China’s Growth: The Making of an Economic Superpower Linda Yueh

China’s Growth: The Making of an Economic Superpower What has driven growth since 1979? Re-balancing challenges Goal for next 30 years: Overcoming the “middle income country trap” 2

China vs G7 3

Average income near “trap” level

5

China’s impressive growth 6

Growth drivers % from capital/labour 30-40% TFP productivity 9.6% average GDP growth

8 50% adding capital 10-20% adding workers 60-70% Factor accumulation

% Human capital 8-15% Re- allocative efficiency 16-17% Innovation 30-40% TFP

10 Up to 2/3rd Imitation 6-13% Technology 16-17% Innovation

Contributions to growth  Factor accumulation: 60-70% Capital accumulation: 50% Labour accumulation: 10-20%  Total Factor Productivity (TFP): 30-40% Human capital: 11-15% Factor re-allocation: 8-15% Innovation: 16-17% minus “imitation” = 6-13% 11

Re-balancing challenges (1) Increase reliance on own market, less on exports (2) Raise consumption, reduce inefficient savings (3) Grow private sector, reduce distortions from state- owned sector (4) Increase innovation, as imitation limits reached (5) Continued opening, include firms “going global” 12

13 (1) Re-balancing towards services Services Industry Agriculture

14 (2) Raise consumption as % GDP

15 (2) Address growth in savings Share of GDP

(3) Reduce state sector? 16 State-owned enterprises Private firms

(3) State-owned sector still important for jobs 17

(3) Notable productivity differences 18

(3) Also in return on assets 19

(4) Signs of innovation 20

21 (5) China “going global” Source: IMF.

Salter-Swan Model linking interest rate & exchange rate reforms

23 The next decades of reform 2020: Re-structuring the economy 2030: Productivity & innovation as growth drivers 2040: Stable & strong institutional foundations

China’s Growth: The Making of an Economic Superpower Linda Yueh