Looking Inward for Transformative Growth in China

Export led growth has been very effective in modernising China’s economy and establishing a large high-saving middle class. Notwithstanding political opposition from trading partners, this growth strategy has also offered the rest of the world an improved terms of trade and cheaper finance. Yet slowing demand in export destinations has forced a transition to inwardsourced growth. This paper uses a numerical model of the Chinese economy with oligopoly behaviour to examine the available “inward” sources of transformative growth along with the policies needed to exploit them. Continued transformative growth is shown to be feasible though it will require accelerated skilled labour supply growth and the extension of industry policy reform to heavy manufacturing and services. These gains nonetheless require further openness and, even though the share of Chinese light manufactured exports would decline, global acceptance would be required of exported Chinese heavy manufactures. Failure to accommodate these would greatly limit China’s growth and force a return to a more primitive trading pattern that would also hurt the global economy more generally.