China's Growth Outlook: Is High-Income Status in Reach?

Can China build on its development success to achieve high-income status in the decades ahead? To shed light on this question, we examine the past and prospective future sources of growth in China through the lens of the neoclassical growth model. Our key finding is that China would need to sustain total factor productivity growth at the top end of the range achieved by its high-income Pacific Rim neighbors in order to match their success in raising living standards. While fast-growing working-age populations boosted per capita income growth elsewhere in the Pacific Rim, a rapidly aging population will act as a powerful drag on income growth in China’s case. Moreover, China's already capital-intensive production structure will make it difficult to match those countries' gains from capital deepening. These restraints mean that a sustained and exceptionally high pace of productivity growth will be needed for Chinese per capita incomes to reach even 50 percent of the U.S. level by 2040. We argue that lagging institutional development represents the chief obstacle to the needed productivity gains.