By Li Shantong, Zhai Fan

The 13th Plenary Session of the 11th National Congress of the Communist Party of China held in 1978 marks an important milestone in China's economic development. Since then, major changes have taken place: 1. The economic system has step by step stridden into a socialist market economy from the traditional central planning economy. 2. The closed economy is in the transition to an open one. 3. The pace of China's industrialization and urbanization has accelerated. The major changes in the economic system and structure have promoted the economic development with annual GDP growth averaging 9.8% from 1978 to 1997, much higher than the annual growth rate (5.98%) in the first 30 years after the founding of the New China and the world average in the same period.

Table 1. Economic Growth Rates in China and other Parts of the World (%)

	1980—1988	1989—1997	1979—1997
World	3.4	3.2	3.3
China	10.1	9.5	9.8
Developing Countries	4.3	5.7	5.0
Asia	6.8	7.8	7.3
Hong Kong, China	8.2	4.8	6.6
Malaysia	5.8	8.7	7.2
Republic of Korea	8.1	7.3	7.7
Singapore	7.3	8.5	7.9
Thailand	6.7	7.8	7.2
Latin America	2.7	3.1	2.9
Africa	2.3	2.6	2.4
Developed Countries	2.7	2.2	2.5
The Unites States	2.7	2.3	2.5
Japan	3.8	2.4	3.1
The European Union	2.3	2.0	2.2

Source: Brilliant Achievements in 20 Years, compiled by the State Statistics Bureau.

The high economic growth in the past 20 years has led China to step into the ranks of lower-middle income countries from a low-income country. It has also helped China to improve its people's life by quite a big margin and greatly raise its in international standing. However, the crucial period will come in the next 20 years. If we can maintain the rapid development in the period, we will be able to further narrow our gap with the developed countries, further raise the standard and quality of the people's life and lay a solid foundation for realizing the objectives set in the third phase of development strategy. Looking into the prospects of China's economic development in the next 20 years, the article will first analyze the potentials in and challenges to China's economic development. Then it simulates the possible economic prospects till 2020 by means of the general dynamic and calculable equilibrium model of China's economy.

I. Potentials in and challenges to the economic development

To look ahead into future economic development, it is necessary to look back into and summarize the economic development process in the past and the current economic situation. The past has provided us with the starting point of and basic restraints on the future development as well as the fundamental experience and lessons drawn from the success or failure of the policies.

China's economy has witnessed profound changes in the past 20 years with rapid growth coupled with huge restructuring: the fast industrialization and urbanization, the rapid emergence of non state-owned economy, greater dependence on the external economy and the initial establishment of the framework of a market economy system. The high growth achieved in the past 20 years mainly benefited by fast accumulation of capital in kind and the increase in productivity, while the contribution of the labor force growth was only secondary. Calculation shows that from 1978 to 1997, capital input contributed nearly 60% to the output growth, productivity increase contributed 30%, while the expansion of the gross work force contributed only 12 percent.

Capital accumulation represented the main contributor to the economic growth in the past 20 years. Apart from in the 1980s when the investment had the nature of "making up for the missed lesson," the annual increase in investment maintained at about 38% after 1985 and at 40% from 1993 to 1995. Such an investment ratio was not only higher than that in countries of other areas, but also higher than that in Southeast Asian nations which share a similar cultural tradition and social practice and a high savings tendency with China. The two major sources to ensure high investment ratio come from rapid increase in people's savings and rising inflow of foreign capital. Since China adopted the policy of reform, people's income saw great increase in 17 years as a result of the fact that the distribution of the national income kept tilting toward individuals. The traditional consumer goods and new durable consumer products like electric appliances were much sought in the 1980s, but after that, no new hot areas attractive to the consumers surfaced. But on the other side, the Chinese have the tradition of thrift and savings. Such a situation prompted the balance of the savings deposits of Chinese urban and rural residents to reach 4,628 billion RMB yuan at the end of 1997 from 21.06 billion at the end of 1978. In the same period, the decline in the state revenue led to a fall in the government savings/investment, but the huge rise in the savings deposits of the residents ensured the high investment ratio. Meanwhile, direct foreign investment in China increased at a yearly rate of 29.1% from 1979 to 1997, accounting for over 10% of the overall investment in China.

Higher productivity is another major cause to push up the economic growth. The higher productivity since 1978 fundamentally stems from the two state policies of reform and opening up. The reform to turn the economy market-oriented promoted the rational resources flow among the departments, enhanced the disposition efficiency and heightened enterprises' motive to seek profit. The opening up helped the introduction of advanced foreign technology and equipment into China, but also enabled us to learn the modern management skills and boosted the competitiveness of domestic enterprises both at home and on the world market.

