How Fast Will China Grow?

BEIJING – In the 35 years since China’s transition to a market economy began, the country has grown at an average rate of 9.8% – an explosive and unprecedented rise. But there are signs that the Chinese miracle is coming to an end – or at least that the country’s economic growth is slowing. China’s growth rate has been falling since the first quarter of 2010. In 2014, it was a relatively anemic 7.4%.

China’s economic growth is likely to continue to face stiff headwinds this year as well, at least when compared to previous decades. As policymakers draw up the country’s 13th five-year plan, they will grapple with a fundamental question: How fast can China expect to grow?

In setting a country’s GDP target, the first thing to understand is the economy’s potential growth rate: the maximum pace of expansion that can be attained, assuming favorable conditions, internally and externally, without endangering the stability and sustainability of future growth. As Adam Smith discussed in An Inquiry into the Nature and Causes of the Wealth of Nations, economic growth depends on improvements in labor productivity, which today result from either technological innovation or industrial upgrading (the reallocation of productive capacity into new sectors with higher added value).

But developed countries at the innovation frontier are at a disadvantage. To benefit from new technology, they must create it. Developing countries, by contrast, possess a “latecomer advantage,” because they can achieve technological advances through imitation, importation, integration, and licensing. As a result, their costs and risks are lower. Over the last 150 years, developed economies have grown at an average rate of 3% per year, whereas some developing countries have achieved annual growth rates of 7% or higher for periods of 20 years or longer.