Economy

Changing growth model key to sustaining growth

(Xinhua)
Updated: 2010-11-11 17:03

NINGBO - China's sustainable growth in the future would be dependent on how well the country can shift away from its old investment-led growth model to focus on boosting productivity and domestic consumption, an expert said Thursday.

"However remarkable the success China has had in the last three decades, the next two or three decades will be ineluctably more difficult than what has already been achieved," Martin Wolf, associate editor and chief economics commentator of the Financial Times, told Xinhua.

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Wolf ranked the difficulty in raising productivity levels, managing an inevitable decline in investment rates, protecting its financial sector and securing natural resources at workable prices as some of the most crucial challenges that lie ahead for Chinese policymakers.

"As China is becoming a middle-income country, its economy has come to a point of development where it no longer can compete on cheap wages, and it doesn't yet have the technological capacities as the advanced countries," Wolf said on the sidelines of the third annual Globalization and Economic Policy Center (GEP) conference in Ningbo, Zhejiang province.

The fact that the old model had "clearly reached its end" had been widely understood and accepted among China's leaders and it was clear that the country's next five-year plan would be built around that recognition, said Wolf.

"The danger of falling into the 'middle-income trap' is quite small, but if that is going to be avoided, the aim for China over the next two or three decades is going to have to be very, very rapid increases in fundamental productivity and innovation," said Wolf, a long-time observer on the economy of China since the 1990s.

Wolf also pointed to the management of the consequences of China's "simply staggering" investment ratio as a big challenge for China.

"Astonishingly and quite uniquely in history, China has emerged as the largest investor relative to gross domestic product in the world." He said this investment-led growth pattern, while ensuring rapid economic growth over the last decade, created a "significant vulnerability".

As no economy can maintain a growth rate of 10 percent forever, an inevitable slowdown would reduce the investment rate that China needs by 20 percentage of GDP, from 45 percent to 25 percent of GDP, Wolf said.

"If this happens abruptly, like it did to Japan in the past, there will be a collapse in demand," he said.

"This is not an imminent risk but a sharp adjustment is likely to happen at some point in the next 25 years and when that happens, China will have to shrink its savings dramatically or increase its current account surplus to something like 20 or 25 per cent of GDP if it is to balance its economy."

Wolf said that Japan failed to rise to the challenge, adding that "China is going to have to manage a decline in investment rate without losing its dynamism."

"The current Chinese model has to be changed in quite fundamental ways towards a domestic demand-led model, which can only happen if consumption takes off. A fundamental strategic shift will be required," said Wolf.

"The core policy is that what sort of policy can China pursue that would lead to domestic consumption growing faster than GDP for the next ten to 15 years on a sustainable basis," he said.

He also said a reduction in income inequality and a significant rise in wages would need to happen, and a shift in income from capital to labor would be needed.

Wolf expected China to take policies to encourage higher real wages, and lower saving through the creation of a social security network, and said public consumption needed to rise as the government finances were very strong and running a surplus.

As corporate profits were very high in China, which are largely retained by the corporations, the country could raise taxes on them to fund government consumption in public services such as education and health care system, he said.

Despite the challenges, China still had great growth potential as measured by its distance from the global productivity frontier, namely, the difference between the per capita gross domestic product (GDP) of China and that of a major economy which was furthest ahead, said Wolf.

"China is still far behind the frontier, with output per head, at common international prices (or purchasing power parity), at a fifth of US levels," he said.