China could grow 5%-6% annually by 2035, and 3%-4% between 2035 and 2049, says Justin Yifu Lin

IF it develops based on comparative advantages, China would have "latecomer advantage," says the former Senior Vice President and Chief Economist of the World Bank.

We are sharing the final part of our four-post series of Justin Yifu Lin’s August 26 speech at the State Organs Work Committee to cadres in the central-level Communist Party of China (CPC) and Chinese Government organs.

In this part, the senior Chinese economist who previously served as Senior Vice President and Chief Economist of the World Bank, 2008-2012 explained why he thinks theoretically China’s economy could grow 5%-6% annually by 2035, and 3%-4% between 2035 and 2049.

The text is sourced from the 新经济学家 New Economist WeChat blog, and Lin has been contacted by me before this translation. - Zichen

Justin Yifu LIN is Dean of Institute of New Structural Economics, Dean of Institute of South-South Cooperation and Development and Professor and Honorary Dean of National School of Development at Peking University. He was the Senior Vice President and Chief Economist of the World Bank, 2008-2012. Prior to this, Mr. Lin served for 15 years as Founding Director and Professor of the China Centre for Economic Research (CCER) at Peking University. He is Councillor of the State Council and a member of the Standing Committee, Chinese People’s Political Consultation Conference.

Regarding the future development of China, there are currently many pessimistic arguments. There are various opinions about China's development potential and possibilities. Some believe that China has already passed the phase of high-speed development and even suggest that due to an aging population, China might enter a phase of low growth similar to Japan.

Another perspective suggests that China's economy is becoming increasingly massive and is now comparable to that of the United States, so our economic growth rate is also resembling that of the United States. If we were to fall into a period of low growth, and considering that the United States maintains a 2% growth rate, it raises questions about whether we can narrow the gap with the United States to navigate through the profound changes unseen in a century while achieving the great rejuvenation of the Chinese nation. This is a matter that requires careful consideration.

To answer this question, it's important to first understand the essence of economic development. On the surface, development appears to involve a continuous increase in income levels, but its foundation lies in the continuous improvement of productivity. How do we elevate productivity levels continually? The key is to ensure that existing industries undergo continuous technological innovation, yielding new value and the emergence of higher-value industries. So, how can we encourage ongoing technological innovation in our existing industries and the emergence of new, higher-value industries? In this process, if we follow our comparative advantages, I believe China still has significant development potential.

Because in this process, if we develop according to comparative advantages, firstly, we possess a "latecomer advantage." Why?

Because our current per capita GDP is around $12,000 to $13,000, while developed countries have already reached $50,000, $60,000, or even $70,000 in per capita GDP, we have a significant gap with them. The difference in per capita GDP represents the disparity in industry and technological levels per capita. Our industries and technologies still have a considerable gap compared to those of developed countries. When a developed country has a high per capita GDP, it signifies that its industrial and technological capabilities are at the forefront globally. In such cases, relying on technological innovation and industrial upgrades, they typically need to invent new technologies, create new industries, and invest heavily in these endeavors, with a high level of risk and a high probability of failure.

Of course, when they succeed, the returns can be enormous, with access to global markets, patent protection, and high profits for successful enterprises. However, for those that do not succeed, it can lead to complete financial loss. So, when it comes to innovation in new technologies, we can say that success results in great achievements, but most endeavors end in failure.

From the mid-19th century to the present, the growth in per capita GDP of developed countries has been around 2%. When you add in population growth, the overall growth rate in developed countries falls within the range of 2% to 3%, depending on the speed of population growth. Developing countries also engage in technological innovation and industrial upgrades. In the context of technological innovation and industrial upgrades in developing countries, it's important to understand the meaning of innovation. Innovation means that in the next production cycle, the technology I use is better than what is currently in use, that's technological innovation.

Developed countries, possessing technology at the forefront of the world, have to invent new technologies themselves. However, developing countries, with a technology gap compared to developed nations, can use technology transfer, assimilation, and absorption as sources for their own innovation. Importing, assimilating, and absorbing technology is generally much less costly and risky than inventing entirely new technologies, which is what developed countries often do.

Similarly, in industrial upgrading, when developed countries need to enter new industries, they must invent these new industries themselves, which involve high risks and significant investments, with a substantial probability of failure.

