Justin Yifu Lin on how China can grow 6% (2021–35) and 4% (2036–50) annually
Justin Yifu Lin on how China can grow 6% (2021–35) and 4% (2036–50) annually
The senior economist advises transitioning SOEs, reforming household registration, enhancing financial services for the real economy, bolstering property rights protection, and expanding opening up.
China could achieve an annual growth rate of about 6 per cent in 2021–35 and 4 per cent in 2036–50 by leveraging the comparative advantage, focusing on internal circulation, and deepening both reform and opening up, according to Justin Yifu Lin.
The following content is excerpted from Lin’s "China’s new development paradigm and future development", a chapter of China’s Transition to a New Phase of Development, edited by Ligang Song and Yixiao Zhou, published by ANU Press in 2022.
The author of this chapter, Justin Yifu LIN, is Dean of Institute of New Structural Economics, Dean of Institute of South-South Cooperation and Development and Professor and Honorary Dean of National School of Development at Peking University. He was the Senior Vice President and Chief Economist of the World Bank, 2008-2012. Prior to this, Mr. Lin served for 15 years as Founding Director and Professor of the China Centre for Economic Research (CCER) at Peking University. He is Councillor of the State Council and a member of the Standing Committee, Chinese People’s Political Consultation Conference.
Prof. Lin shared the chapter with us and authorized us to share a portion of this chapter.
The potential of China’s future development
The further development of China’s economy is necessary for the country to weather this ‘great change unseen in a century’ and develop significant domestic circulation as the core of its economy. The speed of China’s development depends not only on the potential of future economic growth, but also on efforts to tap into this potential.
How should we look at China’s future development potential? During the period of reform and opening-up from 1978 to 2020, the average annual growth rate of China’s economy was 9.2 per cent. Never in human history had any country or region maintained such a high growth rate for such a long time. The issue of China’s future growth receives great attention domestically and internationally. At present, academic and public opinion at home and abroad are generally not optimistic about China’s future development potential. There are two reasons for this.
The first reason cited is that China’s development in the past 42 years has been abnormally rapid and will inevitably return to normal growth levels. According to Larry Summers, a world- renowned economist, former US Treasury Secretary and president of Harvard University, China will fall back to a normal growth rate of 3–3.5 per cent. Meanwhile, according to the tenth edition of the Penn World Table, China’s per capita GDP at the end of 2019 had reached US$14,129 according to the PPP of US dollars in 2017. Some economists have used this figure to make comparisons with Germany and Japan, finding that the average annual growth rate for Germany was only 2.3 per cent in the 16 years after its per capita GDP reached US$14,120, and Japan’s average growth rate was 4.4 per cent in the 16 years after reaching this level. Germany and Japan are famous for their economic development performance. Based on their average growth rates in this period, China’s growth potential in the 16 years from 2019 to 2035 should therefore not be high, which sounds reasonable.
The second cited reason is that China’s population has begun to age. Facing the same problem, other countries have seen a significant slowdown in their economic growth. It is believed that its ageing population will also inevitably slow China’s growth.
The above reasoning seems convincing; however, I disagree with it, due to the many factors that allowed China to achieve an annual growth rate of 9.2 per cent over the past 40 years, the most decisive of which was its ability to make full use of its latecomer advantage in economic development—an advantage that China still, to a large extent, possesses.
For any country or region, economic development and improvement of living standards depend on the continuous improvement of productivity, which requires continuous technological innovation and industrial upgrading. The technologies and industries of developed countries are at the global forefront and their technological innovation and industrial upgrading must naturally rely on their own inventions. Investment in these activities is very large, the risks are very high and the rate of progress is very slow. Historical experience shows that the normal pattern for developed countries over the past hundred or more years is average annual growth of per capita income of 2 per cent, plus a 1–1.5 per cent expansion through population growth, for an overall economic growth rate of 3–3.5 per cent. However, developing countries can use industrial and technological gaps with developed countries to introduce mature technology as the source of their own technological innovation and industrial upgrading. The costs and risks of this method are relatively small. Developing countries taking this route can develop their economies faster than developed countries. After China’s reform and opening- up, it became one of 13 developing economies to make use of this advantage, achieving growth rates of 7 per cent or higher for 25 years or more in the process.
