Social Science Division ，Hong Kong University of Science &Technology
Clear Water Bay ，Kowloon ，Hong Kong
E-mail：[email protected]；Tel/Fax ：+8522719-8557
3July 2005
Views of the future China vary widely.While some believe that the collapseof China is inevitable，others see the emergence of a new superpower that increasinglyposes a threat to the U.S.This paper examines the economic growth prospects ofChina over the next two decades.Extrapolating past real GDP growth rates into thefuture，the size of the Chinese economy surpasses that of the U.S.in purchasingpower terms between 2012and 2015；by 2025，China is likely to be the world'slargest economic power by almost any measure.The extrapolations are supported bytwo types of considerations.First，China ‘s growth patterns of the past 25yearssince the beginning of economic reforms match well those identified by standardeconomic development and trade theories （structural change ，catching up ，andfactor price equalization ）。Second，decomposing China ’s GDP growth into growthof labor and other variables，the near-certain information available today aboutthe quantity and quality of Chinese laborers through 2015and possibly several yearsafter allows inferences about future GDP growth.Short of some cataclysmic event，and given a continuation of the generally sound economic policies of the past ，demographics alone suggests China ‘s continued economic rise.If talent is randomlydistributed in the world population and if agglomeration of talent is important ，then the odds are strongly in China ’s favor.
Keywords：economic growth ，growth accounting ，growth forecasts，developmenttheories，human capital formation ，education （all ：China ）
I am grateful for comments from seminar/panel participants at the Center forEast Asian Studies，Stanford University （23February 2004），the Association forAsian Studies meetings，San Diego （5March 2004），and the Universities ServiceCenter for China Studies，Hong Kong （30June 2005）。Thomas P.Lyons has providedsuggestions at various turns，and the paper has benefited from communication withThomas G.Rawski on Chinese statistics.
1.Introduction
The rapid economic growth of China since the beginning of the economic reformsin 1978has captured the imagination of Western commentators and researchers.Theresponses range from outright pessimism about China ‘s future to fear of a strongChina.Lester Brown （1995）wonders who will feed China.Gordon Chang （2000）announces the coming collapseof China.Callum Henderson（1999）sees China as on the“brink ，”while Ross Terrill（2003）writes of the “illusory nature of the market in most of the Chinese economy” and that“a crash looms because the Leninist core of the regime is unchangedfrom Mao‘s construction of it in Yan ’an six decades ago”（pp.329，313）。Nicholas Lardy（1998）stresses the large economic problems and the unprecedentedpotential for social unrest due to ever more indebted state-owned enterprises ，the extent of nonperforming loans ，and a decline in government revenue.At theother end of the range are those who project a strong China.Geoffrey Murray（1998） describes China as the next superpower.A number of authors view an all-powerfulChina as a threat （Bill Gertz，2000，or Edward Timperlake and William TriplettII，2002）。1News items imploring the“devastation Chinese competitors are inflictingon U.S.industries，from kitchenware and car tires to electronic circuit boards ” and the “futility of trying to match the China price ”have become common fare.2What is undeniable is China ‘s rapid economic growth over the past 25years sincethe beginning of economic reforms in 1978，of，measured in gross domestic product（GDP ），on average 9.37%per year.In economic size China is surpassed today onlyby the U.S.，Japan ，Germany ，and France.3Its share in global growth 1995-2002has been estimated at 25%，compared to 20%for the U.S.4While China ’s economicgrowth has received much attention in the popular literature，China researchers ，when it comes to economic growth，tend to focus on narrow topics，measuring totalfactor productivity growth in enterprises in different ownership forms or investigatingthe growth prospects of individual industries or firms.For example ，Douglas Allen（2002）documents the transformation in four industries in China and predicts theimminent emergence of world-class Chinese brands.Ming Zeng and Peter Williamson（2003）examine the international growth prospects of Chinese firms （positive）。
Colin Carter and Scott Rozelle（2001）ask if China will become a major forcein world food markets （yes ，if structural transformation occurs ）。
