Change Needed in China to Sustain Critical GDP Growth

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Macroeconomics

Continued from Part One.

In China’s richest 25 cities, GDP per capita is as high as that in some OECD countries, but in the country, it is at some of the lowest levels anywhere.

With the right incentives, this process of urbanization could, in theory, continue for some time and Beijing has made much of affordable housing supporting urbanization as a plank of economic growth in the years ahead. However, challenges remain – such as China’s archaic hukou system of residency permits and the ever-rising cost of life in the cities relative to life in the countryside.

Without the safety net of social support and the children of migrant workers being deprived access to education, workers are tied to the land. With no capital behind them, farm workers also face a rising financial barrier to relocate to cities and continue the process of urbanization that has driven growth over the last decade.

Yet, without a continuing supply of new workers, rising GDP will become constrained as the labor market tightens and wages rise; evidence of this is already widespread in major cities like Shanghai and Beijing. The extent to which Beijing can continue to encourage workers from the land and into urban employment will determine the extent to which the country can support its aging population and maintain growth rates.

None of this is new to the authorities, and there have been moves to effect change, but many hurdles remain.

Apart from changes to the hukou system mentioned above, allowing farmers the right to own the land they work rather than have it communally owned would hasten the pace at which small plots were sold to form larger, more efficient units. This would boost food production with more efficient modern farming techniques and allow farmers to realize the capital in their land to fund a move to the cities.

The current system of region-dependent social services and education, communal ownership of land and various lesser constraints, will remain challenges to China’s ability to grow at even its current 8% level, let alone the heady double digits of the last decade as the working age population declines.

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