Since 1978, the Chinese economy has seen phenomenal growth. While that’s not in dispute, the reason why China has managed to grow so fast and whether it can maintain that growth is far less clear. The consensus view among China scholars is that the country has grown by relying heavily on investments, exports, and its huge low-cost labor force. That formula has worked well so far, but evidence indicates that China is getting less and less from this approach lately. The country’s export growth is decelerating quickly, and China is already investing an amount equivalent to about half of its GDP—which is probably the highest level ever among any country in peacetime.
China has just completed its once-in-a-decade leadership transition. An item that should be high on the new leadership’s agenda is changing the country’s strategy so that its growth wastes less energy, requires less investment, and is less reliant on exploiting cheap labor as a competitive advantage. We do not know the policy deliberations among the Chinese leaders; in fact we don’t know whether or not these policy discussions are taking place at the highest echelons of the Chinese government. What we do know is that a transition out of the rapid growth model of the last three decades will be fraught with technical uncertainties and political complexities. But it is critical that it happens.