Therefore, China’s future development potential depends not on current income levels, but on the gap between China and developed countries such as the United States.
Again, we take Germany and Japan as examples. Germany’s per capita GDP reached US$14,120 in 1971, which was 72.4 per cent of the per capita GDP in the United States at that time. Undoubtedly, Germany was already one of the most developed countries in the world and had exhausted most of its latecomer advantage. To carry out technological innovation and industrial upgrading, Germany needed to rely on its own inventions and its economic growth rate naturally slowed. In 1975, Japan’s per capita GDP also reached US$14,120, which was 69.7 per cent of that of the United States at the time. Japan had also become one of the most developed countries in the world, with its technology close to the global forefront. Most of its economic growth also relied on its own inventions, naturally leading to a slowdown of its development.
China’s GDP per capita reached US$14,129 in 2019, but this was only 22.6 per cent of that of the United States for the same year. When did the per capita GDP rates of Germany, Japan and South Korea—the three best-performing advanced countries—reach 22.6 per cent of that of the United States? For Germany, it was in 1946, Japan in 1956 and South Korea in 1985. From 1946 to 1962, Germany’s average economic growth rate reached 9.4 per cent; from 1956 to 1972, Japan’s average economic growth rate was 9.2 per cent; and from 1985 to 2001, the average annual growth rate in South Korea was as high as 9 per cent despite the fact it suffered from the Asian Financial Crisis and the GFC and suffered negative growth in 1998.
China should reach about 9 per cent annual growth over the 16 years from 2019 given the experiences of Germany, Japan and South Korea when relying on the same latecomer advantage.
It is true that countries with ageing populations have slower economic growth, however, these are generally developed countries and their technology has already developed to the global forefront and technological progress has come to depend on their own inventions. The economic growth rate for developed countries is only between 3 and 3.5 per cent, including 2 per cent of per capita income growth and 1–1.5 per cent of population growth, as mentioned above. When an ageing population stops growing, the economic growth rate will drop significantly to about 2 per cent.
Although China’s population is also beginning to age, its per capita GDP is only 22.6 per cent of that of the United States. Technological innovation and industrial upgrading can make use of the latecomer advantage and reallocate labour from low value-added to high value-added industries to improve labour productivity. The room for such adjustments is still very large. Therefore, if China can exploit its latecomer advantage, even if the population and labour force do not grow, it can grow faster than ageing developed countries.
In addition, China’s retirement age is very low and can be gradually raised, which is conducive to increasing labour supply. Moreover, the most important thing for a labour force is not only quantity, but also quality. As such, China also has the potential to improve its education system to increase the quality of its labour force.
Let us compare the population growth of Germany, Japan and South Korea in the 16 years after their per capita GDP reached 22.6 per cent of US levels and examine the contribution of population factors to their economic growth. The average annual population growth of Germany from 1946 to 1962 was 0.8 per cent, that for Japan from 1956 to 1972 was 1 per cent and for South Korea from 1985 to 2001 it was 0.9 per cent. China’s natural rate of population growth was 0.3 per cent in 2019, and it could drop to zero in the future. Therefore, even if we do not consider the possibility of raising the retirement age and improving the quality of labour through education, if China uses its latecomer advantage to develop its economy, when compared with Japan, Germany and South Korea, the impact of population growth on economic growth will be, at most, 1 percentage point. Therefore, if China can make good use of its latecomer advantage, it should have an annual growth rate of 8 per cent to 2035.
Moreover, when compared with Germany, Japan and South Korea in those years, China has an additional advantage for future development. Today, a large part of the new economy comprises internet, mobile communications, new energy and so on, and the research and development (R&D) cycle for these products and technologies is very short, with human capital the main input for their innovation. Given that developed countries began developing their economies at the start of the Industrial Revolution—with capital accumulated over hundreds of years—their per capita financial and material capital is much greater than China’s, giving them comparative advantages in traditional capital-intensive industries.
For the new economy with short R&D cycles and human capital as the main input, the importance of financial capital is relatively small. In this domain, China and developed countries are on the same starting line, but China has advantages in human capital compared with many developed countries.
