China may still grow strongly for 20 years

Latecomer's economic advantage suggests future growth more like Japan's or South Korea's, writes Lin Yifu Justin.

After three decades of 9.8 per cent average annual GDP growth, China's economic expansion has been slowing for 13 consecutive quarters - the first such extended period of deceleration since the "reform and opening up" policy was launched in 1979.

Real GDP grew at an annual rate of only 7.5 per cent in the second quarter of this year (equal to the target actually set by the Chinese government at the beginning of this year).

Many indicators point to further economic deceleration, and there is a growing bearishness among investors about the outlook for China. Will China crash?

In fact, many other rapidly growing emerging economies have suffered - and worse than China - from the drop in global demand resulting from ongoing retrenchment in high-income economies since the 2008 financial crisis. For example, GDP growth in Brazil has slowed sharply, from 7.5 per cent in 2010 to 2.7 per cent in 2011 and to just 0.9 per cent in 2012, while India's growth rate slowed from 10.5 per cent to 3.2 per cent over the same period.

Moreover, many high-income newly industrialised economies (NIEs) with few structural problems were not spared the effects of the 2008 crisis. South Korea's GDP growth slowed from 6.3 per cent in 2010 to 3.7 per cent in 2011 and to 2 per cent in 2012; Taiwan's fell from 10.7 per cent to 1.3 per cent over this period; and Singapore's plummeted from 14.8 per cent to 1.3 per cent.

Given this, China's economic slowdown since the first quarter of 2010 has apparently been caused mainly by external and cyclical factors. Facing an external shock, the Chinese government should and can maintain a 7.5 per cent growth rate by taking counter-cyclical and proactive fiscal-policy measures, while maintaining a prudent monetary policy. After all, China has high private and public savings, foreign reserves exceeding $3.3 trillion, and great potential for industrial upgrading and infrastructure improvement.

Indeed, China can maintain an 8 per cent annual GDP growth rate for many years to come, because modern economic growth is a process of continuous technological innovation and industrial upgrading. Of course, this is true for developed and developing countries alike. But developed countries differ from developing countries in an important way.

Since the Industrial Revolution, developed countries have always been on the frontier of technologies and industries, which has required them to invest in costly research and development.

By contrast, technologies and existing industries in developing countries are in general well within the global frontier. As a result, they benefit from the "latecomer's advantage": technological innovation and industrial upgrading can be achieved by imitation, import, and/or integration of existing technologies and industries, which implies much lower R&D costs.

According to the Growth Commission led by Nobel laureate Michael Spence, 13 economies took full advantage of their latecomer status after World War II and achieved annual GDP growth rates of 7 per cent or higher - at least twice as high as developed countries' growth rates - for 25 years or longer.

China became one of the 13 economies after 1979. The key to understanding its potential for further rapid growth in the future lies in estimating how large those latecomer advantages still are.

Per capita GDP is a useful proxy to estimate latecomer's advantage. That is, the per capita GDP gap between China and developed countries essentially reflects the gap between them in technological and industrial achievement.

According to the most up-to-date estimate by the late economic historian Angus Maddison, China's per capita GDP in 2008 was $6725 in 1990 dollars, which was 21 per cent of per capita GDP in the United States. That is roughly the same gap that existed between the US and Japan in 1951, Singapore in 1967, Taiwan in 1975, and South Korea in 1977 - four economies that are also among the 13 successful economies studied by the Growth Commission.

If the latecomer's advantage implied by the income gap between the four NIEs and the US enabled the NIEs to realise average annual GDP growth rates of 7.6 per cent to 9.2 per cent for 20 years, China's annual growth potential should be a similar 8 per cent for the 2008-28 period.

To realise its potential growth as a latecomer, China needs, above all, to deepen its market-oriented reforms, address various structural problems, and develop its economy according to its comparative advantages.

©Project Syndicate, 2013. www.project-syndicate.org