Getting Rich Before Getting Old or Vice Versa?

The decline in China’s TFP growth has attracted attention from certain experts. This reveals that China’s economic development and economic growth, contrary to what the academic field has concluded, are not attributable to high TFP growth and technological progress.  When confronted with social impact such as the financial crises in 1997 and 2008, China’s TFP growth turned negative. The figure in 1979, 1980 and 1981 was -1.321 percent, -1.483 percent and -3.384 percent respectively; -0.575 percent, -3.599 percent and -4.413 percent in 1986, 1989 and 1990; and in 1998, 1999 and 2009 the figure was -0.861 percent, -0.712 percent and -0.402 percent. (See Zhao Zhiyun and Yang Chaofeng, “The Calculation and Explanations of China’s TFP 1979-2009,” published in Research on Financial and Economic Issues, issue 9, 2011).

Zhang Xiaoqiang, vice minister of the National Development and Reform Commission, remarked that China has invested more in technological research and development in the 21st century. In 2012, over RMB one trillion (1.98 percent of GDP) was invested in science and technology, but the rate of technology transfer was only 10 percent, much lower than the 40 percent of developed countries. China’s economic growth still relies on inputs of a large quantity of resources and investment. In 2012, China was consuming 50 percent of the world’s steel, cement and coal. Its import dependence on petroleum was 57 percent, copper 70 percent, and in this cycle, high consumption of resources led to air, water and land pollution.

Avoiding the Middle-income Trap to Reach Affluence

To get affluent before getting old depends on whether China can escape the middle-income trap. The East Asia Development Report of 2006 raised the concept of the middle-income trap, meaning that very few middle-income economies ascend to the rank of high-income countries. They usually fall into economic stagnation because they can neither compete with low-income countries for salary nor with better-off countries for cutting-edge technology and inventions. Some countries in Latin America and Southeast Asia typify the middle-income trap. Japan and South Korea, on the other hand, have made the successful transition to high-income countries. Singapore, Taiwan and Hong Kong have also avoided the middle-income trap.

Compared with developed countries, the influence of China’s aging population has become more and more significant. Between 1982 and 2012, the population of age 65 and above had surged from 49.9 million to 127 million, making up 4.9 percent and 9.4 percent of the total population respectively, an increase of 62.6 million, up 4.5 percentage points. In the same period, the population of age 65 and above in the U.S. increased from 26.8 million to 41.8 million, making up 11.58 percent and 16.9 percent of the total population respectively, an increase of 15 million, up 4.5 percentage points. But China is a new middle-income country, while the U.S. is already a high-income country.

Escaping the middle-income trap depends on China’s development mode and institutional improvements as well as making the best of people’s incentives and creativity. China should take advantage of the present situation to further its reforms and opening-up. It should straighten out its system and mechanisms to guarantee sustainable and healthy economic progress instead of being complacent with the praise from some Western media. On one hand, China should make the best of its comparative advantages, including its ability to provide auxiliary items for some industries, its huge domestic market as well as a large population of educated workers. On the other hand, China needs to hasten its restructuring and transform development modes to balance the relations between government (including the central government and local governments) and market to reach a well-regulated, healthy market order. It also has to accelerate its opening-up and reforms and establish a fair distribution system as well as make optimal configurations to maximize such factors as human resources, market factors, science and technology, land, and capital. Increasing input in science and technology, promoting transformation of scientific and technological progress into productive forces, and accelerating institutional innovation are also necessary. In short, by strengthening system construction and taking a suitable path for development towards an effective and fair economy and social system, China can become affluent before getting old.