On the other hand, developing countries, during the process of industrial upgrading, can enter into industries with higher value-added than their current ones but which are already mature. They can utilize technology transfer, assimilation, and absorption for industrial upgrading. This approach generally carries lower risks and costs than inventing entirely new industries. If the risks and costs of technological innovation and industrial upgrading are significantly lower for a developing country compared to a developed country, it has the potential to achieve faster technological innovation, industrial upgrading, and economic development through this approach. This possibility in development economics is often referred to as a latecomer advantage.

Being a latecomer, of course, means having lower income levels, which is a sign of being behind. However, in a dynamic context, it can actually be an advantage, and this is what we call the "latecomer advantage." For developing countries, if they utilize this latecomer advantage effectively, their development speed can be several times that of developed countries. For example, since our economic reform and opening-up in 1978 until last year, our average economic growth rate was 9%, and our per capita GDP growth rate was 8%. In contrast, the average growth rate in developed countries is around 3%, with an annual GDP growth of only 2%. This means our overall economic growth rate is three times that of developed countries, and our per capita GDP growth rate is four times that of developed countries. This was achieved by leveraging our latecomer advantage, capitalizing on the technological gap between us and developed countries.

Now, the question is, how large is our latecomer advantage when we look ahead? It depends on the current gap between our industries and technologies and those of developed countries. In 2019, our per capita GDP was approximately 22.6% of that in developed countries, which is roughly 1/5, equivalent to the gap between Germany and the United States in 1946.

In 1946, Germany's per capita GDP was approximately 22-23% of that of the United States. In 1956, Japan's gap with the United States was also around 22-23%. Similarly, in 1985, South Korea's gap with the United States was at a similar level. So, when it comes to the development gap with advanced countries, with the United States as a representative, in 2019, our level was equivalent to that of Germany in the mid-1940s, Japan in the mid-1950s, and South Korea in the mid-1980s. These three countries performed relatively well among advanced nations during those time periods. From 1946 to 1962, Germany achieved an average annual GDP growth rate of 9.4%. Japan had a continuous 16-year period from 1956 to 1972 with an annual GDP growth rate of 9.6%. Similarly, South Korea had a 16-year period from 1985 to 2001 with an average annual economic growth rate of 9%. Now, due to aging populations and stagnant population growth, we can exclude the part of economic growth brought about by population and focus on per capita GDP growth. If we look at the period from 1946 to 1962, the average annual population growth rate was 0.8%, and per capita GDP growth was 8.6%.

From 1956 to 1972, Japan had an average annual population growth of 1% and achieved a per capita GDP growth rate of 8.6%. Similarly, South Korea, from 1985 to 2001, had an average annual population growth rate of 0.9% and achieved a per capita GDP growth rate of 8.1%. So, these three countries, by effectively leveraging their development advantages and narrowing the technological gap with the United States, consistently achieved annual growth rates of over 8%. If they continue to utilize their advantages as latecomers, they have the potential to achieve per capita GDP growth rates of over 8%. I believe that if we harness this advantage, from 2019 to 2035, over these 16 years, we also have the potential for an average annual growth rate of 8%.

Due to our aging population and stagnant population growth, per capita GDP growth will play a critical role in our overall economic growth rate. Therefore, when analyzing the situation in this context, I believe that we still have the potential for an annual growth rate of 8% until 2035, because these countries have already demonstrated such growth. This signifies our untapped potential. Furthermore, compared to Germany, Japan, and South Korea at a similar stage of development, we have an advantage they didn't have at the time – the opportunity to leapfrog into the new economy. The new economy is fundamentally based on the digital economy. Within this new economy, characteristics such as the internet, big data, and artificial intelligence play a significant role.

The development cycle for products in this field can be quite rapid. For example, in the realm of artificial intelligence, one of the most talked-about models is ChatGPT. Just a few months ago, it was at version 3.5, but within a month, it was replaced with version 4.0. This demonstrates the fast pace of advancements and updates in the field of AI and technology.

It's highly likely that ChatGPT will release a 5.0 version next year. In this new economy, one of its defining characteristics is the remarkably short development cycle for new technologies and products. The primary driver for research and development in this space is human capital, although it does require some financial investment as well. The capital used is relatively minimal compared to traditional industries, where a single product cycle may take 10 to 20 years. Traditional industries also require substantial human capital and significant financial investment. In the new economy, the emphasis is primarily on human capital. For example, within China, we can see the case of Xiaomi, which is celebrating its 13th anniversary this year. Xiaomi was founded by Lei Jun, who assembled a team of just over 100 people and managed to launch the first Xiaomi smartphone within a year. Considering the limited financial resources that could be invested in a team of around 100 people, this demonstrates the efficiency of human capital. These individuals were highly skilled and capable. China has several advantages in this new economy. With a population of 1.4 billion, there's a vast pool of high-tech talent. This abundance of human capital is one of China's strengths in this field.

