China’s Economic Growth Prospects

China’s Economic Growth Prospects

From Demographic Dividend To Reform Dividend

Cai Fang

In this book Cai Fang explores the contribution of demographic transition to economic growth in China’s reform period, depicts the population factors causing the economic slowdown since the second decade of the twenty-first century, analyses the challenges facing its long-term sustainability when the demographic dividend is disappearing, and proposes important policy remedies. He suggests that in order to avoid the middle-income trap, China's economic growth has to transform from an inputs-driven pattern to a productivity-driven pattern, which requires eliminating several institutional obstacles.

Chapter 2: The development of a dual economy

Cai Fang

Subjects: asian studies, asian economics, economics and finance, asian economics, labour economics

Extract

[U]nto a land flowing with milk and honey. (Old Testament, Exodus) The possible slowdown facing China has to do with changes in the stages of economic development undergone by the country. In order to understand such developmental changes, we must first enumerate the unique characteristics that have distinguished economic growth in China since the 1980s, when economic reform was initiated. The Chinese story, however, cannot be told within the framework of the mainstream theory of growth, which considers economic growth to be a unitary, homogeneous process in which wealth slowly—but linearly—expands. The homogeneity assumption might be applied to countries in the early stages of industrialization, perhaps, but it does not hold explanatory power over existing developing economies. Until the dual economy development theory (coined by Arthur Lewis, a Nobel laureate in economics) came to prevail, conventional wisdom concerning the neoclassical theory of growth had failed to capture the characteristics distinguishing developing countries from developed countries and thus to identify the factors that prevent developing countries from catching up with their developed counterparts. The Lewisian theory has made at least two important contributions to development economics. One, it has built a bridge between two well-recognized phases of economic development, that is, the Malthusian poverty trap and neoclassical growth (Hansen and Prescott, 2002). Two, it provides a tool for understanding a unique phase of development—dual economy development—which many early industrialized economies have gone through and through which currently developing countries are still going.

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