1 The new normal of economic development
China’s potential to achieve medium- to high-speed economic growth1
In the 33 years of reform and opening up, China has achieved an average annual GDP growth rate of 9.9%, which is a miracle in the history of world economy. When people get used to this rapid growth, it is easy for them to feel puzzled over the slowdown since 2012. Even observers who highly praised China’s economic achievements cannot help but feel pessimistic about China’s economic prospects. Some prognosticators, who have long talked about the downside of China’s economy and repeatedly cried “wolf” and come to nothing, think that this time they have accidently got it right. Some investors (speculators) believe that the slowdown in China’s economic growth provides opportunities for them and intend to short sell the Chinese economy. If there are no ulterior motives, these misjudgments of China’s economic prospects must be the result of erroneous methods of observation and an erroneous theoretical basis underlying them. Once we lay bare the wrong methodology in understanding China’s economic growth, we will be able to clear up the fog of pessimism and see the bright future of China’s economy.
Regular patterns of rapid and slow economic development
Macroeconomics is traditionally composed of theories of economic cycles and theories of growth. However, scholars who focus on the problem of cycles often neglect the perspective of growth. Mainstream economists are used to analyzing the observed slowdown of economic growth as a cyclical phenomenon caused by insufficient demand, so they often place their hopes on demand stimulus policies to reverse the downward trend of an economy. In the event that the downward momentum of this growth rate never hits bottom, pessimism and even an exaggerated pessimistic mood will arise. However, applying this methodology to observe the slowdown of China’s economic growth is undoubtedly a mistake of an empiricist nature because what China’s economy is facing is not a cyclical phenomenon but a change in the stage of economic development. The change from a high-speed to a medium-high-speed growth is the result of the law of economic development and one of the characteristics of entering a new normal.
DOI: 10.4324/9781003221814-1
If we rank the world’s economies according to the level of per capita GDP, we can see from the process of moving from a level of low income to one of middle income and then to a high-income level that a decline of economic growth rate is a regular phenomenon. According to the grouping criteria of the World Bank, China’s economic growth rate, whether at the low-income stage before 2000, at the lower-middle-income stage during 2000–2010, or at the current upper-middleincome stage (per capita GDP close to $8000 dollars), has been significantly higher than the average level of countries at the same stage of development. Compared with itself at the stage of its lower-income level, the deceleration of the growth rate in China, which is currently at a stage of a higher-income level, is undoubtedly a phenomenon conforming to the regular patterns of economic development. Only by understanding the new normal from the supply side can China’s economic policies have a targeted force without the need to pursue a short-term V-shaped rebound by focusing on development cycles and the demand side.
Also, economists abroad, such as Professor Robert J. Barro, look at China’s economic slowdown from the perspective of economic growth. They believe that China’s long-term high-speed growth is a catch-up phenomenon and a successful story of economic convergence. Based on the hypothesis of convergence and progressive decline, these scholars believe that the high-speed catch-up cannot be maintained for a long time, so China’s economic growth will eventually slow down. This judgment makes some sense. What doesn’t make sense is American economist Lawrence H. Summers’ prediction that China will soon revert to “the mean” of about 3%. That does not make sense because he has not figured out what exactly China relies on to keep its rapid growth. Reform and opening up means to remove the institutional barriers hindering the allocation of resources and to release the demographic dividend, so as to achieve a catch-up and surpassing highspeed growth. China’s economy can still maintain a medium-high growth rate after the slowdown because the catch-up conditions still exist, which enable China to continue to keep up a relatively high potential growth rate. Moreover, by tapping the traditional growth drivers and cultivating new ones through supply-side structural reform, we can reap tangible reform dividends and further increase the potential growth rate.
Features of quantitative and qualitative economic development
We are not blindly optimistic. There is no denying that China’s economy has its own problems. However, the problems do not lie in the speed of growth but in the substance of growth, that is, the existence of “unbalanced, uncoordinated, and unsustainable” development. The deceleration as a consequence of the change in the stage of economic development has not worsened the problems; rather it is conducive to their solution. In fact, it is precisely when the growth rate declines that China’s economy is moving at a faster pace toward a more balanced, coordinated, and sustainable track of development.
First of all, the balance in economic growth has been improved. In terms of the troika stimulating demand, the contribution rate of consumer demand to economic
The new normal of economic development 3 growth increased from 43.1% in 2010 to 66.4% in 2015, which is 5.2 times faster than that in the 5 years before 2010. The development of tertiary industry has accelerated, and there is more balance between secondary and the tertiary industries. In 2015, the output value of tertiary industry accounted for more than half of the total output value for the first time. The growth rate in the past 5 years was 2.7 times that of the previous 5 years. In addition, new points of regional economic growth are emerging in China. Some central and western provinces are catching up, and the development of regions is more balanced.
Second, new growth drivers are taking shape at a faster pace. Economic growth under the new normal is bound to be a process of creative destruction; that is, while the traditional growth drivers are weakening, new ones begin to emerge. For example, some domestic think tanks have identified certain industries to represent the new economy on the basis of factors such as human capital stock, science and technology intensity, industrial direction, and growth potential and have constructed a “new economic index”. They find that this index is not positively correlated with the traditional “purchasing managers’ index”. Even when the latter shows a downward trend, the new economy still keeps going up against the trend. As another example, scholars at Harvard University use the “economic complexity index” to measure the export diversity and complexity of economies. China’s global ranking in this index moved from the 48th place in 1995 to 39th place in 2005 and then made a dramatic advance to 19th place in 2014.
The sharing of economic development has significantly improved. Under the joint impact of the government’s redistribution policy and the change in the stage of development, income distribution begins to change in the direction of benefiting laborers and low-income groups. The increase of residents’ income is faster than that of the GDP, and the increase of farmers’ income is faster than that of urban residents. In terms of constant prices, after the income gap between urban and rural residents reached a peak of 2.67:1 in 2009, it narrowed year by year to 2.40:1 in 2014. At the same time, the national Gini coefficient dropped from a peak of 0.49 in 2009 to 0.47 in 2014.
Integration of reform, growth, and stability
Recently, Taylor, an analyst at Moody, has said that the three goals of reform, growth, and financial stability that China has set and pursued cannot be achieved at the same time. A choice has to been made eventually, and at least one of the three goals has to be abandoned within a certain period of time. Taylor separates these three goals and endows them with the nature of being independent of and opposing one another because he has followed the popular perspective and method and has failed to grasp the nature of the problems facing China’s economy. Once we observe the phenomenon, analyze the problems, and find a way out from the supply side, we find that there is no either/or or decline/growth relationship among the three goals. On the contrary, just as the triangle is the most stable structure in mechanics, correctly choosing the direction and priority areas of structural reforms starting from the supply side and properly and accurately carrying them out can
not only directly achieve the goal of maintaining a medium-high-speed economic growth but also help prevent financial risks and achieve economic and financial stability.