Then, in this new economy, if you succeed in technology research and development, China has two advantages. The first one is that, according to purchasing power parity, China already has the world's largest market. After the successful development of these technological products, they can be introduced into the world's largest market. Once you enter the largest market, your unit production costs can be lower, and your competitiveness in the global market will be stronger. This is the advantage of our large domestic market.

The second advantage is that if this technology requires hardware, we have the world's best industrial support. The time needed from conception to product is the shortest. For example, Tesla's new energy vehicles, which took more than a decade to develop in the United States, and Elon Musk, who spent more than a decade in the United States, were producing only two to three thousand new energy vehicles a year. When he invested in Shanghai, he built a factory in one year, and in the second year, he could immediately produce 500,000 units. In this new economy with short development cycles, we have a lot of human capital, a large domestic market, and a well-developed industrial ecosystem advantage. This is also very evident, for example, if you know the number of unicorns in China, it competes with the United States for the first or second place in the world every year. And now, among the top 5 most downloaded applications in the United States, aren't some of them from China? This represents the advantages of our new economy, which is something that Japan, Germany, and South Korea did not have when they were chasing the United States back then.

So, in terms of growth potential, looking at it from these two perspectives, there is a possibility of an 8% annual growth rate until 2035. However, when it comes to harnessing this growth potential, there is a disadvantage compared to Japan back in the day. We are currently facing profound changes unseen in a century and the United States is highly motivated to place technology restrictions against China because of it. In the 1980s, Japan faced a similar situation, where the United States put pressure on it. Now, the United States is likely to be even more motivated to keep China down. But that is, as I analyzed earlier, essentially a zero-sum game. From a corporate perspective, it involves self-damaging to a significant extent.

This is because those capable of challenging China's position are primarily involved in high technology, and achieving technological breakthroughs requires substantial research and development investments. Once a technological breakthrough is achieved, there can be substantial profits. However, continuous R&D investment is necessary to maintain their technological lead. If they choose not to sell this technology to China, they might transition from high profits to low profits or even no profits. Consequently, their ability to continue R&D may be compromised, and they could potentially be eliminated in the competitive technology landscape. So, for these high-tech companies, having access to the Chinese market is a matter of life and death, as I mentioned earlier. Because those willing to challenge China's position are primarily the United States, driven by its political interests and the desire to maintain global dominance, they are willing to sacrifice their economic interests to achieve their goal of sustaining world hegemony.

This political objective is not something that American companies are very willing to execute. For instance, as we discussed earlier, Huawei was the first company to be targeted by the United States. Huawei's smartphones heavily relied on Qualcomm chips, but four years ago, the US government issued an order prohibiting Qualcomm from selling chips to China, including Huawei.

Within three months of this situation starting, Huawei began stockpiling chips, but it quickly ran out of them. Once the chips were used up, Huawei couldn't produce smartphones. In 2019, Huawei's smartphones had already surpassed Apple, becoming the global leader in sales and market share. However, because it couldn't access Qualcomm chips, its global smartphone market share declined.

But how did Huawei's smartphones start to recover last year? For example, how did I get a Huawei Mate 50? In fact, Qualcomm couldn't endure the situation because 30% of its chips were sold to Huawei. If it stopped selling any chips to Huawei, Qualcomm would go bankrupt before Huawei.

So, under this situation, two years ago, Qualcomm applied to the US State Department, and now, apart from 5G chips, it can sell other chips to Huawei. Therefore, Huawei began producing non-5G smartphones with excellent performance. Huawei is also working on its own chip technology, and it might introduce 5G chip smartphones again by October this year. In this context, even American companies themselves, for their own survival, are not very willing to comply with the US government's policies. Moreover, Qualcomm is only prohibited from selling 5G chips to Huawei but can sell to Xiaomi, Vivo, and others, so the US cannot completely block technology access.

So, in this scenario, while we might indeed face profound changes unseen in a century that could lead to some pressure, the real entities at risk of being "strangled: are those American companies with exclusive technology. Why should Germany or France adhere to American policies? Following American policies, from a corporate perspective, amounts to harming themselves as much as harming their competitors, if not more. In this context, other countries, as long as we keep our markets open and maintain growth, are actually willing to sell technology to China. That's why the German Chancellor visits China with a large delegation of businesses, and the French President often comes to China with substantial business delegations. They value the Chinese market. So, in this situation, those truly willing to restrict our access should be very few in number.

