Structural Challenges to Sustained Economic Growth in China

• Published date: 01 January 2023
• Author: Dwight H. Perkins
• Date: 01 January 2023
• DOI: http://doi.org/10.1111/cwe.12457

©2023 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 22–43, Vol. 31, No. 1, 2023

22

Structural Challenges to Sustained

Economic Growth in China

Dwight H. Perkins*

Abstract

This essay focuses on three broad sets of issues that may not slow China’s GDP growth

to under 3 percent a year, but they will almost certainly create major social and physical

problems that will be diffi cult to deal with. The fi rst is the demographic and education

challenges featured by a rapidly aging population combined with a large share of the

population being under-educated. The second is the environmental challenges China

faces in achieving the state goal of carbon neutrality by 2060. The third challenge is low

consumption and unprecedentedly high investment, a strategy that has driven China’s

high growth rates in the past decades but is no longer sustainable. These three challenges

are intertwined, making China’s adjustment path even more uncertain. What would a

sustainable development strategy involve? The clearest need is to shift investment away

from energy-intensive housing and infrastructure and toward investment in people.

Keywords: carbon neutrality, development strategy, middle income, sustainable growth

JEL codes: E20, E60, Q58

I. Introduction

Structural change is central to all countries as they move from low-income through

middle-income to high-income status. Most countries start with a population dominated

by farming and located where arable land is available, followed by employment and

housing in manufacturing, ending up with most people working in services and highly

urbanized. Those are the obvious and nearly universal structural changes when countries

achieve sustained economic growth. Within that broad structural transformation,

however, many other changes are less universal and are, in part or in whole, a result of

policy decisions by the government. The decision by the Soviet Union (and later China)

to industrialize rapidly while minimizing dependence on foreign trade, for example,

made an early emphasis on the development of the heavy or producer goods industry

*Dwight H. Perkins, The Harold Hitchings Burbank Professor of Political Economy, Emeritus, Department of

Economics, Harvard University, US. Email: Dwight_perkins@harvard.edu.

©2023 Institute of World Economics and Politics, Chinese Academy of Social Sciences

Structural Challenges to Sustained Economic Growth in China 23

a necessity.1 China’s decision after 1978 to give greater emphasis to the expansion of

foreign trade based on manufactured exports made it possible to rely in part on imported

producer and intermediate goods.

The structural challenges that face China over the next one to two decades are

quite diff erent from those the country faced in the early 1950s or even the 1980s and

1990s. Some of these challenges are the unavoidable result of moving from low-income

to high-income status. Others, however, result from policy decisions made by the

government that may have solved a problem at the time they were introduced but have

subsequently created new challenges.

China’s economic challenges going forward involve economic growth and social

issues. Many economic growth issues are common in most countries with high incomes

per capita. Countries with large amounts of surplus labor will continue to have low

wages. But as the surplus labor disappears through migration, wages begin to rise.

Rising wages make labor-intensive methods of manufacturing costly, leading enterprises

to either mechanize production or shift it abroad to where labor costs are cheaper.

Employment shifts into services that use high-wage labor, which requires high-priced

labor that, in turn, requires high/enhanced skills. If the country is fully integrated into

world markets, to remain competitive, companies must innovate in order to stay ahead

of the foreign competition at least in certain areas. Countries at the latter stages of

economic growth thus tend to slow down. GDP annual growth rates of 7 to 10 percent

are no longer possible because those are “follower country rates.” Follower countries

have clear paths to what comes next – mostly, they copy what other successful countries

did before them but do so at lower costs.

The present paper, however, will not focus on issues of why all rapidly growing

countries slow down when they approach high-income status. Nor will this essay focus

on whether economic growth in China will be caught in the “middle-income trap” where

growth slows to a crawl or stops altogether. The issues that have caused some middle-

income countries’ growth to be caught in the trap do not appear likely to have a major

impact on China. Those forces include the earlier large external debt problems of parts

of Latin America and Eastern Europe. The weaknesses of many education systems in

some countries, particularly at the tertiary level, may be suffi cient to inhibit the move

from middle to high-income status. China does not have an external debt problem,

and its tertiary education system has made enormous progress over the past three-plus

decades and is producing large numbers of qualifi ed engineers, scientists, and others.

1The decisions by both the Soviet Union and China to minimize dependence on foreign trade resulted, in part

at least, from the fact that many industrialized market economies imposed embargos on trade with the Soviet

Union and China.