The expansion in the gross work force was not a major cause to push up the economic growth, however the redeployment of the labor force among industrial sectors was an important growth source. Even with the same input and technological level, higher output can still materialize through demand structure change to enable production to lean toward industries with higher productivity and to allow resources to flow to the highly productive sectors from those with lower productivity. When production shifts to the sectors of higher productivity, the growth generated by the redeployment of resources is more evident. In the past 20 years, China's industrial restructuying also constitutes a major condition for the high economic growth rate, particularly large numbers of work force in agriculture have moved into the secondary and tertiary sectors where the economic yields are relative higher. Research indicates that in the economic growth of 9.8% from 1978 to 1997, the shift from the agricultural work force contributed 0.8 percentage points to the growth.

Therefore, China's future economic growth will be determined by whether the growth factors mentioned above can be maintained.

In the next 20 years, China will be able to keep the high savings rates (investment rates). Primarily, resident savings will continue to increase on the back of sustained income growth, further improvement in the living standards of the people inhabited in poor areas, and the tendency of savings among the residents. The 1996 sample survey conducted by the State Statistics Bureau demonstrates five purposes for the urban population to save: 1. bill children's education cost; 2. meet an emergency; 3. pay medical expenses; 4. cover the living expenses when becoming aged; 5. bill children’s marriage cost. Of the five, children's education cost, medical expenses and old-age living expenses would account for 60% of the total financial assets of the residents. There will be no big change in the inclination to save among the residents in a short time, and the national savings level is expected to remain fairly high in the next 20 years. At the same time, the stability in China's political and economic environment and the enormous Chinese market will still be quite attractive to foreign investors. Viewed from the long-term perspective, the growing inflow of foreign investment will remain steady. The characteristic in China's population growth and structure determines that in the next 15 to 20 years, the labor force will continue to grow, particularly in the first 10 years when the growth is expected to be around 1.5%. With the development in education and urbanization, the quality of the labor force will be constantly upgraded, and the accumulation of the labor force capital will play a bigger role in the economic growth.

China is still in the process of industrialization. The share of the primary industry in GDP will go down further, and the trend of the labor force moving from agriculture into non agricultural sectors will continue, but at slowing paces. The proportion of the tertiary industry employees in the economy is not only far lower than the high-income nations, but also lower than many lower middle-income countries of. It even falls below that in India, whose development level is close to that of China. The tertiary industry will become a major sector to absorb the labor force shifted from the primary and secondary sectors.

Deeper reform and opening up will help China constantly raise productivity. Higher productivity in agriculture will mainly spring from rising level of agricultural science and technology and from the improved way in organizing production. The reform of the state-owned enterprises and the vigorous development of small and medium-sized enterprises will certainly boost productivity. The structural reform of the government departments will also help economic efficiency to climb.

Despite these favorable factors for the development in the next 20 years, we should also see the challenges and restraints facing China's future development.

1. Restraints of endowment of natural resources

China is endowed with rich natural resources. But its large population results in the low per capita possession of the resources, and the quality of many kinds of the resources is relatively low. The cultivated land area accounts for only 8.9% of its total land area and forestry 13.39%. Its per capita cultivated land amounts to only 0.08 hectares, less than one third of the world average (0.26 hectares per person). The per capita possession of water stands at 2,300 cubic meters, equaling one fourth of the world average. On the other hand, the growing population and dwindling natural resources are further diminishing the per capita possession of natural resources like fresh water, cultivated land, forestry, grassland and minerals. Natural resources will be one of the factors to restrain fast economic growth.

2. Environment protection and sustainable development

Since the reform, outstanding achievements have been scored in environment protection. The rapid expansion in the scale of the economy has not been coupled with a deterioration in the quality of environment as having happened in the developed countries from the 1950s to 1970s. However, China will still face grave environment problems as pollution is intensifying and the work to bring it under control is arduous. Coal accounts for over 70% of the non-renewable resources of energy and such an energy structure cannot be altered in a longer period, worsening pollution of the atmosphere. Economic development will place China as a leading warm house gas emitter in the world. Although the per capita volume of the emission is not high, the pressure to reduce it is on the rise. As for the water resource, dwindling per capita possession will exacerbate the unbalance in regional distribution while a larger quantity of sewage is being discharged to aggravate water pollution. The disposal of solid wastes cannot be ignored either. If insufficient attention is paid to the environment and ecology and no enough measures are adopted, China's economic development will be constrained, development gains will be offset by the deterioration of environment and it will be difficult to improve the quality of the people's life. We should make more rational use of our natural resources and put more resources into environment protection and control to achieve sustainable development.

3. Population and work force

China abounds in work force resources. Its demographic structure determines that in the next 10 years, the population of work age (15 to 64 years) will keep growing. The industrialization and urbanization will free a large amount of work force from rural economic activities. Such a situation indicates that China has abundant supply of work force, but also means that sufficient new jobs must be created to cope with the employment problem brought about by the increase in the work force and the laborers displaced from the agricultural sector.