The nature of the supply-side structural reform can be understood from its goal of increasing the potential growth rate. Reforms that are conducive to increasing the supply of production factors and the growth rate of total factor productivity should be given priority on the reform agenda. For example, when the total size of the labor force is no longer growing, increasing labor participation rate is an important choice to expand labor supply in the future. Our analysis shows that for every 1% increase of labor participation rate, a reform dividend of 0.88% for the potential growth rate can be won, while for a 1% increase in the growth rate of total factor productivity, a reform dividend of 0.99% can be won. Reforms in this area include the reform of the household registration system, the adjustment of policies to reduce enterprise and transaction costs, the removal of institutional barriers to the entry and exit of competition, and so on. Since these reforms focus on the supply side and do not have to rely too heavily on demand-side stimulus policies, they also reduce financial risks and thus break the so-called Moody’s impossible triangle of reform, growth, and stability.
Leading the new normal to achieve medium-high
To double the growth rate requires medium-high speed
speed2
The Fifth Plenary Session of the 18th CPC Central Committee did not set a specific quantitative target for the economic growth rate during the “13th Five-Year Plan” period but put forward the requirement of “maintaining a medium-high-speed economic growth”. In fact, the phrase “medium-high speed” is a goal that integrates qualitative and quantitative objectives. In other words, medium-high speed is one that enables us to double the GDP and the income of urban and rural residents in 2020 on the basis of 2010. The total size of China’s GDP was 40.89 trillion yuan in 2010. If the growth target of 7% is achieved in 2015, the GDP will reach 59.63 trillion yuan, calculated at constant prices. During the “13th Five-Year Plan” period, the total GDP will reach 81.81 trillion with an average annual growth of only 6.53%. Even if the growth rate in 2015 is at 6.9%, the GDP will still reach 59.57 trillion yuan. It only needs a slightly higher average annual growth rate –6.55% – to realize the requirement of doubling.
To achieve this growth rate of no less than 6.5% during the “13th Five-Year Plan” period, we need to adapt to and lead the new normal and obtain the necessary reform dividends based on the potential growth rate. According to our estimate, China’s potential growth rate in the “13th Five-Year Plan” period is 6.2%. At this rate, the total GDP in 2020 will reach 80.55 trillion yuan calculated at constant prices in 2010, which is slightly below the required doubling, that is, there is a gap of 1.54% or 1.26 trillion yuan. Therefore, the task of achieving a medium-highspeed economic growth needs to be divided into two parts: first, to strive to realize the potential growth rate of 6.2% and second, to add the necessary percentage
The new normal of economic development 5 points (no less than 0.3%) on this basis. If the actual economic growth rate falls short of the potential growth rate (6.2%) or fails to reach the growth rate required by the target of doubling (6.5%), it must be caused by different reasons. Therefore, striving to achieve the potential growth rate and the additional percentage points need to take different paths.
The new normal is not a cyclical phenomenon
If the actual growth rate is lower than the potential growth capacity, it is usually due to the impact of the demand side. Therefore, countercyclical macroeconomic policy instruments should be adopted to deal with it, which not only has a theoretical basis but also accords with the usual practice of various countries. During the whole period of reform and opening up, China’s economic growth has been lower than the potential growth rate for several times, resulting in a large growth gap. For example, the actual growth rate in 1981 was 5.2% while the potential growth rate was 7.6% at the time. The difference between the former and the latter, namely the growth gap, was about 2.3 percentage points. In 1990, the actual growth rate and the potential growth rate were 3.8% and 6.9% respectively. The growth gap was about 3.0 percentage points. In 2009, the actual growth rate and the potential growth rate were 9.2% and 10.4% respectively, and the growth gap was 1.2 percentage points. These growth gaps were all caused by insufficient demand and were eventually dealt with through policy instruments to stimulate demand, thus bringing economic growth back to its normal potential. If demand shocks occur again in the future, it is still necessary to use stimulating macroeconomic policies, which can be expected to be effective. In this sense, it is not necessary to negate the analytical framework of the so-called troika.
However, the deceleration and downward trend of China’s economy so far is the decline of the potential growth rate caused by supple-side and structural factors. Due to the disappearance of the demographic dividend, the potential of labor supply, the speed of the improvement of human capital, the level of returns on capital, and the rate of increase of total factor productivity have all changed in the direction of reducing the potential growth rate. Meanwhile, the actual growth rate so far is still in line with the potential growth rate, and there is no growth gap. For example, the actual and potential growth rates in recent years are 7.7% and 7.9% in 2012, 7.7% and 7.5% in 2013, 7.3% and 7.1% in 2014, and 6.9% (actual performance in the first three quarters) and 6.9% in 2015 respectively. According to the definition of the potential growth rate (that is, the growth rate at which production factors are fully employed), this growth rate will not cause cyclical unemployment. So, on the whole, it should be acceptable.
It is worth pointing out that the potential growth rate decreased abruptly at the turning point of 2010 when the working-age population turned from positive to negative growth. In order to maintain proper economic stability, it is necessary and justifiable to adopt appropriate stimulus instruments and to make decreasing use of the traditional growth drivers to make the decline of the actual growth rate gentler. However, trying to raise the actual growth rate to a level significantly
The new normal of
higher than the potential growth rate by stimulating demand alone is not only ineffective but also dangerous. In other words, the liquidity generated through a monetary policy that exceeds real economic needs will not really enter the real economy and the infrastructure sector derived from it but will spill over to sectors of speculative demand, such as real estate, the stock market, and other asset markets unrelated to the comparative advantage of China’s economy, which will inevitably generate asset bubbles, resulting in systemic risks.
In particular, the factors contributing to the decline of the potential growth rate continue to intensify, and, in the end, it will not be enough to curb this trend by relying on stimulus policies. Take the factors of labor supply caused by demographic changes as an example. First of all, following the absolute decrease of the population aged 15–59 in 2010, the economically active population aged 15–59 will also show a trend of decreasing year by year from 2017 due to the slowdown of the rate of increase of labor participation.
Secondly, if the official statistic on the proportion of the agricultural labor force is properly revised, further estimates based on existing studies show that the actual proportion of agricultural labor force in China decreased from 64.0% in 1984 to 19.1% in 2014. The labor force engaged in agriculture is older as a whole, and most of them no longer have the will and ability to transfer to nonagricultural industries. The speed of the transfer of labor force from agriculture to nonagricultural industries and cities is bound to slow down.
Finally, whether according to the size of the permanent rural population or that of the registered agricultural population, the number of rural youth aged 16–19, who constituted the main body of migrant workers, reached a peak in 2014. Since then, the number has decreased in absolute terms every year. The increase of migrant workers will slow down or even stagnate accordingly. For example, migrant workers grew by 4% during 2005–2010, fell to just 1.3% in 2014, and then to 0.1% in the first half of 2015, according to the data of the National Bureau of Statistics. If we look at the problem of labor growth potential discussed here within the framework of economics and the theories of economic growth, we find that the impact on the growth rate does not come only from the supply of labor force. As we know, the rapid economic growth in the past 30 years has occurred under the condition of unlimited supply of labor. Once this dual economic development feature disappears, the role of all explanatory variables in growth accounting or production function will change, resulting in a decline in the potential growth rate. Moreover, economic growth is an incremental or rate concept. Therefore, static indicators such as the abundance of the total labor force or a high proportion of working-age population cannot be used to deny the stage change that will inevitably lead to a decline of the potential growth rate in China’s economy.
