Sino Shift

AuthorDavid Dollar
Positiona Senior Fellow at the Brookings Institution's John L. Thornton China Center.

OF all the World Bank projects carried out in China during my years as Country Director, one small project stands out.

The World Bank gave a very modest grant to a nongovernmental organization that was trying to help “left-behind children” in rural Sichuan. Both parents of these children had left for better economic opportunities—the mothers often to work in labor-intensive factories in the areas surrounding Hong Kong SAR, the fathers more typically to work construction in cities throughout the country. Children were left behind in rural villages with their grandparents.

The project brought in college kids on weekend visits from the provincial capital to help the children with computer and Internet skills they could not learn from their grandparents. Under new policies unveiled at the recent National People’s Congress, and driven very much by the country’s demographics, the nature of rural-urban migration in China is set to change. The kind of manufacturing and construction employment that migrant workers sought in the past has already peaked, so future migrants are likely to work in the service sector. And it will be increasingly easy for migrants to bring their families and become permanent urban residents, benefiting from a full range of urban services.

These shifts reflect the rebalancing of China’s economy away from a growth model that relied heavily on investment and exports toward a new model that relies more on innovation as a source of growth and on consumption as a source of demand. The extent to which China succeeds in this rebalancing will have a large effect on the global economy, and on developing economies in particular.

The old growth model

China has been growing extremely rapidly for a long time, but an important shift in this growth pattern occurred at the time of the global financial crisis.

Before the crisis, during the six years ending in 2007, China’s GDP grew at an average rate of 11 percent, with investment of 41.5 percent of GDP. That investment expanded the housing stock, manufacturing capacity, and infrastructure such as roads and rail. The country’s current account surplus (exports minus imports) was rising in this period, reaching more than 10 percent of GDP. In the six years since the global crisis, the external surplus fell sharply to 2 to 3 percent of GDP; the shortfall in demand was made up almost completely by an increase in investment, reaching more than 50 percent of GDP in recent years. China’s growth has been impressive compared with the rest of the world, but lost in the admiration is the fact that the growth rate has slowed to less than 8 percent, more than 3 percentage points slower than in the precrisis period. Thus, China has recently been using a lot more investment to grow significantly more slowly than in the past.

This pattern of growth manifests three problems. First, technological advance as measured by total factor productivity (TFP) growth has slowed. TFP measures how much an economy is getting from its capital and labor. Second and closely related, the marginal product of capital is dropping—it takes more and more investment to produce less and less growth. The real-world indicators of this falling capital productivity are empty apartment buildings, unused airports, and idled factories in important manufacturing sectors such as steel—excessive investment that generates little additional GDP. And third, consumption is now very low, especially household consumption, at only 34 percent of GDP.

The earlier experiences of Japan, Korea, and Taiwan Province of China provide some useful historical guidance about China’s current stage of...

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