'China’s Growth Prospects'

Robert Barro on China:

China’s growth prospects: ...it is not possible for the per capita growth rate to exceed 5% per year for very much longer.

China can be viewed as a convergence success story, in the sense that the strong economic growth over a sustained period led to a level of real per capita GDP that can be characterised as middle income. To put the Chinese accomplishment into international perspective, I calculated all the convergence success stories in the world based on reasonable criteria.  Specifically, I looked first at countries that had at least doubled real per capita GDP since 1990.  Within this group, I defined a middle-income success as having achieved a level of real per capita GDP in 2014 of at least $10,000.  An upper-income success requires a level of at least $20,000 (the numbers are in 2011 US dollars and factor in international adjustments for changes in purchasing power).

With these criteria, the world’s middle-income convergence success stories comprise China, Costa Rica, Indonesia, Peru, Thailand, and Uruguay (Uruguay is a surprise, apparently boosted by dramatic migration of human capital out of Argentina.)  The upper-income successes consist of Chile, Hong Kong, Ireland, Malaysia, Poland, Singapore, South Korea, and Taiwan.

A view that has gained recent popularity is the ‘middle-income trap’. According to this idea, the successful transition from low- to middle-income status is typically followed by barriers that impede a further transition to upper income. The data suggest that this trap is a myth.  Moving from low- to middle-income status, as achieved recently by China, is difficult. Conditional on achieving middle-income status, the further transition to upper-income status is also difficult.  However, there is no evidence that this second transition is harder than the first one.

As mentioned before, China’s growth rate of real per capita GDP has been remarkably high since around 1990, well above the rates predicted from international experience.  Although I forecast that China’s per capita growth rate will decline soon from 7-8% per year to 3-4%, this lower growth rate is sufficient when sustained over two to three decades to transition from low- to middle-income status (which China has already accomplished) and then from middle- to high-income status (which China will probably achieve).  Thus, although the likely future growth rates will be well below recent experience, they would actually be a great accomplishment. 

Perhaps the biggest challenge is that the prospective per capita growth rates in China are well below the values of 5-6% per year implied by official forecasts.  Thus, the future may bring political tensions in reconciling economic dreams with economic realities.  Reducing the unrealistically optimistic growth expectations held inside and outside China’s government would reduce the risk of this tension and lower the temptation to achieve targets by manipulating the national-accounts data.