Why Investment‑Led Growth Lowers Chinese Living Standards

Matthew Higgins

No 20241114, Liberty Street Economics from Federal Reserve Bank of New York

Abstract: Rapid GDP growth, due in part to high rates of investment and capital accumulation, has raised China out of poverty and into middle-income status. But progress in raising living standards has lagged, as a side-effect of policies favoring investment over consumption. At present, consumption per capita stands some 40 percent below what might be expected given China’s income level. We quantify China’s consumption prospects via the lens of the neoclassical growth model. We find that shifting the country’s production mix toward consumption would raise both current and future living standards, with the latter result owing to diminishing returns to capital accumulation. Chinese policy, however, appears to be moving in the opposite direction, to reemphasize investment-led growth.

Keywords: China; consumption; investment (search for similar items in EconPapers)
JEL-codes: E13 E20 E27 I31 O40 (search for similar items in EconPapers)
Date: 2024-11-14
New Economics Papers: this item is included in nep-cna and nep-gro
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