Lin Yifu： China’s Economic Development Potential, New Challenges and Countermeasures
There are many factors for China to achieve rapid growth in the past 40 years, but the most important determinant is to make full use of the advantages of latecomers contained in the industrial and technological gap with developed countries in the process of economic development. If China can take advantage of its latecomers, it can grow faster than developed countries even if its population does not increase.
Before 2035, China should still have an average annual growth potential of 8%. Of course, if it has this growth potential, it is not necessary to develop at full speed regardless of others. To achieve high-quality growth, China must solve the environmental problems, the regional gap between urban and rural areas, and the "stuck neck" problem caused by the friction between China and the United States, and must rely on its own innovation to overcome it. On the whole, it should be possible for China to achieve an average annual growth of 5%-6% in the next 15 years (2021 -2035).
This year is a very important node, which is not only the centenary of the founding of the Communist Party of China (CPC), but also the beginning of a new journey of building a socialist modern country in an all-round way. The most important task of this year’s two sessions is to discuss and adopt the "14 th Five-Year Plan" and the outline of long-term goals in 2035. At the Fifth Plenary Session of the 19th Central Committee held last year, General Secretary of the Supreme Leader made suggestions to the 14th Five-Year Plan and the outline of the long-term goal in 2035, saying that we must have two overall situations in mind when considering the issue: one is the strategic overall situation of the great rejuvenation of the Chinese nation, and the other is the great change that has never happened in the world in a century. I want to talk about China’s future economic challenges and countermeasures from this perspective.
People from all walks of life should be concerned that there are indeed many challenges in China’s future development: aging population, peak carbon dioxide emissions in 2030, carbon neutrality in 2060, the transformation of major social contradictions into meeting people’s growing expectations for a better life, and so on. At the same time, it is also facing the new scientific and technological revolution and the friction between China and the United States.
Faced with so many challenges, it has been mentioned in the "14th Five-Year Plan", the outline of long-term goals in 2035 and various documents issued by the Central Committee that development is the basis and key to solving all problems in China. Therefore, before I elaborate on the challenges, I want to talk about the development potential of China from 2021 to 2035, and what the development trend is. It is very important to understand this.
Correctly understand the future development potential of China.
How should we look at China’s future development potential? From the reform and opening up in 1978 to 2020, China’s economy grew at an average annual rate of 9.2%. No country or region in human history has ever sustained such a high growth rate for such a long time. We all witnessed and participated in this miracle in human economic history.
For the future, all walks of life are very concerned, but at present, academic circles and public opinion circles at home and abroad are generally not optimistic about the potential of China’s future development. To sum up, there are roughly two reasons:
One reason is that China has developed in the past 42 years. Too fast is abnormal, and it will eventually return to normal growth. According to Summers, an internationally renowned economist, former US Treasury Secretary and president of Harvard University, China will fall back to the normal growth rate of 3%-3.5%. At the same time, according to the research data released by the 10th edition of the WorldTable of the University of Pennsylvania, the per capita GDP of China at the end of 2019 has reached $14,129 at the purchasing power parity of 2017 dollars. Some scholars use this figure to compare Germany and Japan, and find that Germany’s average annual growth rate is only 2.3% in the 16 years after reaching a per capita GDP of about $14,120. After Japan reached this level, the average growth rate in 16 years was only 4.4%. The economic development of Germany and Japan is world-famous. Since their average growth rate in the 16 years after reaching this level is only 2.3% and 4.4%, the growth potential of China in the 16 years from 2019 to 2035 will not be very high. This reasoning sounds reasonable.
Another reason is that China has begun to have an aging population. After the aging population in other countries, the economic growth has slowed down, and China will inevitably slow down its economic growth.
The above research seems very convincing, but I personally disagree. Because there are many factors for China to achieve an annual growth rate of 9.2% in the past 40 years, but the most important decisive factor is to make full use of the advantages of latecomers contained in the industrial and technological gap with developed countries in the process of economic development.
For a country or region, to develop its economy and improve its living standard, it depends on the continuous improvement of labor productivity, which requires continuous technological innovation and industrial upgrading. The technology and industry of developed countries are at the forefront of the world, and their technological innovation and industrial upgrading must be invented by themselves, with great investment, high risk and limited progress. Historical experience shows that the normal growth of developed countries in the past 100 years is 3%-3.5% per year. However, developing countries can take advantage of the industrial and technological gap with developed countries and introduce mature technologies as the source of their own technological innovation and industrial upgrading. The cost and risk of this method are relatively small. Developing countries that know how to use this method can develop their economy faster than developed countries. After the reform and opening up, China has made use of this advantage to achieve an annual development of 7.0% or even higher, lasting for 25 years or longer, and become one of the 13 developing economies after the Second World War.
Therefore, from this perspective, the future development potential of China depends not on the current income level, but on the gap between China and the developed countries represented by the United States.