Responding to structural changes with reform
That the economic development in China has entered a new normal is manifested in a series of structural changes. Therefore, in response to these structural problems, reforms aimed at removing obstacles to the supply of production factors and
The new normal of economic development 7 the improvement of productivity are bound to promote economic growth on the whole. In other words, the relationship between reform and growth is not one or the other or as one falls, another rises. For example, in a study that I and my collaborators conducted, under the premise of formulating relatively ideal assumptions, we estimated, on the basis of a relatively ideal hypothesis, that reforms could raise the potential growth rate by 1 to 1.5 percentage points in a certain period in the future by increasing the labor participation rate, improving workers’ human capital, and accelerating the increase of total factor productivity.
It is important to have an accurate understanding of this estimated reform dividend. First of all, the estimation of the reform dividend itself, like all econometric models, assumes a closed scenario. Beyond this scenario, we should also see that promoting reforms will inevitably allow creative destruction. In other words, abandoning the traditional mode of economic development or reducing dependence on traditional growth drivers will sacrifice a certain economic growth rate, just like squeezing out water and eliminating the focus (of an infection to treat a disease). Second, the estimation of the reform dividend is purely theoretical, and it does not correspond to the benefits brought by reforms in reality. Some reforms have immediate effects while others take time. We should not expect to get all the potential dividends in one stroke. Finally, unlike stimulus policies, reform dividends are not tangible and often appear in the form of “nourishing all things in silence”, which requires more insight and determination, confidence and patience.
However, the estimation of reform dividends is not just engaging in idle theorizing in an academic sense; it has strong policy implications. First, it helps build up the determination and sense of urgency to push reform forward. The greater the downward pressure on economic growth, the more we need to curb the impulse to adopt stimulus policies and demand dividends from deepening reform. Second, recognizing the existence of reform dividends can help us choose the right way to promote reform over time. Reform can bring dividends but also needs to incur costs. In many cases, those who bear the costs of reform may not be able to get all the benefits of reform. This phenomenon arises from the nature of promoting reform itself as a public good. Therefore, the key to the progress of reform according to a timetable is to make the costs of reform be reasonably shared among participants and to make reform dividends reach the expected values and eventually be reasonably shared among the various groups through appropriate institutional arrangements and mechanism design.
In promoting reform, priority should be given to areas that can bring the most obvious dividends. Specifically, reforms that are conducive to the increase of the labor participation rate and total factor productivity and that can bring immediate results should be promoted first. According to theories of economic growth, on the one hand, the growth potential of the labor force affects not only the supply of this factor of production itself but also the potential growth rate through the improvement of human capital, the rate of returns on capital, and the efficiency of resource relocation. When it is difficult to increase the labor force, the way to tap the potential of labor supply is to increase the labor participation rate in nonagricultural industries. On the other hand, when the traditional drivers of growth are weakened,
total factor productivity is ultimately the driving force for long-term sustainable economic growth.
Our simulation results show that increasing the labor participation rate in nonagricultural industries by 1 percentage point a year can raise the potential growth rate of the economy by 0.88 percentage point, while increasing the growth rate of total factor productivity by 1 percentage point can raise the potential growth rate by 0.99 percentage point. To be on the safe side, in the next 5 years, to get a reform dividend of no less than 0.3 percentage point, we need only to increase both the annual labor participation rate and the growth rate of total factor productivity by 0.2 percentage point every year. If we add it to the statically estimated potential growth rate (6.2%), we can achieve a medium-high-speed GDP growth rate of no less than 6.5% during the “13th Five-Year Plan” period.
Understanding and making full use of the fundamentals of China’s long-term sound economic development3
General Secretary Xi Jinping recently pointed out that the fundamentals of China’s long-term sound economic development have not changed. The basic characteristics of good economic resilience, full potential, and ample room for maneuver remain unchanged, the sound support and conditions for sustainable development remain unchanged, and the forward trend of restructuring and optimization also remains unchanged. Among these “unchanged” fundamentals, the first profoundly reveals the macro background and basic pattern of China’s long-term economic trend when its economic development enters the new normal and points out where our confidence in China’s economic development lies and the foothold of leading the new normal. To accurately grasp the fundamentals of economic development is to go beyond the short-term, disturbing, and partial phenomena and focus on the dominant trend and the macro level. Reform and opening up is the driving force for China’s development. Therefore, understanding the important argument that “the fundamentals of China’s long-term sound economic development have not changed”, from the two aspects of the world situation and national conditions, can only enhance our determination to further promote reform and opening up in an all-round way and boost our confidence in achieving a medium-high-speed growth rate and movement toward a medium and high-end industrial structure.
From the perspective of the international political and economic environment, the theme of the era – peace and development – has not changed, and many new factors are conducive to our country’s economic development. Although the negative impact of the financial crisis undermining the growth momentum of the world economy is still around, the global economy has, on the whole, made a tortuous recovery in the course of a deep adjustment. Although some people conclude that the world economy has entered a “new mediocre” with developed countries as the target, the economic performance of developing countries is getting better, and their contribution to the overall growth of the world economy is increasing, which will help restore the momentum of world economic growth and shape the climax of a new round of globalization. In 2014, the average growth rate of the world
The new normal of economic development 9 economy was 2.5%, of which the average growth rate of high-income countries defined by the World Bank was 1.7%, that of upper-middle-income countries was 4.5%, and that of lower-middle-income countries was 5.8%. Countries defined as belonging to the low-income group, on the other hand, achieved an average growth rate of 6.3%. By taking a more active part in global economic management, by winning more institutional discursive power in the formation of international economic and trade rules on behalf of the interests of developing countries, and by promoting the opening up to the outside world both in depth and in scope, we can make full use of the international political and economic environment to realize a medium-high-speed growth of China’s economy.
With life science, information technology, new energy, new materials, and other scientific and technological fields as the key areas and their combination with the Internet and mobile networks, a new round of scientific and technological revolution and industrial transformation is ready to take off, creating a handsome opportunity for China to realize innovative development. On the one hand, China’s per capita GDP has already reached the level of upper-middle-income countries and is closer to the threshold of high-income countries. It is in the process of transforming from investment-driven to innovation-driven growth. This, together with the advantages of a singularly huge domestic market and rich human capital, has created a unique opportunity for China to make use of the current incubation period of scientific and technological revolution to prepare for the future, win the firstmover advantage, and realize the overtaking on the competitive curve. On the other hand, as there is a large gap between China and developed countries in the sphere of science and technology, especially in terms of innovation capacity, we still maintain the latecomer advantage of catching up in science and technology. The history both of science and technology and of economics shows that the closer we get to the eve of a new round of scientific and technological breakthroughs, the more opportunities and growth momentum we can obtain from the existing stock of science and technological achievements of latecomer countries. Therefore, the combination of first-mover and latecomer advantages can help our country achieve a more economical, more efficient, and faster catch-up in science and technology and realize an innovative development.
