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It is increasingly accepted that the gross domestic product (GDP) growth rate of the People's Republic of China (PRC) is slowing down, but the reasons for the slowdown are not yet well understood. Part of the reason is that growth in all countries that reach high-income status slows down when they reach a global research income level that is still far below the level of the highest income countries. In the PRC, on the supply side, this is happening because total factor productivity (TFP) is slowing down whereas, because of slowing labor force growth, it would have to increase in order to maintain near double-digit GDP growth. On the demand side, a low share of household income in GDP has required the PRC to maintain an unusually high rate of investment in transport infrastructure and housing, but the rapid growth in both of these areas is coming to an end. Environmental investment could take up the slack and keep aggregate demand at a level that would fully employ resources. Finally, the PRC has reached the point where the manufacturing share of GDP has peaked and will begin to decline as the economy becomes increasingly service based, but services seldom grow at the double-digit rates that manufacturing is sometimes capable of.
Keywords: TFP, GDP growth rate, housing construction, transport investment, environmental investment, service-based economy
JEL codes: E6, 043, 047, P42
I. Introduction
It has become increasingly accepted within the People's Republic of China (PRC) and outside that the PRC's slowing growth rate is a long-term phenomenon, not a temporary or cyclical downturn. The future rate of growth can fluctuate from year to year depending on world economic conditions and on the PRC's domestic policies-notably whether the government calls for a fiscal and monetary stimulus or not-but there are compelling reasons for believing that the long-term trend in the growth rate is sloping downward. The PRC's gross domestic product (GDP) may well grow at 5% or 6% for the next 1 to 2 decades and possibly a point or two faster than that for the next few years. If there is a fiscal stimulus comparable to what occurred during 2009-2010, the rate could be even higher but with likely long-term effects that would be negative.
The...