Monday, December 17, 2018

How low is low for Chinese GDP growth?

The deceleration in the Chinese economy over the last decade has raised concerns about the sustainability of the Chinese economic "miracle". But is that deceleration unusual when compared to other countries? What is to be expected in the coming years?

Economists like to look at emerging markets through the lens of the convergence model (based on the work of Robert Solow). Successful emerging economies are supposed to grow faster than advanced economies and catch up. But as the process of catching up materializes, growth will slow down and over time will approach that of the most advanced economies. How does China compares to other successful emerging economies? It is not easy to find a perfect historical example for China but South Korea comes the closest. It is a successful converging economy in Asia and it is a fairly large economy (unlike Singapore or Hong Kong, two other successful converging economies).

We start by focusing on the period 1980-2018 and use GDP per hour as an indicator of productivity. For each year we compare the initial level of GDP per hour with the growth of GDP per hour over the 5 years that followed. The initial level of GDP per hour is measured relative to the US (as an example of a country close to the technology frontier).

In the context of this period, the deceleration of China makes its growth rate land right at the sample place as the growth rates that Korea had at similar levels of development. The last observation corresponds to the period 2013-2018. Today (2018), China is abut 20% of the US level and if it were to follow the Korean benchmark it would be growing at rates around 6%, very close to current Chinese growth rates. China reached this position after a volatile early decades. Possibly underperforming in the 1980s and over performing in the decade of 2000s when growth passed 10%. 

If we add early decades the comparison becomes much noisier as both South Korea and China had much more volatile, and lower overall, growth rates.

In summary, the deceleration of GDP growth rates in China can be seen as a natural evolution of the economy as it follows its convergence path, in particular if we use recent decades in South Korea as a benchmark. Let's not forget that South Korea is one of the best performer for countries in the range below 50% of the US GDP per capita. So using South Korea as a benchmark we might be providing an optimistic benchmark for Chinese growth.

Antonio Fatás

[Data Source: Total Economy Database, The Conference Board]
on December 17, 2018 |   Edit