Making Sense of China’s Growth Model

SHANGHAI – Although China’s economy has expanded at a staggering pace over the last three decades, its growth model is now widely agreed to be exhausted. Even China’s top leadership acknowledges the need for change – a belief that culminated in the far-reaching reform agenda presented two months ago at the Third Plenum of the Chinese Communist Party’s 18th Central Committee.

While not everyone agrees on exactly what the new growth model should look like, proposals do not differ drastically, given the prevailing consensus that the current model rests on an unsustainable foundation. On the demand side, many economists endorse a shift from investment-led to consumption-driven growth. Even more popular is the supply-side recommendation of a shift from extensive to intensive growth – that is, from a model based on capital accumulation to one propelled by gains in efficiency, measured by total factor productivity (TFP).