Why is China's GDP growth rate slowing down?
Three generations of worker archetypes
In a nutshell, it comes down to some basic arithmetic.
Let’s consider three archetypes of workers:
A subsistence farmer
Blue-collar laborer
Highly educated white-collar worker
“Low-income” economies are dominated by the first archetype — poor farmers that aren’t equipped with modern equipment whose productivity levels are largely based on muscle power. These would be countries like Madagascar, Ethiopia and Haiti that have per capita GDPs in the $1,000 to $3,000 range.
“Middle-income” economies are dominated by the second. Many of the subsistence farmers (and/or their many children) have moved into the cities and now work in factories where they can leverage their muscles with some modern machinery and capital. These would be economies like Vietnam or Indonesia that feature per capita GDPs in the $7,000 to $13,000 range.
“High-income” or “advanced” economies are dominated by the third archetype. The blue-collar workers from the last generation saved up and paid for their 1–2 kids to get a nice education so they could work in a better environment, like an office or a shop. These kids work for companies that have been organized around sophisticated supply chains and take full advantage of modern machinery, software and/or automation. These would be economies like Chile, Malaysia, South Korea and the United States that have per capita GDPs in the $20,000 to $60,000 and above range.
Let’s say for the purposes of this exercise that each shift takes a generation, or around 25 years.
Here’s where we need to perform that arithmetic:
The first jump from $2,000 to $10,000 (the mid-points of those ranges) results in annualized growth in per capita GDP of 6.6%. Add in some elevated population growth (due to rapidly declining mortality rates and still-large-sized farming families) and you get to 7.5 to 8.0% GDP growth.
The second jump from $10,000 to $30,000 results in annualized growth in per capita GDP of 4.5%. Population growth typically slows down drastically during this stage, so aggregate GDP grows only slightly faster than per capita metrics at this point.
Directionally, this simple mathematical model actually describes the last four decades of China’s development quite well.
In 1980, per capita GDP was around $300 and the vast majority of the Chinese population were subsistence farmers performing tiring, back-breaking work. The first economic reforms were focused on the agricultural sector — removing price controls on many categories of agricultural products and allowing farmers more freedom to make their own economic decisions. This resulted in a burst of productivity gains, which led subsequently to a gradually increasing pool of excess labor.
This excess labor was soaked up by emerging export-oriented factories in the Pearl River Delta and Yangtze River Delta regions around Hong Kong and Shanghai, respectively. A disproportionate number of these were started by Taiwanese and Hong Kong entrepreneurs who brought capital, know-how and links to foreign markets, three things that China (at the time) was sorely lacking.
By 1995, per capita GDP had risen to $1,807, a more-than-sixfold increase from 15 years earlier. Population growth was quite rapid as well, averaging 1.4% per annum over this period. This resulted in very high growth rates in the 14–15% range.
From 1995 to 2008, the industrialization process continued. Growth rates were still very high as young people streamed out of the villages and into the cities. Major reforms (抓大放小) for state-owned enterprises in the mid-to-late 1990s also created additional pools of excess labor that needed to be soaked up. It hit some bumps but the Chinese economy was able to absorb much of this excess through export-oriented industrialization, modernizing domestic-centric sectors (e.g. real estate, telecoms, banking) and general urbanization.
Up until this point, China’s economic development very much mirrored that of other East Asian export bloc countries/economies like Japan, South Korea and Taiwan But ten years ago, its path hit a major bump and the Chinese economy had to veer off in a different direction.
That bump, of course, was the Global Financial Crisis — which absolutely crushed China’s export sector. In response, Chinese policymakers rapidly shifted economic priorities to credit-fueled capital-intensive activities like infrastructure and real-estate development. This helped soak up the millions of suddenly unemployed export-sector workers and smooth out the drop in economic activity. Nevertheless, growth rates still declined sharply compared with the prior period: over the past decade, growth rates averaged around 7–8% per annum.
Then five years ago, with worries about increasing levels of indebtedness in the system (largely stemming from the above-mentioned credit binge), Chinese policymakers began shifting the growth focus to consumption and the services sector. Growth rates have slowed even further and will continue to slow — I expect somewhere in the neighborhood of 5% average growth rate for the next decade.
But if they can achieve this, the simple arithmetic says that China will officially be an “advanced” or “high income” economy sometime between 2025 and 2030.
Several years ago, I met a family in Zhongshan. The grandfather had been born into a farming family in Guangdong province during World War II. He had not received much of an education but had managed to send two of his four children to school.
His son, armed with a high-school education, landed his first job working in a factory in Dongguan owned by a Hong Kong business family in the late 80s before eventually rising to the level of plant manager. He was frugal and had been fortunate in buying some property in Shenzhen in the early 2000s and was now on the cusp of retirement.
His granddaughter had attended local university, gotten her graduate degree overseas and had recently returned to work for a well-known technology company in Shenzhen.
Sitting on the couch with three generations of this one Chinese family, you could catch a glimpse of each phase of the development of China’s modern economy and get some idea of its trajectory in the coming decade.
This was originally published on Quora in September 2018.