In a recent article from the Dallas Federal Reserve, titled "Korea, Japan growth experiences suggest China’s economy to slow in next 20 years," economists Sewon Hur and Braden Strackman provide a comprehensive analysis of China's economic future. Drawing parallels with the growth experiences of Korea and Japan, the article offers a nuanced perspective on what lies ahead for China's economy. Here, we delve into the key takeaways from this insightful piece.
The End of Rapid Growth?
China's economy has been a global powerhouse since the 1980s, particularly after its entry into the World Trade Organization in 2001. However, this era of rapid growth is likely nearing its end. The article suggests that as China's economy matures, factors like demographic changes and its closeness to economic and technological frontiers will slow its growth pace.
Facing New Challenges
China confronts several significant challenges that could hinder its economic progress. A notable concern is the steady decline in total factor productivity (TFP) growth since 2000. Additionally, demographic shifts, including a shrinking working-age population due to the one-child policy and rising youth unemployment, pose serious threats. The cooling down of the real estate sector, once a major growth driver, adds to these challenges.
Projected GDP Growth
The projections for China's GDP growth indicate a significant slowdown. While the GDP is expected to grow by 5.0% in 2023, it is predicted to slow to an average of 3.8% annually over the next decade. This marks a substantial decrease from the 7.8% average annual growth rate witnessed over the past two decades.
Analyzing Growth Prospects
The article employs a modified growth accounting framework to dissect China's growth prospects. This approach considers various factors, including TFP, the capital-to-output ratio, hours worked per working-age population, and the working-age population ratio.
Learning from Korea and Japan
The economic trajectories of Korea and Japan, both of which successfully transitioned from middle to high income, offer valuable lessons for China. These countries experienced similar challenges, such as a decline in the working-age population and slower productivity growth, as they progressed.
China's Future Outlook
The forecast for China includes a decline in TFP growth, capital-to-output factor growth, and hours worked per working-age person over the next two decades. The working-age population ratio is also expected to decrease. Consequently, China's GDP per capita growth is projected to be around 5.7% over the next decade and 4.2% for 2032-41.
The Path to High-Income Status
For China to evolve from a middle-income to a high-income country, significant economic reforms are essential. The country needs to shift from its reliance on industrial exports to focusing on innovation and service-based sectors. However, challenges such as restrictions on foreign investment and a dependence on manufacturing exports remain.
Conclusion
The article by Hur and Strackman provides a clear-eyed assessment of China's economic future, drawing important lessons from the experiences of Korea and Japan. While China has made some progress towards transitioning to a high-income economy, the path ahead requires substantial reforms and strategic shifts. As the world watches, the next two decades will be crucial in determining whether China can successfully navigate these challenges and continue its remarkable economic journey.
Source: https://www.dallasfed.org/research/economics/2023/1114
This blog post is based on the article "Korea, Japan growth experiences suggest China’s economy to slow in next 20 years" by Sewon Hur and Braden Strackman from the Dallas Federal Reserve. The views expressed are those of the authors and should not be attributed to the Federal Reserve Bank of Dallas or the Federal Reserve System.
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