After entering of the 21st century, China will soon encounter the challenge posed by an aging population. By 2002, over 10.15% of the population will be aged 60 years and above (The Report on China’s Development, 1996). Judged by the standard of aging society (according to the proportion of people aged 60 and above) practiced in China up to now, China will enter the aging society by then. Even under the prevailing international criterion (according to the proportion of people aged 65 and above), China will step into the aging society no later than 2020. Different from developed countries, China will turn into an aging society at the stage of lower middle-income. The increased burden of the aging society will affect to a fairly big extent the consumer pattern and social development.

4. Discrepancy in income distribution and among regions and assistance to the poor areas

China is a low-income developing country and also a country with a vast territory and a big pupulation. The varied geographical, climate, humanistic, historical factors and different development conditions and speeds of various regions leave them with disequilibrium in development and the disparity in income. Since the reform, China has achieved speedy growth in the overall economy with all the provinces, municipalities and autonomous regions having benefited from the growth, but there exist big disparity in their development speed. For example, from 1978 to 1995, the growth rate averaged 14.2% a year in Guangdong Province, but only 4.28% Heilongjiang Province. Such a state of affairs widened the gap in the economic development among regions and the gap tends to further widen in coming years. To minimize the discrepancy among regions by coordinating regional economic development will remain an arduous strategic work.

China quadrupled its per capita GDP in 1997 from the amount in 1980 and greatly improved the living standards of its people, but there still exists a large poor population. Even in the relatively affluent province of Guangdong, poor areas can still be found. It is estimated that 70 million people are living under the poverty line in Chinese cities and rural areas. Calculated according to the standard of the poverty line of one U.S. dollar a day set by the World Bank, 22 percent of the Chinese population are living in poverty. Poverty alleviation will be a problem calling for urgent solution for China in the future.

II. Analysis of the economic development prospects in the next 20 years

Employing the general dynamic and calculable equilibrium model and taking into account of the impact of some fundamental factors, we simulate the possible economic prospects till 2020. But it should be pointed out that such analysis is not a forecast, and its value does not lie in the provision of some particular economic facts or accurate estimation of events but in the revelation and clarification of the fundamental factors affecting future economic development. The comparison and analysis of different quantitive imitated situations quantities can help us understand the risks and uncertainties in our future development so that we can define the future development objectives and strategies on a more solid basis. This article will provide a brief account of the major features of our simulated basic scenarios from 1995 to 2020.

1. Population and work force

In the next 20 years, China’s population will keep growing at a low pace and the growth rate will tend to further slow. From 2000 to 2010, the growth rate will fall to 0.62% from the current 1%, and will further drop to around 0.47% from 2010 to 2020. The population is expected to reach 1.4 billion in 2020. The family planning policy China adopted in mid 1970s has cut down the proportion of children in the total population and increased the work force population. In the period from 1980 to 1996, the total population grew at an annual rate of 1.4%, but the growth rate for people aged between 15 and 64 increased by 2.1%. In 1997, the people aged between 15 and 64 accounted for 68% of the total population, while in other low-income countries and all the middle-income countries, the proportion of people of this age group in the total population stands at 57% and 61.5% respectively. The trend of rising proportion of work age population will continue to 2010 when the proportion reaching its highest point of 72%. After that year, the fall in the children population and the aging process will gradually cut down the proportion of the work age population. From 2000 to 2010, the work age population will grow at an annual rate of 1.2%, but the growth rate will be less than 0.5% from 2010 to 2015, and will further fall after 2015.

The proportion of the aging population will constantly increase in the next 20 years with the growth picking up speed from 2010. The annual growth rate of the aging population will stand at 2.2% from 2000 to 2010, but will rise to 4% form 2010 to 2020. In 2020, people aged 65 years and above will amount to over 10 % of the total population, leading China into an aging society. The change in the age composition of the population will lower the dependency ratio by a biger margin in the first 10 years of the 21st century, but the number will gradually pick up after that. The changes mentioned above have far-reaching significance to the future economic development and employment in China. They will directly determine the supply of the work force, but also produce an indirect impact on social savings and public expenditures. The fast growth in the supply of work force and falling dependency ratio at the beginning of next century will facilitate the rapid development of the economy, but will also pose grave challenges to employment. However, the economic growth will be affected after 2010 when the growth of work force begins to slow down and dependency ratio goes up, leading to declining economic growth, falling savings level and heavier social burden generated by the rising aging population.

Table 2 Population Growth and Age Composition (1997—2020)

Source: US Bureau of Census, International Data Base. *Dependency ratio is defined as the ratio between the non-work age population (children population plus aging population) and the work age population.

Figure 1. China’s Population Growth, 1997-2050

Source: US Bureau of Census, International Data Base.