Take Germany and Japan as examples. Germany’s per capita GDP reached about $14,120 in 1971. At that time, it was 72.4% of the per capita GDP of the United States. Undoubtedly, it has become one of the most developed countries in the world, and has exhausted the advantages of latecomers. Technological innovation and industrial upgrading must be invented by itself, and the economic growth rate naturally slows down. Japan’s per capita GDP reached about US$ 14,120 in 1975. At that time, the per capita GDP reached 69.7% of the average level of the United States, and it became one of the most developed countries in the world. Technology has reached the forefront of the world, and economic growth must be explored by itself, and the speed of development will certainly slow down.
China’s GDP per capita reached $14,129 in 2019, but it was only 22.6% of the same period in the United States. In contrast, when did Germany, Japan, South Korea and other countries with better development reach 22.6% of the US GDP per capita? Germany was in 1946, Japan in 1956 and South Korea in 1985. From 1946 to 1962, the average economic growth rate in Germany reached 9.4% in 16 years; From 1956 to 1972, the average economic growth rate in Japan reached 9.2% in 16 years; From 1985 to 2001, South Korea experienced a one-year negative growth during the Asian financial crisis, and the average growth in 16 years was still as high as 9.0%. Judging from these data, China should also have a growth potential of about 9% in the next 16 years (from 2019), because German, Japanese, Korean and other countries have already achieved it.
In this regard, many people have begun to emphasize the second reason, that is, the aging population affects economic growth. Indeed, countries facing an aging population are experiencing slower economic growth. But don’t forget that most countries with aging population are developed countries. When aging comes, their technology has developed to the forefront of the world. Technological progress depends on their own exploration, and the economic growth rate will be even slower if the speed of labor supply is reduced.
China is experiencing an aging population, but our per capita GDP is only 22.6% of that of the United States. Both technological innovation and industrial upgrading can take advantage of latecomers, and the labor force can be allocated from low value-added industries to high value-added industries to improve labor productivity. This space is still very large. Therefore, if China can take advantage of its latecomers, it can grow faster than developed countries even if its population does not increase. In addition, China is gradually extending the retirement age, which is conducive to increasing the labor supply. Moreover, the most important thing for the labor force is not only quantity, but also quality, and China can also improve the per capita efficiency.
Let’s compare the population growth of Germany, Japan and South Korea in the 16 years after the per capita GDP reached about $14,100, and see the contribution of population factors in economic growth. The average annual population growth in Germany from 1946 to 1962 was 0.8%; The average annual population growth in Japan from 1956 to 1972 was 1.0%; The average annual population growth in Korea from 1985 to 2001 was 0.9%. The natural population growth rate of China in 2019 is 0.3%, and it may drop to 0% in the future. Therefore, even if we don’t consider the possibility of allocating the labor force from low value-added industries to high value-added industries, and the possibility of extending retirement and improving the quality of education, the gap between China and Japanese, German and Korean population growth factors is at most 1 percentage point.
Therefore, I think that before 2035, China should still have an average annual growth potential of 8%. Compared with the actual growth of 9% in Germany, Japan and South Korea, I consider the population growth factor and reduce it by one percentage point.
Of course, having this growth potential doesn’t necessarily mean developing at full speed regardless of other factors, because what China wants to achieve is high-quality growth, and it must solve environmental problems, including peak carbon dioxide emissions, carbon neutrality, urban-rural gap, regional gap and other problems, as well as the "stuck neck" problem caused by the friction between China and the United States, which must be overcome by its own innovation. Considering these problems that must be dealt with and the growth potential of 8%, I judge that it should be possible for China to achieve an average annual growth of 5%-6% in the next 15 years (2021 -2035).
General Secretary of the Supreme Leader, when giving advice on the "14th Five-Year Plan" and the long-term goal in 2035, mentioned that by 2035, China will strive to double its GDP or double its per capita income on the basis of 2020. No matter which goal is achieved, it is necessary to achieve an average annual economic growth rate of 4.7% from 2021 to 2035.
If China can achieve a growth rate of 5%-6%, by 2025, the per capita GDP will cross the threshold of $12,535 and become a high-income country, which will also be a historic moment. Because until now, the population living in high-income countries in the world only accounts for 18% of the total population. If China becomes a high-income country, this number will double. By 2035, China’s per capita GDP should reach more than $23,000 (based on the purchasing power of dollars in 2019), and it will become a modern socialist country.
Similarly, from the perspective of the industrial and technological level gap represented by the income level gap, we can find that China still has an average annual growth potential of 6% from 2036 to 2049, and considering that there are still many problems to be dealt with, it is entirely possible to achieve an average annual growth rate of around 4%. Based on this calculation, China’s per capita GDP will reach half that of the United States by 2049, which is an important indicator of the great rejuvenation of the Chinese nation.
