China’s economic growth during the past twenty-five years has been remarkable, averaging more than 9 percent a year. While there have been earlier episodes of comparable growth rates in countries such as Japan and South Korea, there is no precedent for such rapid growth in a country the size of China, whose population of 1.3 billion is thirteen times that of Japan when that nation began its rapid growth.

The impact on the rest of the world of economic dynamism on this scale is already being felt. If China continues its rapid growth in the coming decades, it will take the global economy into uncharted terrain.

Within China, rapid economic development has brought a welcome lifting of incomes. As recently as 1980, almost 80 percent of the population lived in extreme poverty (defined as less than $1 per day), according to World Bank figures.1 Today, less than 20 percent does. Yet despite unprecedented progress in reducing the most severe poverty, about 70 percent of the population still survives on very low incomes, defined at the World Bank standard of $2 per day.

Poverty is concentrated in the rural areas, where the average net income in 2005 was $397 per person, compared with $1,281 for urban residents.2 With about 45 percent of the workforce still engaged in low-productivity agriculture, the Chinese economy needs to create hundreds of millions of jobs in higher-productivity sectors to enable these workers to earn their way out of poverty. Overall, China still faces serious income and employment challenges. It will require a further period of sustained growth to provide even a moderate standard of living for its entire population.

The interplay between the Chinese and global economies will have major, perhaps determinative, effects on the well-being of Chinese households. For example, if world trade continues to expand, Chinese exports are likely to continue to grow, and more low-income farmers would be drawn into higherproductivity manufacturing.

However, if trade frictions increase, job creation would slow. To explore the prospects for the future development of China in this global context, this paper draws on economic models that simulate the impact of different international and national policy choices and environments.

The models are those of the Development Research Center of the State Council of China (DRC). The paper is organized as follows. The first section reviews major trends in the evolution of the Chinese economy from 1980 to 2005. The second section examines the impact on China of the country’s 2001 accession to the World Trade Organization (WTO), including both China’s implementation of its commitments and the imposition by the United States and the European Union of restraints on China’s textile and apparel exports to those markets. The third section explores different growth patterns that China could experience over the next fifteen years under three different scenarios.

The scenarios combine national and international developments ranging from conditions that are more favorable than recent trends, to a continuation of current trends, and finally to a higherrisk environment. The final section concludes by summarizing the broad patterns emerging from the experiments. It points to the key challenges that Chinese policy makers must address during the coming decades if they are to optimize China’s development pattern to broadly benefit its population. (Introduction)

Visit China's Economic Prospects 2006-2020 Download Pages

He Jianwu, Li Shantong, Sandra Polaski
Trade, Equity, and Development Program
Number 83, April 2007

© 2007 Carnegie Endowment for International Peace.

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Key Findings:

China's remarkable growth over the last quarter century has lifted hundreds of millions of people out of extreme poverty. Yet most of the population continues to survive on less than $2 a day. Poverty is concentrated in rural areas, where it has been difficult to generate sufficient employment opportunities to raise productivity and incomes.

An exercise simulating China's accession to the World Trade Organization shows that accession generally benefits the economy, although terms of trade turn against China, with prices of imports rising more than prices of goods China exports. The government suffers a net loss of revenue due to tariff reductions. Most households benefit from WTO accession; however, urban households gain more than rural households, increasing already pronounced disparities.

The imposition of textile and apparel export restraints by the European Union and the United States reduces China抯 benefits significantly during the period the restraints are in effect (through 2008). However by 2010 the losses are largely eliminated.

The WTO scenarios suggest that accession increased employment by about 13 million jobs, or 1.4 percent. Compared with the estimated 300 million jobs needed to achieve full employment in China, it is clear that growth in trade alone cannot solve the country's employment challenges.

A separate exercise was conducted to probe the effect on China of three different scenarios of international and national developments. The first scenario continues the trends of recent years. A second scenario is more optimistic, with world trade continuing to grow and China improving its resource allocation. A third, more pessimistic scenario simulates a higher risk global environment, with trade tensions increasing, and a less effective modernization of the Chinese economy through domestic policy changes.

Under the scenario that continues current trends, the economy maintains an average annual growth rate of about 8 percent over the next five years. At 2002 constant prices, the aggregate

GDP would reach $3.6 trillion in 2010, slightly smaller than that of Japan in 2002. Per capita GDP would be about $2,670, comparable to the current per capita incomes of Brazil, South Africa, and Turkey. From 2010 to 2020, growth is projected to slow somewhat, to an annual average of about 7.6 percent. By 2020, GDP would be about $7.5 trillion and per capita GDP would be about $5,300, comparable to per capita incomes in Hungary and Poland today.

The most dramatic difference in impact between the optimistic and pessimistic scenarios is experienced by poor rural households. There are fewer opportunities for agricultural workers to find jobs in the cities and their already low wages stagnate. At the same time, China imports fewer agricultural products from the rest of the world, as agricultural production declines more slowly in China and incomes rise less.

The experiments lead to the finding that domestic demand will likely be the main source of employment creation. This finding suggests policy responses in several areas. Policies that raise household incomes widely, particularly those of rural and lower-income urban households, will be needed to generate broad-based demand. At the same time, such policies would reduce the economy's reliance on trade, help to address current account imbalances, and contribute to more balanced development between urban and rural areas. Fiscal policies and labor market policies have a major role to play. An emphasis on service sector development, particularly in personal services such as education and health care, could generate more labor-intensive jobs, both in urban and rural areas, to absorb surplus labor from the agricultural sector.

China's continued development will require a reasonably benign international environment if recent rates of growth are to be maintained. However, policy choices by the Chinese government will determine whether living standards rise throughout the country, whether productivity increases to smoothly compensate for the aging of the population, and whether the economy evolves in a balanced and sustainable manner.

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