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China's Growth Slowdown and Prospects for Becoming a High-Income Developed Economy

Ding Lu ()

Asian Economic Papers, 2017, vol. 16, issue 1, 89-113

Abstract: After decades of hyper growth, China's economy has slowed significantly in recent years, causing widespread anxiety both within and outside the country. Although economists have not reached a consensus about China's growth potential, it is undeniable that the country has switched gears toward a “new normal” of moderate growth amidst ongoing structural change. To assess China's growth performance and prospects, this study modifies Masahiko Aoki's analytical framework of a unified growth theory into a multi-sector model and applies it to identify the sources of China's per capita income growth in recent decades. The analysis confirms Aoki's early observation that China entered the so-called “Kuznets phase” of development in the 1980s, which then became overlapped by the H-phase, in which human capital–based growth is characterized by high labor productivity growth. This study provides evidence that China's labor productivity growth has been predominantly driven by fixed capital formation. It also reveals that the Kuznets effect (with its labor reallocation effect) has now passed its peak and is fading away. The most alarming finding is that net total factor productivity (TFP) growth in the latest period has slowed to a near halt. This trend is particularly worrisome given that China has exhausted its past demographic dividend and its industrial structure has evolved to the end of industrialization stage. Meanwhile, demographic projections clearly indicate that China has entered what Aoki defined as the development phase of “post demographic transition.” Whether China can reverse the downward trend of TFP growth will determine how soon it can achieve the goal of becoming a high-income developed economy.

JEL-codes: F33 F36 F50 F65 G00 (search for similar items in EconPapers)
Date: 2017
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