Looking at China’s own development potential, there is still a potential growth rate of medium-high speed. At the same time, there are large potential reform dividends to harvest. On the one hand, our country has entered a stage of achieving a higher level of per capita income. On the other hand, the new national conditions of getting old before getting rich have become more prominent. The demographic dividend is rapidly disappearing, the traditional drivers of China’s economic growth are declining daily, and the urgency of tapping new drivers of growth is increasing with each passing day. The transformation of the drivers of economic growth entails a shift in the growth rate manifested in a decline of both the potential and the actual growth rate. However, based on the solid material foundation and human capital stock, even if the potential growth rate and the current actual growth rate decline somewhat, China’s growth rate can still stand out from the rest of the world. More importantly, there is a wide range of opportunities to further
increase the potential growth rate through reform and opening up. There are still institutional factors in China not conducive to tapping the potential of the supply of production factors and improving productivity. Therefore, reform aimed at eliminating these institutional barriers can bring reform dividends, which will be directly manifested as an increase of the potential growth rate.
Implementing the strategic layout of comprehensively deepening reform mapped out at the Third Plenary Session of the 18th CPC Central Committee and the blueprint for development and reform and opening up during the “13th FiveYear Plan” period drawn up at the Fifth Plenary Session of the 18th CPC Central Committee will both bring tangible dividends of reform and opening up. So far as opening up to the outside world is concerned, important measures such as enriching the contents and raising the level of opening up, promoting the Belt and Road Initiative, and actively participating in global economic management will help maintain the pattern of economic globalization and safeguard China’s own development interests through win/win cooperation. When it comes to domestic supplyside reform, accelerating the urbanization of the registered population can stabilize the employment of migrant workers in cities and towns, raise the labor participation rate in nonagricultural industries, maintain the effect of resource reallocation brought about by labor transfer, and thus immediately increase the potential growth rate. Fully implementing the two-child policy is conducive to the return of the fertility rate to the replacement level, improving the age structure of the population after one generation, increasing labor supply and reducing the population dependency ratio, and raising the potential growth rate in the future. Deepening the reforms of administrative management, state-owned enterprises, finance and taxation, and the financial system will not only enable the market to play a decisive role in resource allocation but will also help the government to better play its role and improve total factor productivity. From the perspective of domestic demandside reform, promoting the urbanization of migrant workers, lifting all rural poor out of poverty, pushing forward the reform of the income distribution system, and realizing a more inclusive and shared development will fully release the potential of consumption demand, balance the demand structure of economic growth, and promote macroeconomic stability and rebalancing.
Looking at the source of China’s economic growth under the new normal from international experiences4
One manifestation that China’s economic development is entering a new normal is that the traditional source of economic growth is declining and can no longer maintain the nearly double-digit long-term GDP growth. Moreover, if the unique source of growth under the new normal cannot be found in time, the potential growth rate will continue to fall. According to our forecast, assuming that we continue to rely on the traditional source of growth, the average potential growth rate during the “13th Five-Year Plan” period is likely to fall to 6.2% due to factors such as labor shortage, lower rate of capital formation, and the slowdown in the improvement of total factor productivity. However, correctly leading the new
normal will help to tap new sources of growth in time and maintain a reasonable and stable growth rate. This article will point to at least four aspects from which we can lead the new normal to achieve the goal of stable economic growth.
Growth potential on the supply and demand sides
Since research and policy resources are both scarce, the areas to which these resources are allocated should undoubtedly follow the principle of maximizing payoffs. James Tobin, Nobel Laureate in Economics, supposedly once said that it takes a bunch of Harberger triangles to fill an Okun gap. Two concepts in economics are mentioned here. The former refers to the loss of welfare caused by institutional factors such as monopoly and price distortion, and the latter refers to the extent that actual economic growth is lower than the potential growth capacity. What Tobin meant is that it is more meaningful to focus on macroeconomic issues than on institutional ones.
In the debate about China’s potential growth rate, Professor Lin Yifu holds that the reason for the slowdown in economic growth is insufficient demand. Thus, by increasing investment to stimulate demand, the potential growth rate can be expected to reach 8%. Compared with the forecast I made about the potential growth rate from the supply side, the difference is 1 to 2 percentage points. Calculated on the basis of China’s current total GDP of more than 63 trillion yuan, this difference in judgment means a difference in GDP of more than 1 trillion yuan every year. Therefore, if the current growth rate of China’s economy is lower than its potential growth capacity, it is obviously very important to explore how to fill this Okun gap.
The problem is that, according to my estimation, the actual growth rate each year so far is still above the potential growth rate. For example, I had estimated that the potential growth rate of China’s economy would be 7.89% in 2012, 7.48% in 2013, and 7.14% in 2014. If China’s economy can achieve a GDP growth of about 7% in 2015, the actual growth rate will still be above the potential growth capacity (6.86%). On the other hand, problems caused by institutional barriers, such as insufficient supply of production factors (especially labor force) and low productivity can and must be solved through deepening the reform. According to my calculation, by increasing the supply of labor force, expanding the accumulation of human capital, improving productivity, and balancing population development through reform, the effect of increasing the potential growth rate can be 1 to 2 percentage points of the total GDP in the future. It is thus clear that the reform dividends are rather considerable.
There is no doubt that the supply-side and demand-side factors can transform each other. Therefore, in theory, policies can work from both sides to achieve the goal of increasing the potential growth rate. For example, sufficient labor supply and increased growth of productivity can both reduce the costs of products and thus increase the purchasing power of consumers under the condition of constant consumer budgets and realize the so-called supply-creates-its-own-demand of Say’s law. On the other hand, the increase of consumers’ income can make them
The
bear the quantity of products that they could not afford before. The improvement of infrastructural conditions by the expansion of investment can also be transformed into the supply capacity of enterprises.
There are, however, conditions of constraint on the conversion of demand into supply. First of all, the premise of transforming consumer demand into supply capacity is a closed economy; that is, it does not consider the competition of imported products. If competitors abroad can still provide high-quality and inexpensive products, this expansion of consumer demands will not be transformed into a potential growth rate. Second, the premise of transforming investment demand into supply capacity is that there is no overcapacity. In case of overcapacity in many industries, including infrastructure and thus accumulating financial risks, the expansion of investment demand can only lead to a more serious overcapacity rather than to an increase of the potential growth rate.