Human capital consists of innate intelligence and intelligence acquired through education. Currently, the gap between China and developed countries in education from kindergarten to university and postgraduate studies is not large, while innate intelligence is normally distributed in the same proportion in the population of any country. For the R&D of new technology, what matters is not the proportion of talented individuals in a given country, but the absolute number. China has a population of 1.4 billion people and therefore a potentially large number of such intelligent individuals and, as such, it has an advantage in this new economy, the main input of which is human capital.
At the same time, China possesses the advantage of a large domestic market, which newly developed products and technologies can immediately enter, ensuring their production rapidly reaches economies of scale. If new products and technologies need hardware, China has the most complete set of industries in the world. Therefore, in the new economy, China and developed countries can at least keep abreast of each other—an advantage that Germany, Japan, and South Korea did not enjoy when they were at the same development level as China is today.
China’s advantage in the new economy is clearly reflected in the number of ‘unicorns’ (private startups with a value of more than US$1 billion) that are less than 10 years old and have not yet been listed on the market. According to Hurun’s unicorn list, in 2019, there were 484 unicorns globally—206 in China and 203 in the United States. In 2020, there were 586 unicorns—233 in the United States and 227 in China. China is on par with the United States in the number of such companies.
Based on its latecomer advantage and the realities of the new economy examined above, China has a potential average annual growth rate of at least 8 percent until 2035. However, growth potential represents possible future growth based on supply-side technological innovation. In reality, one must also consider the demand side and other factors. For example, how fast a car can drive depends not only on the highest speed in its design, but also on the quality of the road, the weather, and the abilities of the driver. To achieve high-quality development in the future, China must work to solve the challenges of environmental deterioration, peak carbon, carbon neutrality, urban–rural and regional gaps and so on, as well as the problem of technological ‘strangling’ by US attempts to suppress China’s development. China must pursue its own technological inventions, rather than relying on the latecomer advantages of technological importation, adaptation, and re-innovation.
Considering the above problems, it is entirely possible for China to achieve an average annual growth rate of about 6 percent in the period 2021–35.
An explicit goal mentioned by President Xi in his proposals for the Fourteenth Five-Year Plan and the 2035 vision was for China’s GDP and the income of urban and rural residents to be doubled by 2035 from their 2020 baseline. To achieve this, an economic growth rate of 4.7 percent per year would be required between 2021 and 2035. If China can achieve a growth rate of about 6 percent, GDP per capita will cross the threshold of US$12,535 by 2025 and China will become a high-income country. This will be a historic moment for both China and the world because, to date, only 18 percent of the world’s population resides in high-income countries—a proportion that would double if China joined their ranks. With that growth rate, China’s per capita GDP should be at US$22,000 or higher by 2035, based on the PPP of 2019 dollars.
By the same token, China has a potential annual growth rate of 6 percent from 2036 to 2050, according to the latecomer advantage and the beneficial innovation paradigm of the new economy. To achieve high-quality growth, China must also solve its social and economic problems. It cannot develop completely according to its technological potential, but it should be possible to achieve an annual growth rate of about 4 per cent. Based on this calculation, China’s per capita GDP will reach half that of the United States by 2049, when the nation will celebrate the centennial of the founding of the People’s Republic of China. This will be an important indicator of the great rejuvenation of the Chinese nation. Moreover, as mentioned in the first part of this chapter, the world order will attain a stable new structure on the reaching of this milestone.
Deepening reform and opening-up
How does China turn an annual growth rate of about 6 percent in 2021–35 and 4 percent in 2036–50 into reality? The most important thing is for China to recognise its potential, do its own thing well, and deepen both reform and opening-up.
According to the new structural economics I advocate, a vital principle for economic development is for nations to make good use of their comparative advantages. To bring comparative advantage into full play, the economy needs a vibrant market to mobilise entrepreneurs’ enthusiasm and allocate resources well. The economy also needs a facilitating state to overcome market failures that will inevitably arise from the process of technological innovation and industrial upgrading, to make markets more efficient.