Development is the key to cope with the great international changes.
In the face of the world’s unprecedented great change in a hundred years, we must first think about why this change has occurred. Economy is the foundation. Let’s look at the development and changes of economy.
In 1900, Eight-Nation Alliance attacked Beijing, including Britain, the United States, France, Germany, Italy, Russia, Japan and Austria-Hungary. The GDP of these eight countries accounted for 50.4% of the world in terms of purchasing power parity. After World War II, the Austro-Hungarian Empire collapsed and was divided into two countries. Later, Canada’s economy grew rapidly. By 2000, the GDP of the Group of Eight (hereinafter referred to as G8, the United States, Britain, France, Germany, Italy, Russia, Japan and Canada) accounted for 47% of the world in terms of purchasing power parity. In other words, the international political economy of the whole 20th century was dominated by these eight developed countries.
By 2018, the General Secretary of the Supreme Leader put forward "a great change in a hundred years" at the Central Foreign Affairs Working Conference. The background is that the GDP of the Group of Eight has dropped to 34.7% in the world, from half of the country to three-thirds of the world, and it is difficult to continue to be the dominant force in the world. Therefore, we can see that as early as 2008, when the international financial economy broke out, the "G-8" that dominated world affairs became the "G-20".
The two countries most affected by this change are the United States and China. In 2000, the United States accounted for 21.9% of the world’s GDP at purchasing power parity. In 2014, China surpassed the United States and became the world’s largest economy. The United States now accounts for about 16% of the world’s GDP, and China is even higher than that. These facts show that the proportion of the United States is decreasing and that of China is increasing. In this regard, American politicians, intellectuals and policy research circles are all in the eye. Therefore, when Obama was in power, he put forward the strategy of "returning to the Asia-Pacific". After Trump took office, he launched a trade war and a science and technology war. After Biden took office, I guess it was also "changing the soup without changing the medicine." This exchange of the position of the world’s number one and number two has certainly caused tension between the two countries and brought a lot of uncertainty to the whole world, so it is a "great change that has never happened in a hundred years."
If China can tap its development potential and achieve the development speed as analyzed above, by 2049, China’s per capita GDP will reach half that of the United States, while China’s population is four times that of the United States, so the total economic scale will be twice that of the United States.
Among them, Beijing, Tianjin, Shanghai and five eastern coastal provinces (Shandong, Jiangsu, Zhejiang, Fujian and Guangdong) have a population of a little over 400 million. I believe that the per capita GDP and economic scale of these areas can reach the same level as that of the United States by 2049. Per capita GDP represents the average labor rate and the average level of science and technology industry. By that time, the areas where the United States can get stuck in China’s neck are basically gone. China also has a population of 1 billion in the central and western regions, with per capita GDP only one-third of that of the United States, and the economic scale is similar to that of the United States. These regions are still catching up and the economic growth rate can be faster. Therefore, the economic growth of China as a whole can be faster.
In this situation, I think the relationship between China and the United States may tend to ease from tension. Because first, by that time, there will be nothing in the United States that can hold China’s neck; Second, at that time, China’s economic aggregate was twice that of the United States, and the United States could not change this fact if it was no longer happy; Third, China’s economy is growing rapidly, and it is the largest market in the world. If the American economy is to develop well, it must be needed for its own employment and prosperity.
This situation has historical experience. In Eight-Nation Alliance in 1900, Japan was one of them. In 2000, Japan was the only country in Asia to join the Group of Eight, and Japan was the leader of Asia in the 20th century. But in 2010, China’s economy surpassed Japan’s, its influence was rising, and the Japanese Rightists felt a great sense of loss, so problems such as Diaoyu Island were created, and Sino-Japanese relations were tense. Recently, Sino-Japanese relations have eased. The reason is that China’s economic scale is 2.8 times that of Japan. No matter how unhappy it is, it can’t change this fact. Japan’s economic development depends on China’s market, and the relationship between China and Japan tends to win-win cooperation.
It is mentioned in the "Tenth Five-Year Plan" and the outline of the long-term goal in 2035 that development is the basis and key to solve all problems in China; At the same time, it is also mentioned that China’s development is still in an important period of strategic opportunities, and there are still many advantages and conditions for its continued development. On the premise of ensuring a significant improvement in quality and efficiency, we should give full play to our growth potential. If we can follow the suggestions of the Central Committee, the 14th Five-Year Plan and the policy orientation of the long-term goal outline for 2035, I believe that we can overcome the middle-income trap, build China into a powerful socialist modernization country by 2049, realize the goal of the great rejuvenation of the Chinese nation, and at the same time, manage the great changes that have never happened in a century and rebuild a new, stable and shared prosperity pattern for the world.
(The author is Honorary Dean of the National Development Research Institute of Peking University and Dean of the New jiegou Research Institute)
Reporting/feedback