Adjustment of industrial structure led by productivity
When we try to understand the new normal of economic development from the three aspects of growth rate, growth driver, and structural adjustment, we find that the slowdown of growth rate is a reality that has already emerged. The transformation of an investment-driven to an innovation-or productivity-driven growth driver is an expected goal under the new normal, and structural adjustment is the only way to achieve this transformation. Simon Kuznets, the Nobel Prize Laureate in Economics, pointed out that the core of industrial restructuring and the key to industrial upgrading is the transfer of resources from sectors with lower productivity to sectors with higher productivity, so as to improve the efficiency of resource allocation of the economy as a whole. We can regard this as the evolution of Kuznets’s industrial structure.
Therefore, in order to realize the transformation of the growth driver, the adjustment of industrial structure must follow the direction of Kuznets’s evolution or orient ourselves to the improvement of productivity. For China’s economy, three potential dangers can make the adjustment of industrial structure go against the direction of improving productivity and even become the reverse of Kuznets’s evolution, that is, cause the labor force to flow from sectors with higher productivity to those with lower productivity.
First of all, the trend of demographic changes has led to the return of migrant workers from cities to the countryside. Various studies have shown that the increase of migrant workers comes mainly from rural teenagers who graduate from junior and high middle schools every year and who can generally be represented by the rural working-age population between 16 and 19 years old. Under the current household registration system, migrant workers in general return to their home villages after the age of 40 since they do not have equal access to social security in urban areas. As a result, with the aging of the population, especially the registered rural working-age population, the number of new migrant workers will soon be lower than the number of people returning home, forming a reverse flow of urban and rural labor force. According to the prediction of the age structure of the
The new normal of economic development 13
rural population, the rural population aged 16 (about the age of graduation from junior high school) to 19 (about the age of graduation from high school) will be 35.13 million in 2015 and will drop to 30.55 million by 2020, a net decrease of 4.58 million. In fact, the annual growth rate of migrant workers dropped significantly from 4% in 2005–2010 to 1.3% in 2014.
Second, the economic cycle makes migrant workers suffer from the impact of the labor market. Since 2004, labor shortage has become the norm. Employment opportunities have increased substantially, and wages have continued to rise, creating a situation where rural youth rush into nonagricultural employment after graduating from junior high school (many even drop out of junior high school), and a considerable number of them enter industries related to stimulating macroeconomic and industrial policies. There are actual or potential risks of overcapacity or even bubbles in these industries. Once there is an economic fluctuation, migrant workers will suffer from cyclical unemployment. Due to insufficient human capital accumulation, it is difficult for migrant workers to adapt to the skill requirements of industrial restructuring. In the light of European experiences, cyclical unemployment may turn into long-term structural unemployment. Moreover, migrant workers are not yet covered by urban social security such as unemployment insurance, and the new generation of migrant workers cannot use agriculture as their employment reservoir, which will cause the phenomenon of a concurrence of industrial changes and social risks contrary to Kuznets’s hypothesis.
Finally, the growth and decline of secondary and tertiary industries affect the growth rate of productivity. The slowdown of economic growth in recent years has mainly occurred in the secondary industries, especially in the manufacturing sector, which is related to higher labor costs, and in the construction industry resulting from real estate cooling. Meanwhile, the growth of the tertiary industry is relatively fast, and its proportion has increased to some extent. Since labor productivity of the secondary industry is usually higher than that of the tertiary industry – for example, in terms of relative labor productivity (the ratio of the added value of an industry to the proportion of employment), the secondary industry was 1.45, and the tertiary industry was 1.22 in 2013 – this kind of industrial transfer of labor force produces the effect of an overall decline in labor productivity. Basically, the increase of the proportion of the secondary industry does not necessarily lead to a decline in labor productivity. For example, if with the upgrading of the manufacturing value chain, productive manufacturing is derived from both the pre- and postproduction ends of the direct manufacturing process, labor productivity is bound to be higher. Moreover, it is an innovation-driven result. On the other hand, if the relative contraction of the manufacturing industry leads to a shift of workers to low-end service industries or to changes of statistical criteria caused by “the replacement of the business tax with a value-added tax”, it will not produce the Kuznets evolution effect.
To keep the adjustment of industrial structure in Kuznets’s evolutionary direction and increase labor productivity through structural readjustment, the adjustment of industrial structure should be realized through market mechanisms according to the direction of change of relative prices of production factors and
the direction of change of comparative advantages. Whether it is the increase of labor productivity or that of total factor productivity, in the final analysis, they are realized through the reallocation of resources, including not only the growth and decline of industries and sectors but also survival of the fittest among enterprises. It is against the principle of productivity to keep the sunset industries, to choose new industries as a matter of course, or to maintain zombie enterprises through artificial means. Therefore, the upgrading of the industrial structure must necessarily rely on a mechanism of creative destruction, which means we must tolerate the elimination of backward industries through competition and the decline in the growth rate of industries with backward production capacity. The urgently needed reforms should focus on creating competitive pressure on enterprises, urge the government to create a better investment environment, and promote the outflow of production factors from industries, sectors, and regions with low productivity in order to achieve a better resource allocation. A related example is to promote the transfer of manufacturing industries from the coastal areas to the central and western regions, creating a domestic version of the “wild geese” formation to prevent the flow of manufacturing to other emerging economies too soon and too quickly.
Future-oriented accumulation of human capital
Professor Masahiko Aoki, former president of the International Economic Association, found from the experiences of economic development in East Asia that any country, after going through a stage of economic development led by the government and characterized by Kuznets’s style of structural adjustment, is bound to enter a stage of economic development driven by human capital. In fact, in the process of industrial restructuring, the role of human capital has already become crucial and indispensable. Our calculation shows that improving the overall level of human capital through the development of education and training can contribute about 0.1 percentage point to China’s potential growth rate in the future. This contribution may seem insignificant for an economy that can achieve double-digital growth, but for the new normal of economic development in China, which aims at maintaining a medium-high-speed growth and avoiding falling prematurely into a medium- or even medium-low-speed growth, it is not a negligible figure.
Moreover, what we are talking about here is only the amount of human capital. In most cross-country comparative studies using growth accounts and production functions, human capital is in general represented only by using quantitative indicators of education, and the results are very significant, confirming the positive impact of human capital on economic growth, but the extent of the impact is not very large. The latest research by Rodolfo Manuelli and others shows that, once the quality of education is taken into consideration, human capital will become a more complete and sufficient variable and that its role in promoting economic growth will be greatly improved, even greater than the contribution of the increase of productivity. It is thus clear that the urgent task facing China is how to
significantly improve the quantity and quality of education and to rely on the accumulation of human capital to maintain long-term sustainable economic growth.
The key to improving education quantitatively is to increase the number of years of education for the new generation of workers. Generally speaking, when the rate of enrollment in compulsory education reaches a very high level, the continued substantial increase in the number of years of education must rely on the popularization of senior high school and higher education. The key to improving the quality of education lies in the mode of education and the efficiency with which to teach students, as well as in the kind of knowledge and ability we teach students. An important choice of the mode of education is how to determine the ratio between vocational education and general education. Our colleagues have found some regular patterns relating to this in their analysis of cross-country data, from which we can draw some policy implications.