So, the policy we are adopting, as I mentioned earlier, is to follow the Huawei approach. If a technology is not sold to us, we will produce it ourselves. And in this production, we have an advantage - our new system for mobilizing the resources nationwide to achieve breakthroughs in core technologies. When we only lack a few things, I believe that as long as we are determined, we can break through in a short period, ranging from one to four years.

So, from this perspective, as I analyzed earlier, we should have an 8% growth potential by 2035. Of course, we must consider the possibility of facing restrictions. Therefore, we need to allocate resources and budget for tracking and researching. If we are indeed restricted, we won't be able to import, which may have some impact, and we will need to concentrate our efforts and allocate resources to overcome these challenges.

At the same time, we are committed to achieving our dual carbon goals, which involve transforming some of our existing equipment from high energy consumption and high carbon emissions to low energy consumption and green technologies. This transition requires significant capital investment. Taking all these factors into consideration, I believe that by 2035, if we pursue a development path that capitalizes on our comparative advantages and the ability to overtake others with the latecomer advantages, while balancing security and development, we should be able to achieve an annual growth rate of 5-6%. Similarly, looking ahead, by 2049, I believe there is still a growth potential of around 6%, given our focus on both security and development, as well as achieving the dual carbon goals. We can aim for 3-4% growth in that period.

If we can attain these goals, I believe that by 2049, when we reach our second centennial, our per capita GDP could reach 50% of the United States' level. Why do I believe this? In 2019, our per capita GDP was 22.6% of the United States'. To achieve a 50% level in the next 30 years, our annual per capita GDP growth rate must exceed that of the United States by 2.7 percentage points.

Over the past five to six decades, the average annual per capita GDP growth in the United States was 1.8 percentage points. So, to surpass it by 2.7 percentage points, our per capita GDP growth must reach 4.5 percentage points annually from 2019 to 2049. Given that our population is not growing significantly, it means our per capita GDP growth must be 4.5 percentage points from 2019 to 2049. If we can achieve 5-6% growth by 2035 and then maintain 3-4% growth from 2036 to 2049, we should be able to reach a per capita GDP of 50% of the United States by 2049.

As I mentioned earlier, once our per capita GDP reaches 50% of that of the United States, we will have effectively navigated the profound changes unseen in a century. To further elaborate on this point, I conducted some research, and as of 2019, there were 70 countries where per capita GDP had reached 50% of the United States. In these 70 countries, the per capita GDP exceeded the threshold for high-income countries, which is $13,205. Among these 70 countries, 28 of them had per capita GDP equal to or higher than half of that of the United States. These 28 countries mainly include older industrialized European nations such as Germany, France, Italy, Switzerland, Sweden, as well as emerging industrialized economies in East Asia like Japan, South Korea, Singapore, and Israel. Additionally, a few oil-producing nations were among them, along with small financial-oriented countries like Monaco and Luxembourg. These 28 countries are generally considered among the most developed in the world. To achieve the great rejuvenation of the Chinese nation, following the criteria outlined in the 20th National Congress of the CPC, we aim to become an advanced socialist modernized society. If our per capita GDP reaches 50% of that of the United States, we can place ourselves in the category of advanced and developed countries, much like Germany, France, Switzerland, Sweden, and Japan.

Certainly, achieving the goal of the great rejuvenation of the Chinese nation is possible. As I mentioned earlier, following a strategy based on comparative advantages, we can realize the five distinctive characteristics of Chinese path to modernization. By pursuing this path, we can fully and accurately implement the new development philosophy, as well as put into practice the new development paradigm. We can rapidly establish the domestic cycle as the core and, with our fast economic growth, leverage the domestic market to stimulate both domestic and international markets. This will result in a mutually reinforcing dual circulation.

I believe I have summarized the key spirit of the 20th National Congress of the Communist Party of China report and emphasized the principles of New Structural Economics, which are guided by the fundamental principles of materialism derived from Marxism. These principles highlight the importance of both an effective market and an active government working together. By following this approach and focusing on the utilization of comparative advantages, we can effectively achieve the central and primary tasks outlined in the 20th National Congress report. I share these insights with you and offer them as a reference.

Thank you!

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