We have launched E-mail Alert service,subscribers can receive the latest catalogues free of charge

You Are Here: Home > Publications> Articles

For Higher Efficiency①


By Liu Shijin

Research Report Vol.17 No.3, 2015

I. Significant Progress Made in China’s Economic Restructuring

During the past year, Chinese policy-makers described the new stage of China’s economy as “new normal”, which has reached a broad consensus. Xi Jinping, General Secretary of the CPC Central Committee, pointed out the significance of focusing on the “new normal” of China’s economy when he made an inspection visit to Henan Province. Later, he elaborated, systematically and from various perspectives, the “new normal” during the APEC CEO Summit 2014 and the 2014 Central Economic Work Conference. The real economy demonstrates the features of “new normal” in several aspects. The economic growth rate continues to drop to 7.4%, the lowest during recent years, but the growth remains by and large steady. The employment situation is favorable and structural problems, such as graduate unemployment, have been eased up. Enterprise revenue and fiscal revenue remain stable despite of some slowdown. Moreover, residents’ income increases generally at the same pace with the economy and the income of rural residents rises at a greater rate. With severe haze spreading, people are more keenly aware of the challenges posed by the environment problems while energy use and carbon emission per unit of output fall sharply. Financial risks have been largely exposed, but it is still feasible to prevent overall and systemic risks. More importantly,

China is undergoing a historic economic restructuring. A number of changes, once popular topics for years, have been and are taking place. For example, consumption outnumbers investment; the tertiary industry surpasses the secondary industry; and the economic development more relies on domestic demand and improved factor productivity. As China’s economy enters into the “new normal” from the “old normal”, it is inevitable and common that more problems, conflicts and challenges show up than any other stages. Based on international experience, it is usually at this stage that many economies suffer from serious problems, even a crisis. It is no easy job, no matter for China or the international society, to maintain the economy stable and realize substantive progress during the restructuring in the past year.

However, if China has completed, in the past several years, the first half of the transition from one growth phase to another or economic restructuring, it is now moving into the second half and will probably face a much more difficult situation and more severe challenges. It is therefore the main task in the second half of economic restructuring to proactively adapt to and lead the new normal of economic development on the basis of the correct understanding of the situation. And the key to completing China’s economic restructuring successfully and entering a new stage of development lies in comprehensively boosting factor productivity in a sustainable way.

II. Contributions and Changes of Factor Productivity in China’s Economic Growth

Productivity determines the quality of economic development. During the past 30 years of high-speed economic catch-up, the increasing input of factors was the primary driver and increased productivity has played a crucial role as well. Studies by Harvard professors including Perkins (Perkins et al., 2008) suggest the annual growth rate of productivity in China during 1978-2005 reached 3.8%, contributing to the economic growth up to 40%. According to the latest estimate by the research team under the Development Research Center of the State Council, the annual growth rate of productivity in China reached 3.6% during 1978-2013, contributing 37% to China’s economic growth.

During the past 30 years, the productivity in China has been rapidly raised for such reasons as deepening reform and opening-up, unleashing late-developing advantages in technology, achieving fast technological catch-up, and factors flow from agricultural sectors with low productivity to non-agricultural sectors with high productivity, etc. A study by Bosworth and other scholars at Brookings Institution in the United States (Bosworth et al., 2008) found that from 1978 to 2004 China’s workforce allocation contributed to an average annual productivity growth of over 1%, some 30% of the total increased productivity. Our study also indicates that during the past three decades or so, one-fifth of the increased labor productivity resulted from structural changes, mainly the transfer of agricultural labor force to non-agricultural industries, which contributed an average annual rate of 1.6% to the overall growth of labor productivity.

China’s productivity has experienced fast improvement during the past three decades or so, but many studies show the growth of productivity slowed down in recent years. For example, our research indicates China’s annual growth rate of productivity, since the financial crisis in 2008, dropped by more than 1% compared with the average growth rate during the last thirty years, and declined more sharply in the past two years. Analysis of the situation can be done in the following aspects.

First of all, as China’s economy enters into the “new normal”, it is inevitable that the growth rate of productivity slowed down in recent years, which is largely the same with the growth pattern of economies successful in catching up with advanced nations. Based on the experience of the successful economies, the growth rate of productivity will regularly slow down as the economy develops into more advanced stages and approaches the developed nations in technology. The rule is more obvious especially as the economy approaches the high-income threshold and transits from high-speed growth to medium and high growth. Here is the underlying reason. As the economy marches into more advanced stages, late-developing countries run out of technological advantages; it is more difficult for factors to transfer from sectors with low productivity to those with high productivity; and the process of technological catch-up and factors transfer slows down.

Compared with other successful late-developing economies, it is common that the growth rate of productivity in China has decelerated in recent years, which indicates the economy will develop into the mature state from the rapid catch-up state. To illustrate this point, we use “Penn World Tables 8.0”, which is currently the most acceptable database for multinational and inter-temporal comparison. Based on comparisons and analysis, conclusions are drawn as follows. (1) For technologically advanced economies such as the United States, the growth rate of productivity has always been stable at around 1%. (2) During the stage where per capita GDP reached 11,000 international dollars, late-developing countries like Japan and South Korea transferred from high-speed growth to low-speed growth in terms of productivity. From 1960 to 1973 when Japan experienced high-speed growth, the average annual growth rate of productivity reached 5.58%, but afterwards it underwent a sharp plummet and even negative growth from 1973 to 1980. As for South Korea, the growth rate of productivity was nearly 3% during the high-speed growth period between 1980 and 1990, and then fell to no more than 1%. (3) China has the same trend with successful late-developing economies, such as Japan and South Korea, in terms of the productivity growth. The average annual growth rate of productivity in China exceeded 3% from 1980 to 2007 and dropped to around 1.6% between 2007 and 2011.

Second, apart from the regular factors often seen in the catch-up process, the productivity growth rate decreased in recent years in China for some other regular factors and special factors of our country. For example, during the economic downturn, the growth rate of productivity is low and pro-cyclical. Moreover, strong investment stimulus, implemented to cope with the financial crisis, has to some extent exacerbated overcapacity in some domains.

If you need the full text, please leave a message on the website.

①Due to limited space, the report is an abridged introduction to A Ten-year Outlook on China’s Economic Growth (2015-2024): Striving for High Efficiency.