“The Chinese economy has been growing at a rapid pace for over thirty years,” begins a paper authored by Jane Haltmaier, a senior adviser to the Federal Reserve, that was published online this week. “From 1978 to 2011 real GDP growth averaged about 10 percent per year, resulting in a more than 20-fold increase in the level of output.”
The paper asks the question of whether or not this rate of growth will be sustainable over the next two decades. The short answer to this billion-dollar question is: no, and the graph above provides one illustration of why. Haltmaier observes that Chinese GDP growth is primarily the function of two things: the growth in employment, and the growth in output per employee, or labor productivity.
“China faces challenges in both of these categories,” writes Haltmaier. “The rate of working-age population growth has fallen from 2½ percent in 1979 to less than one percent in 2011, and is expected to turn negative before 2020. With nearly 80 percent of the working-age population already employed, there is not much room for employment growth to exceed working-age population growth.”
With employment gains off the table, she points out that “virtually all of the increase in Chinese GDP over the next couple of decades will have to come from increased output per worker.”
“There may be limits to the extent to which each of these factors can continue to contribute to productivity growth,” continues Haltmaier. She argues that productivity growth within specific sectors — such as manufacturing or services — is largely a product of tremendous investment. The rate of investment in these sectors is unlikely to remain as high in the coming years. In line with the intentions of China’s new leadership, Haltmaier sees the nation’s economy shifting toward consumer goods as living standards improve.
“Furthermore,” she adds, “as the capital stock grows an increasing share of investment needs to be devoted to replacement, leaving less room for net investment. Also, as the capital-labor ratio continues to rise as employment is flat or falling, the marginal product of the additional capital is likely to fall.”
Because of this, and other reasons discussed in her paper, Haltmaier sees China’s GDP growth falling to just over 6 percent per year by 2030.