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(originally published by Booz & Company)


Can China’s Growth Continue?

The influx of rural workers to the industrial labor pool, meanwhile, accounted for about one-fourth of China’s economic expansion. However, the author notes that China’s one-child policy has sharply slowed population growth and ultimately the growth of the labor force.

The remaining quarter of China’s economic expansion can be attributed to productivity gains. But the shift of workers from SOEs to the private sector was responsible for almost all the average annual labor productivity growth of 9.2 percent throughout the 2000s.

Going forward, the author says, China must boost domestic demand (in terms of consumption, investment, and government spending) to compete with its export sector. A shift toward services and away from agriculture would also help to increase urbanization, income, and business diversification. Much of the literature analyzed in the study also discusses the obstacles that China’s institutions and political infrastructure pose to further growth, raising the call for broad legal reforms and additional support for private enterprise.

Without implementing all these changes, the author concludes, China jeopardizes “its ability to overcome the middle income country trap, whereby countries start to slow after reaching upper middle income levels. For China to realise its potential as an economic superpower requires reforms of…the microeconomic drivers of productivity [and] significant transformation of the structure of its economy.”

Bottom Line:
Much of China’s economic growth was due to one-off effects of the capitalist-friendly reforms that it started to institute in the late 1970s. To continue to grow, the country will have to not only make further technology and productivity improvements but also reform its institutions and political infrastructure, strengthening the rule of law and removing other obstacles to private enterprise.

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