International Paper

Running head: ECONOMIC GROWTH IN CHINA

International Paper
BUSN5620 Current Economic Analysis
July 19, 2014

Abstract
The Chinese economy has been growing at a rapid pace for over thirty years. Most of this growth has come from higher labor productivity, while growth of employment has diminished along with a slower rate of increase in the working-age population. This paper looks at the challenges that China will face over the next two decades in maintaining its rapid pace of economic growth, especially as working-age population growth slows further and then begins to decline. Key questions include whether China will be able to continue to devote nearly half of its GDP to investment, whether such investment will become less productive as the capital-labor ratio continues to rise, whether labor participation and employment rates will fall as the population becomes less rural, and whether future shifts out of rural employment will go more toward the services rather than the manufacturing sector, where productivity is higher. In the baseline scenario economic growth falls gradually from its current pace of about 10 percent to near 6½ percent by 2030. However, a combination of less optimistic, but still reasonable assumptions, results in a reduction in the growth rate to about 1½ percent by 2030.
Introduction
The Chinese economy has been growing at a rapid pace for over thirty years. From 1978 to 2011 real GDP growth averaged about10 percent per year, resulting in a more than 20-fold increase in the level of output. Can this continue? Eichengreen et. al. (2011) argues that the evidence from other countries suggests it cannot, and in fact the economy has already slowed in the past couple of years. Although some of the recent slowing may be cyclical, there also has likely been some cooling in the rapid pace of trend growth. This is not surprising-a continuation of growth rates near 10 percent as the Chinese economy becomes more developed would be...