2. Economic growth

Our simulated scenario is based on the optimistic estimation of the internal and external environments for China’s economic development. It assumes that in the coming 20 years, China will continue to pursue the policy of reform and opening up, the socialist market economy system will be established and perfected step by step, agricultural work force will be constantly shifted to non-agricultural sectors, the opening to the outside will expand and deepen and the international environment will remain stable. These factors will enable productivity to rise and economy to grow in the next 20 years at the same level as its achievements of the past 20 years. That is, total factor productivity will keep growing at an annual rate of 2.5 to 3 %.

According to these assumptions, GDP growth will average 7.3% a year from 2000 to 2020. From 2000 to 2010, the average growth will reach 7.9%, but fall to 6.6 % from 2010 to 2020.

Economic growth in the next 20 years will still mainly count on the accumulation of capital and the improvement in productivity. As work force stops to grow after 2010, its contribution to economic growth will gradually decrease to zero. In the first 10 years of the next century, the expected fast capital growth and the higher productivity will provide impetus to fast economic growth. But after 2010, capital growth will tend to slow down and work force increase will gradually stop, dragging the yearly economic growth rate to drop by 1.3 percentage points from the annual average from 2000 to 2010.

Table 3 Economic Grow and its Sources (1990-2020)

In the period from 2000 to 2010, the fast growth in capital stock will chiefly benefit by the sustained high domestic savings level and high investment ratio. The tendency of the Chinese people to keep their savings at a relatively high level is unlikely to change in a short period and the absence of a perfect social security system demands an increase of their savings. Moreover, the growth in the work force and the decline in dependency ration at the beginning of the next century will stimulate the savings rate to further climb. At the same time, the prudent financial policy followed by the government will keep financial deficit at low or even zero level. These factors will keep the overall investment ratio at about 40% in the period from 2000 to 2010. But after 2010, the rise in the dependency ratio, particularly the aging population, will lead the savings level to decline. By 2020, the overall investment ratio will be down to below 35%.

In the next 20 years, foreign trade will continue to grow, but the speed will slacken as its share in GDP. The rapid expansion of foreign trade since 1978 first benefited by the implementation of the policy of reform and opening up, which gave free rein to China's comparative advantage. At the same time, the emerging Asian industrial regions were in the transformation of their comparative advantage and structures, and their labor intensive industries and their shares on markets in the developed countries were shifting to the developing countries where the labor cost is even lower. The rapid growth of China's export in the past 20 years chiefly relied on the increase in the labor intensive products, processed goods export and commodities turned out by foreign-funded enterprises, As China’s labor intensive products have occupied a big share on the international market and export is difficult to rise by a big margin, further growth in export will hinge on product upgrading and the opening up of new markets. Therefore, foreign trade growth in the next 20 years will be slower than GDP growth, with foreign trade in 2020 accounting for about 30% of GDP which is closer to the general dependence on foreign trade in major countries. But the import and export commodity structure will be upgraded, the share of processing trade will go down, and the link between foreign trade and domestic economic activities will be cemented.

Table 4 Demand Structure of GDP (%) (1995—2020)

3. Industrial restructuring

The Chinese economy is still in the process of industrialization and restructuring represents a major source and driving force for economic growth. Table 5 provides the industrial restructuring in the next 20 years under the standard scenario. It indicates that falling share of agriculture and the marked rise of the share of the service sector will be the main features of the industrial restructuring in the 20 years. By 2020, the proportion of the primary industry in the economy will go down, the share of the tertiary industry will climb and that of the secondary industry will stay unchanged. Restrained by Engel effect and agricaltural land, the share of agriculture, the cultivating sector in particular, in the total output will fall by a bigger margin. The share of light industries in the total output, like the foodstuff and textile sectors, which depend on agricultural produce as the intermediate input, will also drop. The share of the energy sector will continue to go up, but that of the raw materials sector will fall. Because the demand for investment and the capital/labor ratio will rise and the progress in technology will find expression in the leaning direction in the intermediate input, the share of capital goods sector will grow. More rapid growth will be particularly found in the electric machinery and electronic sectors. The rising demand of the residents for services and growing dependence of the production activities on the input of the service sectors will push up the growth of the service sector in the coming 20 years.

The change in the employment structure shows that the share of the agricultural work force will almost halve by 2020. However, agriculture will still occupy nearly 200 million laborers, about 26% of the total work force. Compared with the 6 percent share of the agricultural output in the nation’s total output, the pressure posed by the agricultural work force shifting to other sectors will still be quite heavy. This fact indicates that despite the high capital accumulation ratio, the basic situation in China, a country with abundant work force but short of capital, will not change in 20 years. The secondary industry and the tertiary industry will be the main absorbers of the new laborers and the surplus agricultural work force. Employment will grow fair quickly in the service, construction, electronics, electric machinery and some light industrial sectors in the next 20 years.