A number of studies try to explain China‘s past economic growth.Much of thetransition literature explains past reform successes—usually ，if only implicitly，measured as economic growth —through institutional changes （for example ，QianYingyi，2000，2003，or Wing Thye Woo，1994，1999）。Justin Lin，Cai Fang，and LiZhou（2003）explain China ’s reform success with adoption of a “comparative-advantagefollowing strategy，”allowing full play to China ‘s plentiful endowment with labor.Others analyze China’s past economic growth within the aggregate production functionframework （Wang Yan and Yao Yudong ，2003；Wu Yanrui ，2004，Alwyn Young ，2000）。The aggregate production function framework is also occasionally extended into thefuture.Gregory Chow and Kui-Wai Li （2002）estimate an economy-wide，aggregateproduction function for the years 1952-98and obtain GDP values for the years through2010by extending variations of past factor input growth rates into the future；Gregory Chow（2002）further includes an estimate of year 2020GDP.A 1997WorldBank policy analysis of current economic issues is supplemented by an estimate ofChina ‘s GDP in 2020based on a closed-economy model.A systematic study of futureeconomic growth in China that relies as much as possible on hard facts already availabletoday ，however ，is still lacking.Answers to the question of what we know todayabout the economic size of China ten or twenty years from now are relevant not onlyfor the popular discourse on the new superpower and for China threat theorists andmilitary strategists，but also for economists.For example，conventional economicwisdom holds that free trade benefits ，by the laws of comparative advantage，allcountries in the long run.Thus ，a growing China ，and growing trade between Chinaand the U.S.，benefits the U.S.But as Paul Samuelson （2004）within the frameworkof standard trade theory shows，a productivity gain in one country alone may，infact，lead to a permanent loss in per capita real income in the other country ；references to China abound.This paper examines China ’s future economic growthin three steps.First ，it conducts a straightforward extrapolation of a stable ，past growth trend into the future.The following section plays through a numberof scenarios in a comparison with the U.S.But extrapolation is not a particularlyconvincing research tool.Why should the past continue into the future？
One argument why past economic growth may continue into the future is that China‘s economic growth matches standard growth patterns identified by theories of economicdevelopment and trade.These are structural change，catching up ，and factor priceequalization.China ’s past economic growth fits well with all three.Furthermore，China ‘s reform period growth，within these three analytical frameworks，matchesthose of Japan，Korea ，and Taiwan at an earlier stage of their development.Obviously，these four countries differ ，as do the domestic and international circumstancesunder which they experienced a particular stage of development.But the differencesneed not be systematic with respect to the impact on the dependent variable economicgrowth.These growth patterns may well apply to China in the future ，just as theyalready have to Japan ，Korea ，and Taiwan in the past.The final step is to usean income decomposition of GDP to decompose economic growth into growth of laborand of other variables.We already know today with near-certainty the size of China’s working age population through 2015，and can project with high reliabilityfor several years after.In as far as gains in high school and university enrollment，most of them very recent，are unlikely to be reversed ，a bottom line scenario onthe quality of China‘s future labor force can be developed.Future GDP growth canbe re-composed using solely the hard facts about the future quantity and qualityof labor available today.Demographics in form of the quantity and quality of laboris enough to drive continued economic growth in China.Demographics means ，forexample ，that for every“genius”in the U.S.，China potentially has four.If talentis randomly distributed in the world population and if China’s education systemis able to identify the brightest students，then China has a larger pool of talentto draw from than any other country in the world.If growth and innovation dependon the agglomeration of talent（geographically，nationally，culturally，or linguistically），then China is in an excellent position to continue to grow and innovate.The recentexplosion in tertiary level education may yet supply the productivity gains thatPaul Samuelson identifies as potential causal factors for a permanent loss throughtrade in U.S.per capita real income.Projections cannot predict the future withcertainty.Potential complications range from a collapse of Chinese Communist Partyrule to war in the Taiwan Straits ；China researchers ruminate about such issuesas the bad loan problem in China‘s banking system，loss-making state-owned enterprises，pilfered pension funds，local government budget deficits，rural-urban inequality，and environmental degradation.This paper works within these limitations.It doesnot attempt to provide an exhaustive list of complications，to examine the individualissues，to quantify their potential impact，and to attribute a likelihood to theiroccurrence.It predicts China ’s future economic growth under the assumption thatcurrent and future problems continue to be resolved as they arise and that eventsof catastrophic dimensions do not occur.5
