How long until China is a developed country?
How long until China is a developed country?
Between 2025 and 2030, based on 5-7% growth rates
With a per capita GDP (PPP) between $13-14k China is currently classified by the World Bank as an “upper middle income” country. The next level up is the “high income” threshold and the current entrance requirement is per capita GDP of around $22k to $25k [1]. This group includes all the countries you would normally think of as fully developed, such as the United States ($54k), Great Britain ($40k) and Japan ($38k).
China is currently going through an adjustment period, emphasizing consumption as the key driver of growth as opposed to investment and growth in net exports. That is the main reason why growth dropped sharply over the last three years.
With the blanket caveat that trying to predict the future is a guarantee to look foolish, my best – essentially one step above “wild” – guess is China’s “new normal” growth rate is 5-7% [2], compared to 2% in developing countries. Unlike the last decade and a half, the consumption portion of GDP will be the key driver as opposed to investment / gross capital formation.
My main reference points for this guess are Taiwan and South Korea. Today, China’s per capita GDP is a little over one-fifth of the United States. This is where Taiwan and South Korea sat in the early 1980s, following close to three decades of uninterrupted ultra-fast growth. In the subsequent two decades, growth rates fell but still remained very high (9-10%). Both countries reached the “high income” threshold (around 40% of U.S. per capita GDP) in the early 1990s.
Based on this historical analogy, China will reach developed status in 10-15 years, or 2025 to 2030. Incidentally, China’s goal is probably not to just reach the “threshold” but to be at least square in the middle of the pack of developed OECD countries – this will take a fair bit longer.
That China is very different from Taiwan and South Korea is a fair criticism of this historical analysis. At the very least, it’s a massive simplification. That said, while the the analogies are far from perfect I believe them to be useful data points, and certainly more accurate than other analogies that I have seen in popular media (e.g. Japan and Soviet Union in the 1990s).
To be clear, I do not expect China to “perform” as well as Taiwan and South Korea, which have smaller and less complex economies – not to mention essentially being the finest examples of countries that went from dirt poor to developed in less than two generations [3]. That said, being big also has its advantages – just like the United States, China’s massive domestic market can be the primary driver for the innovation necessary to become a developed country.
Note also that this is not as easy a task as the simple arithmetic would imply. Even at lower growth rates of 7%, because of a larger base, China needs to contribute more in absolute terms than it did a decade ago when it was growing at twice that rate. To put it further in perspective, it needs grow incrementally by an India-sized economy every four years just to achieve that rate.
The main risk to the plan is making sure that growth is inclusive so that the broad population can share in the growth and focus their energy on expanding the pie vs. getting a bigger slice. This means combating corruption, continuing to reduce the state’s share of the economy and removing financially repressive policies ... in effect making sure much of the November 2013 reform package put forward by the Xi administration is implemented.
Notes
[1] Based on Argentina and Hungary, the most recent entrants into this club.
[2] 5-7% coupled with a consumption-driven economy means that some years the growth rate could fall below that range and other years it may exceed the range. Consumption is harder to manage than investment.
[3] Although one can certainly argue that the Tier I regions in China have developed even faster than Taiwan and South Korea.
This was originally published in Quora in October 2015.