BEIJING: China’s economy is facing a slowdown, with growth falling from 6.5% before the pandemic to just 4.6% now, and there are concerns that even that number is greatly exaggerated. . As the economy continues to stagnate, living standards remain far below those in developed countries, further highlighting the country’s economic woes, Asia Times reported.
One of the key issues contributing to this economic downturn is the country’s declining total factor productivity (TFP). It is a measure of how efficiently inputs such as labor and capital are used to produce output. Meanwhile, official data shows a decline in TFP over the past decade and decade. For the most part, this claim is still debated. In any case, it is widely agreed that productivity growth is much slower than in the past.
Economist Paul Krugman pointed to the shift to real estate as a major factor in the economic slowdown. After the global financial crisis in 2008, China began pouring resources into the real estate sector, a low-productivity industry, leading to a decline in overall productivity. Additionally, the 2022 analysis highlighted broader structural problems in China’s economy, including inefficiencies in capital allocation and overreliance on an extractive growth model. These systemic challenges existed before the pandemic, but have been exacerbated by trade tensions, the disruption caused by COVID-19, and the impact of the Chinese government’s aggressive industrial policies.
In retrospect, earlier assessments of China’s economic prospects appear to have been overly optimistic. Arthur Clover’s 2016 book, China’s Economy: What Everyone Needs to Know®, charts China’s successful transition from a resource-driven model to one that drives productivity and innovation. Masu. But in the years since, this optimism has faded as the country struggles to maintain the productivity growth needed for sustained prosperity. Mr Kroeber acknowledged that China faces economic challenges, but his hope of a transition to efficiency-driven growth looks unlikely to be achieved today. Although Clover’s insights on fiscal federalism, urbanization, and real estate are valuable, his optimism about China’s future no longer matches the reality of the country’s economic trajectory.
One of the main reasons for the slowdown is that China is reaching the limits of its growth potential. While countries such as Japan, South Korea and Taiwan have successfully transitioned to high-income economies by focusing on technological advancement and productivity, China’s growth has slowed, as has other middle-income countries such as Thailand. Since 2011, China’s TFP has been on a declining trend, with some reports indicating negative growth. As China moves closer to the technological frontier, advanced technologies are becoming more difficult to acquire as companies around the world guard their innovations more closely.
China’s demographics are another factor contributing to the decline in productivity. China has long benefited from a “demographic dividend” with relatively few dependents and a large young workforce. However, as the working-age population began to decline around 2010, this advantage began to fade. Research shows that aging populations tend to correlate with lower productivity growth, and China is no exception. With fewer workers entering the workforce and an aging population, economies face significant challenges in maintaining productivity levels.
Urbanization, which has historically boosted productivity in China by moving workers from low-productivity agricultural jobs to high-productivity urban manufacturing jobs, is losing momentum. be. Urbanization has helped China achieve rapid economic growth for decades, but experts point to a “Lewis tipping point” in 2010, when surplus labor in agriculture began to decline. There is. Moreover, China’s hukou system, which restricts internal migration, further limits the benefits of urbanization. These demographic and structural changes have led to slower productivity growth, and the tailwinds of technology adoption, urbanization, and demographic growth are no longer strong enough to move the economy forward at the same pace.
Another major challenge facing China’s productivity is its research and development (R&D) sector. Although China has increased its focus on research and development in recent years, research shows that state-owned enterprises (SOEs) typically have much lower R&D productivity than private or foreign-owned enterprises. A study by Konig et al. (2021) suggest that although R&D investment contributes to productivity improvement, the impact is small due to issues such as misallocation of resources and misclassification of expenses as “R&D.” I’m doing it. Furthermore, although China is expanding its university research departments and increasing research spending, there are concerns about the quality of China’s academic research and its global leadership. There have been reports of plagiarism, data falsification and nepotism in the country’s scientific community, undermining the effectiveness of research and contributing to low productivity.
China’s export market also faces constraints, which affects the country’s productivity. Economic theory suggests that global competition fosters innovation and increases productivity through “export discipline.” However, since the 2008 financial crisis, demand for Chinese products has slowed due to trade wars and market saturation. Exports to the European Union have increased, but have not compensated for declines in other markets. Additionally, China’s exports to developing countries are increasing, but these countries have much lower purchasing power. As a result, China’s share of global exports has shrunk, reducing the benefits of export-led growth. This shift from an export-led model to a focus on domestic investment poses challenges to the country’s long-term productivity growth, Asia Times reported.
China’s low consumption rate also contributes to productivity challenges. Unlike the United States, where consumption drives economic activity, China’s economy remains focused on investment. Household consumption in China accounts for only 39 percent of GDP, compared to more than 80 percent in the United States. As a result, companies have less incentive to innovate and differentiate their products. This low consumer demand makes it difficult for China to develop high-quality, innovative products that can drive productivity growth. Furthermore, China’s policies generally favor investment over consumption, which unintentionally lowers productivity.
The country’s approach to managing economic stability also hinders productivity. From 2008 to 2016, China used large amounts of state bank loans to prevent a recession, especially in the real estate sector. This strategy helped maintain economic stability, but it also entrenched low-productivity industries such as real estate and state-owned enterprises. The rapid disbursement of funds during this period led to inefficient projects and dependence on sectors with limited productivity growth. Although these measures have been effective in preventing a recession, China’s economy remains heavily dependent on industries with low productivity growth.
To address these challenges, President Xi Jinping has introduced initiatives like “Made in China 2025” aimed at strengthening the domestic semiconductor industry and reducing China’s dependence on foreign technology. However, it remains unclear whether these strategies can successfully reverse productivity declines. Mr. Xi has taken a more aggressive approach over the past three years, targeting industries he sees as disadvantaged, including consumer internet, finance, video games, entertainment and real estate. His efforts are aimed at directing resources such as talent and capital to industries he believes are better aligned with China’s long-term economic goals.
Mr. Xi’s strategy marks a departure from traditional industrial policy, which typically focuses on supporting successful sectors. Instead, he seeks to dismantle industries that he believes are detrimental to the country’s future. For example, companies such as Alibaba, Tencent and Baidu, once considered the backbone of Chinese innovation, are now under intense scrutiny, the Asia Times reported.
This change has raised concerns about the impact of these policies on entrepreneurship. Entrepreneurs may be reluctant to start new businesses when governments suddenly change priorities or seize successful businesses, creating an atmosphere of uncertainty and risk. While shifting resources to priority sectors may initially succeed in directing talent, the long-term impact on innovation and entrepreneurship remains unclear.
China’s efforts to overcome productivity challenges face major hurdles. While the government continues to implement policies aimed at revitalizing specific sectors, broader structural issues remain, including demographic changes, research and development inefficiencies, and declining export demand. Whether Xi Jinping’s industrial policies can effectively address these challenges and restore China’s productivity growth remains an open question, and many experts doubt China’s ability to emerge from its current economic stagnation. expressed skepticism.
