The Next Era of Reform

2022-10-26 13:10

China has ambitious development goals. Meeting them will require even more commitment to reform.

In a recent recap of the past decade of growth and development, the National Bureau of Statistics noted that China’s GDP rose from 54 trillion yuan ($8.6 trillion) in 2012 to 114 trillion yuan in 2021. Over the same period, China’s per capita GDP grew from 39,800 yuan to 81,000 yuan.

Globally, China has done especially well since the 2008 financial crisis. According to World Bank data, between 2012 and 2021, per capita GDP rose by an average of 23% in high-income countries, 59% in middle-income countries, 13% in the Eurozone, 42% in the United States, and 176% in China.

This track record of achievement is impressive and worthy of applause, but it shouldn’t blind us to the fact that there is still plenty of room for improvement. Even after decades of rapid growth, in non-inflation-adjusted dollar terms, Chinese per capita GDP in 2021 was still just 18% of the U.S., 30% of the Eurozone, and 32% of Japan. This gap indicates that the incomes and consumption levels of Chinese are still far from those enjoyed by people in high-income countries.

The recently concluded 20th National Congress of the Communist Party of China set its sights on these problems with a slate of development goals to be achieved by 2035, including bringing GDP per capita on par with that of a moderately developed country, improving disposable income per capita, and significantly increasing the percentage of Chinese in the middle of the income spectrum.

What does this mean in practice? In 2021, the average per capita GDP of countries in the Organisation for Economic Co-operation and Development (OECD) was $42,000. South Korea — a typical representative of a moderately developed country — had a per capita GDP of $35,000. China’s was roughly $12,500. Without accounting for exchange rates and assuming zero economic growth in the developed world, China would still need to sustain 9.8% average annual economic growth rates to reach the OECD average by 2035. It would need to grow by 8.1% annually to surpass Korea.

But after years of annual GDP increases in excess of 10%, China’s GDP growth is slowing down. Chinese GDP grew by 3.9% last quarter, beating expectations but lagging the initial national growth target of “about 5.5%” for 2022.

So, how can a country in China’s position reinvigorate sustainable, rapid growth? The good news is, there is still plenty of low-hanging fruit. Urbanization, for example, has the potential to be one of the most important drivers of China’s economic growth moving forward. Both labor productivity and average income will rise as more Chinese move from rural areas to more productive urban ones, driving overall economic growth and boosting incomes among the migrants.

According to the 2020 census, China had an urbanization rate, including towns, of 63.8%. About 41% of Chinese — 575 million people — live in one of the country’s 680 officially designated city districts. For comparison, roughly 86% of Americans live in one of that country’s “metropolitan statistical areas.”

While MSAs, defined as core urban areas with a population of at least 50,000, are not directly comparable to Chinese urban districts, it is clear China has a much lower level of urbanization than the United States. Closing this gap will require the creation and continued agglomeration of large cities. This can be achieved in two ways: first, through the migration of the agricultural population from the central and western regions to key cities in those respective areas or along the more developed coast; and second, population movement from small and medium-sized cities to large cities.

Worryingly, however, there are signs that some of these flows are slowing down. In particular, cross-province movement has slowed in the last decade in favor of intra-provincial migration. That, coupled with the rising number of east-to-west returnees suggests that barriers to mobility like the hukou system of household registration and other factors have made the coast less appealing or viable for migrants.

The developed eastern regions and large cities have long been the mainstay of new job creation in China. They absorb both migrant laborers and new college graduates from rural and urban areas. As these inflows slow down, the growth of new employment in Chinese cities has likewise dropped. According to a statistical bulletin on the development of human resources and social security, urban employment grew by 6 to 10 million annually prior to 2017. In 2021, it grew by just 480,000. Not coincidentally, youth unemployment has soared over the same period.

None of this is necessarily fatal to China’s ambitious development goals, but it does suggest the need to restart population agglomeration in metropolitan areas and spur migration toward developed eastern cities or key cities in central or western China. This will promote urbanization, put workers in a position to benefit from higher urban labor productivity, and help stabilize urban employment growth.

Healthy urbanization and sustained urban employment growth require certain preconditions. Chief among these are an open, internationalized economy and a unified internal market. After the reform period in the 1980s, the developed eastern seaboard became a migration destination precisely because it opened first. Over time, it established itself as a center in the global division of labor in manufacturing, which in turn created jobs, drove infrastructure investment and household income, and led to better public services and a more livable environment.

Opening to the outside world remains of utmost importance today. China is still a developing country in which domestic demand is low, especially for high value-added products. Current demand is not enough to absorb the non-agriculture employment that comes from rapid urbanization, and relying on domestic consumers will limit the potential of China’s technological progress and industrial upgrading. China still relies on consumers in other countries, in particular developed countries, to buy its goods and ensure the stable growth of its manufacturing industries.

At the same time, this continued commitment to opening and international competition will push Chinese companies to improve and invest in themselves, in part by forcing them to keep progressing in key indicators like labor productivity.

Another of the drivers of China’s economic growth over the past four decades has been the gradual creation of a large, unified market. But lingering flaws, including barriers to cross-regional mobility, have led to China’s big cities not being “big” enough and the economy not being concentrated enough. This, in turn, has exacerbated discrepancies across regions in GDP per capita. Improving China’s unified market by allowing the population to move freely in search of opportunity will help economic growth potential.

China has, rightly, set itself ambitious goals for the next decade and a half. Its ability to meet them will depend on continued reform, openness, and a willingness to let the Chinese people make their own decisions about where and how to live.

Nie Riming is a researcher at Shanghai Institute of Finance and Law, a think tank.

Translator: Katherine Tse; editors: Wu Haiyun and Kilian O’Donnell.

(Header image: A worker prepares to install a rose into a giant bouquet statue on Tian’anmen Square, Beijing, Sept. 21, 2022. Wang Xin/VCG)

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