First of all, at a certain stage of development, with the improvement of the level of economic development, vocational education rises faster than general education, forming a positive correlation between per capita income and the relative proportion of vocational education. According to this statistical “pattern”, in 2012, the ratio of students in vocational education and general senior high school education in the upper-middle-income countries was 0.52:1 on average while in China, the ratio was as high as 0.8:1. If a too high ratio of vocational to general education is formed beyond the development stage, it means that China has overdeveloped vocational education when the level of popularization of general senior high school and higher education is still relatively low. Compared with vocational education, general senior high school education and higher education put more emphasis on general education, cultivating learning ability and soft skills of employment, which is conducive to the training of workers who are good at adapting and adjusting in the course of rapid changes in industrial structure. Therefore, policies of expanding vocational education should adapt to the stage of development and fully take into account the uncertainty of changes in industrial structure.
Second, in developed countries, especially in many countries famous for their advanced vocational education, the ratio of vocational education to general education has shown a significant downward trend in recent years. For example, from 1998 to 2012, the ratio of vocational to general education in the senior high school period fell from 1.82:1 to 0.93:1 in Germany and from 0.67:1 to 0.24:1 in South Korea. This trend is related to economic globalization. The economist Jan Eeckhout and others found that in the process of global division of labor, there is also a division of human capital between workers in developed and developing countries. While emerging economies represented by China are gaining more manufacturing jobs, thus increasing the demand for skilled and semiskilled workers, developed countries are paying more attention to the training of an innovative workforce in science, technology, design, and management. In the process of China’s gradual transition to the new normal of economic development driven by innovation, the demand for talents in the latter category will greatly increase. This type of talent cannot be cultivated by vocational education.
Catching up and surpassing with the help of latecomer’s advantage
At present, people have one judgment and one expectation when it comes to the world economy. The judgment is that the world economy has entered a long downward cycle or in a trend summarized by some as the “new mediocre”. At the same time, people generally believe that a new scientific and technological revolution is in the making and expect that it will bring new growth opportunities to the mediocre world of economic growth. Although this section is not intended to give a definite general opinion on this judgment and expectation, I believe that, no matter whether the preceding judgment is tenable or not and whether the expectation can come true, the global environment and the scientific and technological conditions for China’s long-term economic growth are by no means pessimistic, and China is still in a period of strategic opportunities during which great achievements can be made.
The long cycle observed by Western economists is a phenomenon of long-term economic fluctuation with capital stock adjustment as its essence and interest rate fluctuation as the expression, an assessment mainly based on the economic growth performance of developed capitalist countries. In the context of economic globalization, even the cyclical economic performance observed in some developed countries will no longer necessarily affect the overall trend of the global economy. For example, the economies in Europe and Japan are weak, but the US economy shows a relatively strong trend of recovery. In the meantime when the growth momentum of some BRICS countries slows down, India begins to accelerate its growth pace. The so-called Next-11 (Pakistan, Egypt, Indonesia, Iran, South Korea, Philippines, Mexico, Bangladesh, Nigeria, Turkey, and Vietnam) and the Mints (Mexico, Indonesia, Nigeria, and Turkey) selected by Fidelity investments can all take advantage of demographic dividends to achieve growth beyond the cycle. In fact, calculated on the basis of purchasing power parity, the combined GDP of the New G7 made up of Brazil, India, Indonesia, China, Mexico, Russia, and Turkey has surpassed that of the original G7 of Britain, Germany, Italy, Canada, the United States, France, and Japan. Therefore, the judgment of the economic cycle based on the performance of developed countries does not necessarily reflect the trend and direction of the global economy.
Economists believe that human society has experienced three scientific revolutions so far: the industrial revolution that began in the second half of the 18th century, the large-scale industrialization that began in the second half of the 19th century, and the information technology revolution that started after the Second World War. Each scientific revolution led the rapid development of the world economy. The great impetus of each scientific and technological revolution to economic development was neither one-off nor transient but would last for decades or even longer. Therefore, these major events, which have been labeled the “scientific and technological revolutions”, produced technologies of a “general nature”, which would repeatedly go through the process of development, application, redevelopment, and reapplication in various fields, constantly setting off new waves of innovation between two scientific revolutions. For example, according
The new normal of economic development 17
to the estimation of Professor Charles I. Jones at Stanford University, 80% of America’s economic growth during 1950–1993 came from the application of previously invented scientific ideas. However, the kinds of innovations that do not constitute a scientific and technological revolution are not readily available but depend on large-scale investments in research and education.
Generally speaking, after every scientific and technological revolution, the developed countries at the forefront of science and technology will take the lead in applying new technologies to accelerate economic growth, and then countries at a lesser stage of economic development will follow suit and apply the new technologies to accelerate the catch-up with the developed countries. Therefore, the longer the time is from the previous scientific and technological revolution and the closer it is to the eve of a new scientific and technological revolution, the greater the window of opportunity for developing countries to take advantage of traditional science and technology, and the higher the success rate is for catching up. In terms of the overall level of scientific and technological development, China is not yet at the forefront of scientific and technological innovation in the world. This means that we still have the clear advantage of a latecomer and can make use of the existing scientific and technological achievements to achieve faster innovation-driven growth than developed countries. No matter what the key areas are of the next scientific and technological revolution, the development of Internet technology is bound to be a huge supporting technology for China to fully tap the existing scientific and technological stock and realize an overtaking on the curve.
Setting the growth rate target on the basis of the potential growth rate5
In formulating China’s yearly and 5-year plans for national economic and social development, either the annual growth rate or the average annual growth rate of GDP is proposed as an expected target. This expectation is based on a forecast of the rate of economic growth in a specific future period. Different from other methods of predicting economic growth, this article uses the potential growth rate and its trend to estimate China’s future economic growth rate with the disappearance of the demographic dividend as the starting point. This approach not only helps to determine reasonable expectations of growth rates but also enables us to avoid inappropriate policy stimulus and observe the possible effect of relevant reforms on increasing the potential growth rate, that is, reform dividends.
The “trillion-yuan dispute” on growth rate
With the slowdown of China’s economic growth rate in recent years, especially since 2012, economists and policy researchers are very concerned about how high the future growth rate can be maintained and form a variety of forecasting schemes accordingly. The relevant conclusions are divergent and inconclusive. In general, the following methods are used for forecasting.
One common method is the traditional one of extrapolation, namely extrapolating the future growth rate from past rates. Although this forecasting method often has no precise models and no longer seems to be used in practice, as a way of thinking, it has become very popular. The problem is that it does not take into account changes in the stage of development; that is, the more developed a country is, the slower the rate of economic growth. However, with the Lewis inflection point manifested in labor shortage and wage rise around 2004 and the disappearance of the demographic dividend in 2011 when the working-age population began to change negatively, substantial changes have taken place in the stage of economic development in China. The traditional way of thinking can no longer accurately estimate the future economic growth rate.
