Is China’s economic growth sustainable? A general equilibrium analysis

Despite China’s remarkable economic growth over the last three decades have been well acknowledged, there seems no consensus being reached on how this growth is created and whether it can be sustained in the future. While some economists (e.g., Holz, 2008) argue that “China’s potential for economic growth from relatively low labor costs will continue to exist for another 30 years”, others (e.g., Hofman and Kuijs, 2008, Prasad, 2009, Whalley and Xin, 2010) have questioned its sustainability. Based on a brief literature review and with the help of a well-known CGE model (the GTAP model), this paper attempts to identify the most significant factors that have contributed to the miraculous economic growth in China, namely international trade, FDI, and migrant labor, and to explore how some other economic potentials such as the removal of the household registration system and engaging free trade with its major trade partners could be further exploited. The GTAP is a multi-region, multi-sector CGE model that has been used widely to tackle many economic and trade policy issues in developing countries. The latest version of the dataset which is based on 2007 actual data is used for running two sets of eight counter-factual simulations. According to the results of the simulations, it is concluded that the export-orientation development strategy, effective use of FDI, and exploitation of comparative advantage of its migrant workers are the most significant factors that have contributed to the remarkable economic growth in China. While the opening effect accounts for roughly 40% of GDP growth, the effective use of the migrant workers contributes to about 50%, leaving the remaining 10% or less as the contribution of TFP. Although not all of these factors will persist in the future, several alternative reform measures including the removal of the household registration system and further liberalising international trade through forming FTAs with its major trade partners would keep contributing to sustain China’s economic growth. The policy implication is that China should continue its opening and reform policies toward developing a more liberalised domestic factor market and engaging more FTAs with its major trading partners. When these economic potentials are further exploited, China’s rapid economic growth can be sustained further for at least another decade.