Clear Water Bay ，Kowloon ，Hong Kong
E-mail：[email protected]；Tel/Fax ：+8522719-8557
3July 2005
Views of the future China vary widely.While some believe that the collapseof China is inevitable，others see the emergence of a new superpower that increasinglyposes a threat to the U.S.This paper examines the economic growth prospects ofChina over the next two decades.Extrapolating past real GDP growth rates into thefuture，the size of the Chinese economy surpasses that of the U.S.in purchasingpower terms between 2012and 2015；by 2025，China is likely to be the world'slargest economic power by almost any measure.The extrapolations are supported bytwo types of considerations.First，China ‘s growth patterns of the past 25yearssince the beginning of economic reforms match well those identified by standardeconomic development and trade theories （structural change ，catching up ，andfactor price equalization ）。Second，decomposing China ’s GDP growth into growthof labor and other variables，the near-certain information available today aboutthe quantity and quality of Chinese laborers through 2015and possibly several yearsafter allows inferences about future GDP growth.Short of some cataclysmic event，and given a continuation of the generally sound economic policies of the past ，demographics alone suggests China ‘s continued economic rise.If talent is randomlydistributed in the world population and if agglomeration of talent is important ，then the odds are strongly in China ’s favor.
Keywords：economic growth ，growth accounting ，growth forecasts，developmenttheories，human capital formation ，education （all ：China ）
I am grateful for comments from seminar/panel participants at the Center forEast Asian Studies，Stanford University （23February 2004），the Association forAsian Studies meetings，San Diego （5March 2004），and the Universities ServiceCenter for China Studies，Hong Kong （30June 2005）。Thomas P.Lyons has providedsuggestions at various turns，and the paper has benefited from communication withThomas G.Rawski on Chinese statistics.
1.Introduction
The rapid economic growth of China since the beginning of the economic reformsin 1978has captured the imagination of Western commentators and researchers.Theresponses range from outright pessimism about China ‘s future to fear of a strongChina.Lester Brown （1995）wonders who will feed China.Gordon Chang （2000）announces the coming collapseof China.Callum Henderson（1999）sees China as on the“brink ，”while Ross Terrill（2003）writes of the “illusory nature of the market in most of the Chinese economy” and that“a crash looms because the Leninist core of the regime is unchangedfrom Mao‘s construction of it in Yan ’an six decades ago”（pp.329，313）。Nicholas Lardy（1998）stresses the large economic problems and the unprecedentedpotential for social unrest due to ever more indebted state-owned enterprises ，the extent of nonperforming loans ，and a decline in government revenue.At theother end of the range are those who project a strong China.Geoffrey Murray（1998） describes China as the next superpower.A number of authors view an all-powerfulChina as a threat （Bill Gertz，2000，or Edward Timperlake and William TriplettII，2002）。1News items imploring the“devastation Chinese competitors are inflictingon U.S.industries，from kitchenware and car tires to electronic circuit boards ” and the “futility of trying to match the China price ”have become common fare.2What is undeniable is China ‘s rapid economic growth over the past 25years sincethe beginning of economic reforms in 1978，of，measured in gross domestic product（GDP ），on average 9.37%per year.In economic size China is surpassed today onlyby the U.S.，Japan ，Germany ，and France.3Its share in global growth 1995-2002has been estimated at 25%，compared to 20%for the U.S.4While China ’s economicgrowth has received much attention in the popular literature，China researchers ，when it comes to economic growth，tend to focus on narrow topics，measuring totalfactor productivity growth in enterprises in different ownership forms or investigatingthe growth prospects of individual industries or firms.For example ，Douglas Allen（2002）documents the transformation in four industries in China and predicts theimminent emergence of world-class Chinese brands.Ming Zeng and Peter Williamson（2003）examine the international growth prospects of Chinese firms （positive）。
Colin Carter and Scott Rozelle（2001）ask if China will become a major forcein world food markets （yes ，if structural transformation occurs ）。