As a modification of the preceding traditional method, recent literature shows that the following methods have come to the front. The first is the convergence method of growth, which, following the convergence hypothesis of the neoclassical theory of growth, compares China with other developed countries and regions, such as East Asian economies, in a specific period according to the per capita GDP in order to estimate the possible growth rate of China in a similar period in the future. For example, China’s GDP was only 21% of that of the United States in 2008. Based on some leading countries’ experiences of about 20 years of growth after reaching the similar level of development, including Japan, Singapore, Taiwan, and South Korea, which reached this level in 1950, 1966, 1975, and 1976 respectively, Professor Lin Yifu expects China to continue to achieve a relatively high catch-up growth rate by relying on the latecomer’s advantage.
The second approach is the theory of discontinuity of growth, which holds that high-speed growth will eventually stop at a particular level of economic development. Based on a large amount of national data, Barry Eichengreen and others found that, generally speaking, when the per capita GDP, calculated according to the purchasing power parity of 2005, reached $17,000, the high-speed economic growth tended to decelerate from an average growth rate of 6.8% in the previous 7 years to an average growth rate of 3.3% in the following 7 years. However, the study included too many different national sets of data to find a consistent explanation for the slowdown.
Finally, there is the thesis of regression to the mean, which proposes that any economic growth is bound to return to the world average according to a natural statistical law (regression to the mean). Based on this “law”, Lawrence Summers and other scholars estimate that China’s average annual growth rate in the period of 2013 to 2023 will be only 5.01%. It will further reduce to 3.28% in 2023 to 2033. However, the “law” used here is at best a statistical phenomenon dressed up as a law. It cannot be applied to all countries and is therefore unable to provide a scientifically sound economic explanation of the anticipated deceleration. Because of the disappearance of the demographic dividend, there is a reason to expect a significant slowdown in China’s economic growth. Nevertheless, India is still in the harvest period of demographic dividend. To predict that India’s economy will slow down on the basis of the law of regression to the mean does not make sense.
The new normal of economic development 19
Goldman Sachs, for example, predicts that India’s economy will grow faster than that of China between 2016 and 2018.
According to these corresponding forecasts based on different methods, we can generally sum up the range of forecasts for the likely growth rate of China’s economy in the next decade or more from a relatively pessimistic 5% to 6% to a relatively optimistic 7% to 8%. If we calculate on the basis of a 2% difference between different forecasting methods and of China’s GDP of 61.1 trillion yuan in 2014, 2% of 61.1 trillion yuan is 1.22 trillion yuan. So we can say that the value of this debate about the growth rate involves trillions of yuan, which shows that this debate is by no means insignificant.
Future potential growth rate and growth rate target
Since none of the preceding methods fully take into account the stage change in China’s economic growth, we adopt the method of estimating the potential growth rate to predict the future growth rate. The actual economic growth of a country is affected by demand factors in the short term and by supply factors in the long term. The latter is the potential economic growth rate. In fact, the potential economic growth rate is determined by supply factors such as capital, labor force, and total factor productivity (TFP). The potential level of these supply factors determines the potential of a country’s economic growth rate, while the actual economic growth rate always fluctuates with the potential growth rate. According to our estimate, the potential growth rate in 1995–2010 was 10.3%. The famous Okun’s law shows that the part of the actual growth rate that is lower than the potential growth rate corresponds to a certain degree of cyclical unemployment. Therefore, in the period when the potential growth rate is still high, the “maintenance of about 8%” (保八) growth rate is necessary. Otherwise, we will encounter serious employment shocks. Since the “12th Five-Year Plan” period, the absolute number of the working-age population aged 15–59 decreases every year, so the demographic dividend is gradually disappearing. This is manifested in labor shortages, the weakening of the competiveness of manufacturing industries due to the rise of costs, the diminishing marginal returns on capital, the slowdown of capital accumulation as a result of a rising dependency ratio, as well as the narrowing of the space for the improvement of TFP resulting from the slowdown of labor transfer. All these factors have led to the continued decline of the potential growth rate. If we still emphasize the “maintenance of 8%” at this time, it will probably lead to overcapacity in the real economy and even the formation of economic bubbles. Besides, regarding the reasons for the economic slowdown, some scholars still hold the theory of insufficient demand. In particular, they insist that insufficient demand for exports is the main reason for the decline of China’s economic growth. However, the decline in net exports is, to a large extent, just a phenomenon on the surface. The real reason is that China’s factor endowment has changed, resulting in a gradual loss of the comparative advantage of traditional trade goods.
Our calculation shows that, for 11 labor-intensive products that traditionally enjoyed the comparative advantage and dominated China’s exports, the indicative
comparative advantage index (RCAI, the ratio of the proportion of China’s laborintensive exports to that of the world) has dropped significantly from 4.4% in 2003 to 3.4% in 2013. Obviously, the decline of this index means that our advantages in these products are declining compared to the world average. It is not that there is no absolute demand but that the comparative advantage has declined. This indicates that the changes in China’s net exports in recent years are mainly affected by supply-side factors (the ratio of capital to labor). With the change of China’s demographic structure and the resultant disappearance of the demographic dividend, this process will become more evident. The result will inevitably be a decline in the potential growth rate of GDP.
In fact, China’s potential growth rate has already begun to decline significantly. It is estimated that the average potential growth rate during the “12th Five-Year Plan” period is 7.6%. It will further decline to 6.2% during the “13th Five-Year Plan” period. Even if human capital is added to the model and the impact of demographic changes on labor participation rate and on natural unemployment rate is taken into consideration, the potential growth rates during the “12th Five-Year Plan” and the “13th Five-Year Plan” periods are only 7.75% and 6.7% respectively. The downward trend is evident. When it comes down to each year, we present the estimated potential growth rate in Table 1.1 as a reference. Based on the fact that the fertility policy has become somewhat flexible through the implementation of the selective two-child policy, we have predicted a higher potential growth rate in the future on the basis of an increase of the total fertility rate from 1.4 to 1.6. However, the extremely low child-bearing willingness actually shown after the implementation of the new policy has made us believe that the estimation of the potential growth rate based on a total fertility rate of 1.4 is more appropriate. The result is shown in Table 1.1.
Note: PGR = potential growth rate; GR = actual growth rate.
Table 1.1 Actual and potential growth rate of China’s GDP (%)
When the actual growth rate is higher than the potential growth rate, it means that the capacity utilization rate has exceeded the potentials of a country. At this time, in order to meet the higher output requirements, the number of people employed must exceed the potential employment (or the number of employment under the condition of full employment), while the unemployment rate is lower than the natural unemployment rate (or the unemployment rate under the condition of full employment, including only structural and frictional unemployment). At this point, the macroeconomy will create inflationary pressures. Conversely, if the actual growth rate is lower than the potential growth rate, cyclical unemployment will occur, and the unemployment rate will be higher than the natural unemployment rate. The relationships among actual GDP growth, potential growth rate, and inflation are described as the Philips curve in economics, and the relationships among actual growth rate, potential growth rate, and cyclical unemployment are called Okun’s law in economics. What the Philips curve and Okun’s law describe is the causal relationship between the actual GDP growth rate affected by short-term demand factors and the potential GDP growth rate affected by long-term supply factors, thereby confirming the deterministic theory of potential growth rate.
