

  9. 9.

    Because the data in PWT 7.1 only include those up to 2010, we need to make estimations on the situations from 2011 to 2014. We refer to the data provided in World Development Indicators (WDI). When converted according to PPP, the per capita GDP of the USA in 2013 is ICU5,0459.75 while it was ICU48357.67 in 2010. So the figure in 2013 is 1.043 times that in 2010. The per capita GDP of the USA in 2014 can be calculated using the data on per capita GDP in 2010 provided in PWT 7.1 and further assuming that the growth rate of the per capita GDP in the USA in 2014 is 2 %.

  10. 10.

    It is pointed out in the IMF report recently that China’s GDP aggregate measured according to PPP would exceed the USA’s by the end of 2014. Therefore, China’s per capita GDP is about 23 % of the USA’s at the time.

  11. 11.

    These countries include Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, UAE, and Venezuela.

  12. 12.

    As mentioned in Note 3, we make the prediction on the rising tendency of the PPP on the basis of the tendencies in recent years.

  13. 13.

    Converted on the basis of the data in the predictions of the United Nations, China’s average natural population growth rate is 0.6 % from 2010 to 2015, 0.436 % from 2015 to 2020, 0.220 % from 2020 to 2025, 0.060 % from 2025 to 2030, and −0.060 % from 2030 to 2035. For more details, see http://esa.un.org/unpd/wpp/excel-data/population.htm.

  14. 14.

    As to price indexes, we assume for the sake of convenience that the growth rate of the GDP deflator will decrease from 3.5 % to 3 % within 11 years from 2015 to 2025. We also assume that the growth rate of the USA’s GDP deflator stays at 2 %. Also for the sake of convenience, we assume that the growth rate of China’s PPP will decrease from 2.5 to 2 % within 11 years.

  15. 15.

    For specific country classifications, see http://data.worldbank.org/about/country-classifications. China belongs to the high middle-income countries.

  16. 16.

    Sample countries represent two-thirds of the population and 80 % of the output of the globe.

  17. 17.

    These countries include Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, UAE, and Venezuela.

  18. 18.

    The value at the inflection point here is the result calculated with the parameter values with seven digits after the decimal point. Because of limited space, the regression tables only have figures with three digits after the decimal point. The value of the inflection point calculated with the parameters given in the tables might not agree with the values here. For example, the first and second-order parameters used in the regression of the proportion of the employed population of the secondary industry are respectively 0.3029531 and −0.0164221. The corresponding ln (GDP) of the maximum is 9.70057. Per capita GDP comes from the reverse calculation from the value of Napierian logarithms, which is USD16,326. When calculated directly with the figures with three digits after the decimal point, the per capita GDP is USD13,681. The values of the two parameters for the added values are respectively 0.4000069 and −0.0206177. These values are given here for reference.

  19. 19.

    The proportion of the added value of China’s industry did not show an obvious rising tendency from 1978 to 2010 although its per capita GDP rose from USD1085 to USD7746 within this period, calculated according to PPP in 2005. This situation belongs to part of the increase in the reverse U-shaped structure in our results of regression. One possible explanation is that China’s planned economy stressed on the development of heavy industry before 1978 and such special policy orientation resulted in the situation that the proportion of the added value of China’s industry reached its peak ahead of the usual moment.

  20. 20.

    Here we discuss the change of the labor force in agriculture. Labor Productivity in Agriculture = (Added Value of the Primary Industry/Employed Population of the Primary Industry) = (Proportion of the Added Value of the Primary Industry/Proportion of the Employed Population of the Primary Industry)*Per Capita GDP/Proportion of Working-Age Population. In the results of prediction in this section, the proportion of the added value of the primary industry decreases very fast, from 10 % to 2.5–2.8 %. The corresponding decrease in the proportion of the employed population of the primary industry is relatively even, from 36 % to 16.9–17.5 %. However, the growth rate of China’s per capita GDP will be basically above 5 % until 2030 as predicted in the third section and the proportion of the working-age population also decreases continuously in the future. According to the prediction data in the UN’s World Population Prospects: The 2012 Revision, Volume II: Demographic Profiles, the proportion of the population between 15 and 64 years old will decrease from 73.5 % in 2010 to 65.7 % in 2030. As a result, the labor productivity of agriculture in China has always been increasing and such increase is only constantly slowing down.

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  1. Fudan University, Shanghai, China

    Zhang Jun

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Jun, Z. (2016). Know the Future from Studying the Past: Estimation of the Potential Growth Rate and of the Tendency for Structural Change in the Chinese Economy for the Next 20 Years. In: End of Hyper Growth in China?. Palgrave Macmillan, New York. https://doi.org/10.1057/978-1-137-53718-8_9

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  • DOI: https://doi.org/10.1057/978-1-137-53718-8_9

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