Why China Can Grow According to Plan

BEIJING – China’s recently finalized 13th five-year plan maps out its economic strategy and ambition for the 2016-2020 period. Among its objectives are a doubling of GDP and average rural and urban household incomes relative to their 2010 levels.

These targets would require China’s economy to grow at an average annual rate of at least 6.5% during the next five years. While this pace would be significantly slower than the 9.7% growth the country has averaged since 1979, it is undeniably fast by international standards. And, given that China’s growth has decelerated every quarter since the beginning of 2010, some have questioned whether it is achievable. I believe that it is.

Economic growth results from increases in labor productivity caused by technological advance and industrial upgrading. High-income countries, already on the cutting edge of productivity, must earn their increases through technological and organizational breakthroughs; as a result, their typical growth rate is about 3%. Developing countries, however, could potentially accelerate productivity growth, and thus GDP growth, by borrowing technology from advanced countries – that is, tapping the latecomers’ advantage, as China has done.

The question for China, after 36 years of catching up, is how much longer it can continue to benefit from this process. Some scholars believe it has reached its limits. Using historical data compiled by the economic historian Angus Maddison, they show how other East Asian countries experienced a deceleration of economic growth after their per capita GDP reached about $11,000 in purchasing-power-parity terms relative to constant 1990 US dollar prices, or $17,000 in constant 2005 US dollar prices.