It is thus clear that the actual growth rate corresponding to the potential growth rate is appropriate and that there is no longer a need for the “maintenance of 8%”. The expected targets of China’s growth rate for 2012 and 2013 were both 7.5%, and we achieved a growth rate of 7.7% for both years, which was in line with the potential growth rate. Therefore, there was no serious problem of unemployment. In fact, the central government did not seek a growth rate higher than the expected rate in the past 2 years, which reduced the excessive government intervention in direct economic activities, alleviated further aggravation of overcapacity, and avoided the formation of economic bubbles, creating a favorable macroeconomic environment for reform. It is therefore very important to set the expected target of economic growth on the basis of a correct understanding, judgment, and estimation of the potential growth rate. We should persist in gradual standardization and in becoming more scientific.
Based on the actual downward trend of the economic growth rate and the estimated potential growth rate, we can put forward some suggestions for the expected target of economic growth in 2015 and in the “13th Five-Year Plan” period accordingly. Given that China’s potential growth rate is 6.9% and 7.2% in two different forecasts and taking into account the following two effects offsetting each other, namely the positive effect of a certain reform dividend on the potential growth rate as well as the short-term negative effect that a slight increase in fertility may have on the potential growth rate, we believe that it is reasonable to set the target of GDP growth rate at 7% in 2015. Given that the average potential growth rate under two kinds of simulations during the “13th Five-Year Plan” period are 6.2% and 6.7% respectively and considering that the release of more reform dividends will increase the potential growth rate, we propose that it is reasonable to set the expected rate of GDP growth during the “13th Five-Year Plan” period at 6.5% to 7%.
Significance
of determining growth rate in accordance with potential
growth rate
The new normal of China’s economy is manifested in the shift from a high-speed growth to medium-high-speed growth, the acceleration of the adjustment and upgrading of the industrial structure, and the change of the drivers of economic growth from input driven to innovation driven (the improvement of productivity). Setting the expected target of economic growth according to the potential growth rate is an appropriate response and a concrete action to actively adapt to the new normal of economic growth, treat the slowdown of economic growth with a normal state of mind, and strive for better growth results by reaping reform dividends.
First of all, determining the target of growth rate according to the currently estimated potential growth rate, plus reasonably anticipated reform dividends, the target of doubling the total GDP during 2010–2020 set by the 18th CPC National Congress can be achieved; that is, calculated at constant prices, the total GDP will reach 80.3 trillion yuan in 2020 on the basis of 40.15 trillion yuan in 2010. According to the 2013 estimate of the future potential growth rate shown in Table 1.1, China’s total GDP in 2020 will be 78.9 trillion yuan, which is slightly lower than the required doubling target. However, according to the 2014 estimate, China’s GDP will reach 80.63 trillion yuan, which is exactly the target of doubling the GDP. In addition, according to our forecast, reforms can significantly raise the potential growth rate by increasing the labor participation rate, human capital stock, and total factor productivity. Assuming that the potential growth rate can reach 7% in the “13th Five-Year Plan” period, China’s GDP will reach 82 trillion yuan in 2020, even slightly exceeding the required doubling target.
Second, excessive use of stimulus can be avoided. In understanding and actual estimating the potential growth rate, a misunderstanding must be clarified. The potential growth rate reflects the medium- and long-term growth capacity of an economy determined by supply-side factors. It has no direct connection with changes in short-term demand. Labor supply, savings rate, and total factor productivity are the most important factors affecting potential growth rate and determining the reasonable range of economic growth speed. Export, investment, and household consumption, on the other hand, only determine whether an economy is able to operate within a reasonable range of speed but cannot change this range. In other words, demand-side factors can only affect the actual growth rate, making it higher or lower than the potential growth rate and creating the difference between the former and the latter, that is, the so-called growth rate gap but cannot change the potential growth rate.
Thus, when the potential growth rate is set, it is necessary to use macroeconomic policy to manage demand if there is a risk that insufficient demand may cause the economy to operate below the level it should. However, it is undesirable and dangerous to raise the actual growth rate above the potential growth rate by using policies to stimulate exports, investment, and consumption. After losing its demographic dividend in 1990, the mainstream understanding in Japan was that the cause behind the weak growth was insufficient demand. Therefore, for many years,
Another random document with no related content on Scribd:
a cuántos bienes alargó la mano el que de la amistad mostró el camino; y luego vos, de la amistad ejemplo, os me ofrecéis en estos pensamientos. Y con vos a lo menos me acontece una gran cosa, al parecer estraña; y porque la sepáis en pocos versos, es que, considerando los provechos, las honras y los gustos que me vienen desta vuestra amistad, que en tanto tengo, ninguna cosa en mayor precio estimo,[289] ni me hace gustar del dulce estado, tanto como el amor de parte mía. Este conmigo tiene tanta fuerza, que sabiendo muy bien las otras partes de la amistad, de la estrecheza nuestra, con solo aqueste el alma se enternece; y sé que otra mente me aprovecha, que el deleite, que suele ser pospuesto a las útiles cosas y a las graves.[290] Llévame a escudriñar la causa desto ver contino tan recio en mí el efeto, y hallo que el provecho, el ornamento, el gusto y el placer que se me sigue del vínculo de amor que nuestro genio enredó sobre nuestros corazones, son cosas que de mí no salen fuera, y en mí el provecho solo se convierte. Mas el amor, de donde por ventura nacen todas las cosas, si hay algunas que a vuestra utilidad y gusto miren, es razón grande que en mayor estima tenido sea de mí, que todo el resto, cuánto más generosa y alta parte es el hacer el bien que el recebillo;[291] así que amando me deleito, y hallo que no es locura este deleite mío.
¡Oh cuán corrido estoy y arrepentido de haberos alabado el tratamiento del camino de Francia y las posadas![292] Corrido de que ya por mentiroso con razón me tendréis; arrepentido de haber perdido tiempo en alabaros cosa tan dina ya de vituperio; donde no hallaréis sino mentiras, vinos acedos, camareras feas, varletes codiciosos, malas postas,[293] gran paga, poco argén, largo camino;[294] llegar al fin a Nápoles no habiendo dejado allá enterrado algún tesoro, salvo si no decís que es enterrado lo que nunca se halla ni se tiene. A mi señor Dural estrechamente[295] abrazad de mi parte, si pudierdes. Doce del mes de Otubre, de la tierra do nació el claro fuego del Petrarca, y donde están del fuego las cenizas.[296]