In the process of technological innovation and industrial upgrading, it is necessary to provide incentives to first-movers and help them overcome infrastructure bottlenecks. At the same time, China is a country in transition, carrying out its economic reforms in a gradual, dual-track approach. In a manner apparently inconsistent with the proper use of China’s comparative advantages, the government has continued to provide protection and subsidies to state-owned enterprises in capital-intensive industries established before the economic reforms. State-owned enterprises (SOEs) that are nonviable but nonetheless necessary for the operation of the national economy, ensuring people’s livelihoods or for national security have been provided with continuous protection and subsidies during the transitional period. At the same time, the government implemented new approaches for the new enterprises in labour-intensive industries that are consistent with China’s comparative advantages, opening market access to entrepreneurs, attracting foreign investment and setting up industrial parks to facilitate the development of these industries. Relying on these pragmatic approaches, China’s economy has achieved stable and rapid development in the past 40 years of transition. But this approach has also left in its wake various interventions and distortions in the market.
After more than 40 years of rapid development and capital accumulation, most of the industries that ignored or shunned their comparative advantage in the early stages of reform and opening-up have since moved in line with that advantage. Enterprises previously lacking viability have become viable. The nature of protection and subsidies in the dual-track system has changed from providing charcoal in the snow (that is, assistance) to providing icing on the cake. Therefore, the comprehensive deepening reform proposed by the Third Plenary Session of the Eighteenth Central Committee in 2013 should be implemented. The distortions left by dual-track reform should be eliminated to allow the market to play a decisive role in resource allocation. The role of the government is to help enterprises overcome market failure.
The product market in China has been essentially liberalised, but many structural obstacles in the factor markets remain. For the financial market, China should improve its services to the real economy. In China’s real economy, farmers and micro, small and medium-sized enterprises account for 50 per cent of taxes paid, 60 per cent of GDP and more than 80 per cent of employment. China’s financial structure comprises mainly big banks, stockmarkets, corporate bonds and venture capital— arrangements that mainly serve large enterprises. To realise the financial system’s function of servicing the real economy, it is necessary for reforms to develop regional small and medium- sized financial institutions that can provide better financial services for farmers and micro, small and medium-sized enterprises, in addition to improving existing financial arrangements.
In terms of improvements in the labour market, China should reform the household registration system and solve the problem of high housing prices by returning to a policy in which houses are used for living in, not speculating on, to facilitate flows of talented workers.
China should implement a policy allowing rural collective land to enter the market to increase the supply of land for industrial, commercial and housing purposes.
In terms of property rights reform, it is necessary to implement the stated policy of consolidation and development of the state-owned economy and encouragement of, support and guidance for the development of the private economy, so that private enterprises will not be subject to access or operation obstacles due to different property rights arrangements in the market.
China has adopted a dual-track system to its opening-up. In the early stage of transition, foreign direct investment was allowed for industries that were deemed consistent with China’s comparative advantages, while there were many restrictions on foreign investment for industries that were not. However, given the country’s rapid development and accumulation of capital, many industries for which it once possessed no comparative advantage have since gained such advantages. Apart from a few industries related to national security and the operation of the national economy and people’s livelihoods, China should expand the policy of opening-up to make full use of international resources. China should expand the scope of pilot free-trade zones, reduce tariffs and cut the negative list of foreign investment. In addition, successful policies in the pilot free-trade zones should be implemented throughout the country.
Internationally, China should more actively promote reform of the World Trade Organization (WTO) and participate in regional economic cooperation agreements; good examples are the recently signed Regional Comprehensive Economic Partnership Agreement (RCEP) and the China–European Union Investment Agreement. In addition, China has expressed its willingness to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and should strive to achieve this goal as soon as possible.
Another advantage of China’s deepening reform and further opening-up is that other countries will be able to make better use of China’s market and resources. As the largest and fastest-growing market in the world, China can provide other countries with opportunities for development, meaning such countries will not readily join the US blockade of China. If the United States wants to isolate China, it will be the United States that finds itself isolated. Therefore, further opening-up will help resolve the adverse international situation that China is facing.
Again, the above is excerpted from a chapter of China’s Transition to a New Phase of Development, edited by Ligang Song and Yixiao Zhou, published by ANU Press in 2022.
Pekingnology has recently published, in four parts, Justin Yifu Lin’s August 26 speech at the State Organs Work Committee to cadres in the central-level Communist Party of China (CPC) and Chinese Government.
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