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Growth to sustain as the poor catch up with the rich
By Li Wei and Stephen Green |
December 3, 2012, Monday
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Print Edition
Print Edition
Much recent discussion has focused on China's potential growth rate in the next few years. Most economists who have done the math suggest that 7 to 8 percent real growth is a reasonable expectation for another five years, and perhaps longer if structural reforms can be introduced soon.
We postulate what would happen to national growth if, over the next few years, Guizhou, currently China's poorest province, became Shandong, and then grew further to become Shanghai. In other words, we work out how much growth would be generated if the poor parts of China caught up with today's rich parts. Simple math suggests that a sustained 7 percent rate of growth for at least five more years is a reasonable expectation.
Three tiers
We group the provinces into three tiers according to gross domestic product per capita:
Tier 1 municipalities, Beijing, Tianjin and Shanghai and their rural outskirts, are home to 4 percent of China's population, produce 9 percent of the country's GDP, and had average per-capita GDP of 78,800 yuan (US$12,500) in 2011.
Tier 2 provinces, with average per-capita GDP of 50,000 yuan in 2011, include seven provinces, Fujian, Shandong, Liaoning, Guangdong, Inner Mongolia, Zhejiang and Jiangsu. One-third of the country's population officially live here.
The rest provinces are left in Tier 3. This group had average per-capita GDP of a third of the Tier 1 level. Altogether, Tier 3 provinces contribute about 46 percent of China's GDP, while they are home to 63 percent of the population.
Now, what would happen if Tier 3 and Tier 2 provinces caught up with today's Tier 1 level of per-capita GDP?
If Tier 3 provinces could reach the current per-capita GDP level of today's Tier 2 provinces, China's whole economy could grow at 7 percent for another five years.
If Tier 2 and Tier 3 provinces could increase their per-capita GDP to today's Tier 1 level, the national economy could grow at 7 percent for another 12 years.
Now, we are not saying that economics is simply a process of poor people getting richer in a straight line. Clearly, institutions and policy matter; external shocks can be a pain to deal with; and the macroeconomic cycle does exist, propelling growth at some times and dragging it back at other times.
Potential growth
But our idea here is simple: if the poor parts of China were able to catch up with the rich parts of China - in other words, if the poor parts could just follow the same growth model and do what their neighbors have done - then 7 percent potential growth for another 5 to 12 years looks achievable to us.
At least two substantial arguments could be mustered against us:
First, sceptics might point out that that it is much harder for poorer inland provinces to grow than coastal zones. In response, we argue that inland infrastructure has clearly improved, attracting manufacturing investment; and a number of these places have natural resources to exploit.
Second, the rich provinces might have left behind a grenade that will blow up the bridge to riches. Such problems might include ballooning government debt, a housing-market bubble, or a decline in productivity associated with an overly regulated services sector. These are clearly issues, some of which we have dealt with elsewhere. In short, we believe that policy makers can muddle though.
Indeed, the catch-up by poorer areas has already begun. Levels of Tier 3 and Tier 2 per-capita GDP relative to Tier 1 levels have been rising since 2004. Moreover, except in 2008 to 09, the catch-up process has not lost momentum.
All else being equal, we see no serious barriers to people in poorer provinces moving into urban areas, becoming more productive, being paid more, becoming consumers and generating a larger services sector in their areas.
This is not rocket science, and it does not require a massive change in the growth model - all we look for is for China's Tier 3 regions to do what Tier 1 and 2 regions have done before.
Of such things a few more years of growth are made.
We postulate what would happen to national growth if, over the next few years, Guizhou, currently China's poorest province, became Shandong, and then grew further to become Shanghai. In other words, we work out how much growth would be generated if the poor parts of China caught up with today's rich parts. Simple math suggests that a sustained 7 percent rate of growth for at least five more years is a reasonable expectation.
Three tiers
We group the provinces into three tiers according to gross domestic product per capita:
Tier 1 municipalities, Beijing, Tianjin and Shanghai and their rural outskirts, are home to 4 percent of China's population, produce 9 percent of the country's GDP, and had average per-capita GDP of 78,800 yuan (US$12,500) in 2011.
Tier 2 provinces, with average per-capita GDP of 50,000 yuan in 2011, include seven provinces, Fujian, Shandong, Liaoning, Guangdong, Inner Mongolia, Zhejiang and Jiangsu. One-third of the country's population officially live here.
The rest provinces are left in Tier 3. This group had average per-capita GDP of a third of the Tier 1 level. Altogether, Tier 3 provinces contribute about 46 percent of China's GDP, while they are home to 63 percent of the population.
Now, what would happen if Tier 3 and Tier 2 provinces caught up with today's Tier 1 level of per-capita GDP?
If Tier 3 provinces could reach the current per-capita GDP level of today's Tier 2 provinces, China's whole economy could grow at 7 percent for another five years.
If Tier 2 and Tier 3 provinces could increase their per-capita GDP to today's Tier 1 level, the national economy could grow at 7 percent for another 12 years.
Now, we are not saying that economics is simply a process of poor people getting richer in a straight line. Clearly, institutions and policy matter; external shocks can be a pain to deal with; and the macroeconomic cycle does exist, propelling growth at some times and dragging it back at other times.
Potential growth
But our idea here is simple: if the poor parts of China were able to catch up with the rich parts of China - in other words, if the poor parts could just follow the same growth model and do what their neighbors have done - then 7 percent potential growth for another 5 to 12 years looks achievable to us.
At least two substantial arguments could be mustered against us:
First, sceptics might point out that that it is much harder for poorer inland provinces to grow than coastal zones. In response, we argue that inland infrastructure has clearly improved, attracting manufacturing investment; and a number of these places have natural resources to exploit.
Second, the rich provinces might have left behind a grenade that will blow up the bridge to riches. Such problems might include ballooning government debt, a housing-market bubble, or a decline in productivity associated with an overly regulated services sector. These are clearly issues, some of which we have dealt with elsewhere. In short, we believe that policy makers can muddle though.
Indeed, the catch-up by poorer areas has already begun. Levels of Tier 3 and Tier 2 per-capita GDP relative to Tier 1 levels have been rising since 2004. Moreover, except in 2008 to 09, the catch-up process has not lost momentum.
All else being equal, we see no serious barriers to people in poorer provinces moving into urban areas, becoming more productive, being paid more, becoming consumers and generating a larger services sector in their areas.
This is not rocket science, and it does not require a massive change in the growth model - all we look for is for China's Tier 3 regions to do what Tier 1 and 2 regions have done before.
Of such things a few more years of growth are made.
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