A number of studies try to explain China‘s past economic growth.Much of thetransition literature explains past reform successes—usually ，if only implicitly，measured as economic growth —through institutional changes （for example ，QianYingyi，2000，2003，or Wing Thye Woo，1994，1999）。Justin Lin，Cai Fang，and LiZhou（2003）explain China ’s reform success with adoption of a “comparative-advantagefollowing strategy，”allowing full play to China ‘s plentiful endowment with labor.Others analyze China’s past economic growth within the aggregate production functionframework （Wang Yan and Yao Yudong ，2003；Wu Yanrui ，2004，Alwyn Young ，2000）。The aggregate production function framework is also occasionally extended into thefuture.Gregory Chow and Kui-Wai Li （2002）estimate an economy-wide，aggregateproduction function for the years 1952-98and obtain GDP values for the years through2010by extending variations of past factor input growth rates into the future；Gregory Chow（2002）further includes an estimate of year 2020GDP.A 1997WorldBank policy analysis of current economic issues is supplemented by an estimate ofChina ‘s GDP in 2020based on a closed-economy model.A systematic study of futureeconomic growth in China that relies as much as possible on hard facts already availabletoday ，however ，is still lacking.Answers to the question of what we know todayabout the economic size of China ten or twenty years from now are relevant not onlyfor the popular discourse on the new superpower and for China threat theorists andmilitary strategists，but also for economists.For example，conventional economicwisdom holds that free trade benefits ，by the laws of comparative advantage，allcountries in the long run.Thus ，a growing China ，and growing trade between Chinaand the U.S.，benefits the U.S.But as Paul Samuelson （2004）within the frameworkof standard trade theory shows，a productivity gain in one country alone may，infact，lead to a permanent loss in per capita real income in the other country ；references to China abound.This paper examines China ’s future economic growthin three steps.First ，it conducts a straightforward extrapolation of a stable ，past growth trend into the future.The following section plays through a numberof scenarios in a comparison with the U.S.But extrapolation is not a particularlyconvincing research tool.Why should the past continue into the future？
One argument why past economic growth may continue into the future is that China‘s economic growth matches standard growth patterns identified by theories of economicdevelopment and trade.These are structural change，catching up ，and factor priceequalization.China ’s past economic growth fits well with all three.Furthermore，China ‘s reform period growth，within these three analytical frameworks，matchesthose of Japan，Korea ，and Taiwan at an earlier stage of their development.Obviously，these four countries differ ，as do the domestic and international circumstancesunder which they experienced a particular stage of development.But the differencesneed not be systematic with respect to the impact on the dependent variable economicgrowth.These growth patterns may well apply to China in the future ，just as theyalready have to Japan ，Korea ，and Taiwan in the past.The final step is to usean income decomposition of GDP to decompose economic growth into growth of laborand of other variables.We already know today with near-certainty the size of China’s working age population through 2015，and can project with high reliabilityfor several years after.In as far as gains in high school and university enrollment，most of them very recent，are unlikely to be reversed ，a bottom line scenario onthe quality of China‘s future labor force can be developed.Future GDP growth canbe re-composed using solely the hard facts about the future quantity and qualityof labor available today.Demographics in form of the quantity and quality of laboris enough to drive continued economic growth in China.Demographics means ，forexample ，that for every“genius”in the U.S.，China potentially has four.If talentis randomly distributed in the world population and if China’s education systemis able to identify the brightest students，then China has a larger pool of talentto draw from than any other country in the world.If growth and innovation dependon the agglomeration of talent（geographically，nationally，culturally，or linguistically），then China is in an excellent position to continue to grow and innovate.The recentexplosion in tertiary level education may yet supply the productivity gains thatPaul Samuelson identifies as potential causal factors for a permanent loss throughtrade in U.S.per capita real income.Projections cannot predict the future withcertainty.Potential complications range from a collapse of Chinese Communist Partyrule to war in the Taiwan Straits ；China researchers ruminate about such issuesas the bad loan problem in China‘s banking system，loss-making state-owned enterprises，pilfered pension funds，local government budget deficits，rural-urban inequality，and environmental degradation.This paper works within these limitations.It doesnot attempt to provide an exhaustive list of complications，to examine the individualissues，to quantify their potential impact，and to attribute a likelihood to theiroccurrence.It predicts China ’s future economic growth under the assumption thatcurrent and future problems continue to be resolved as they arise and that eventsof catastrophic dimensions do not occur.5
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