China’s Pattern of Growth: Moving to Sustainability and Reducing Inequality

This paper uses both macro level and sectoral data to study the sources and pattern of China’s impressive economic growth over the last 25 years. Extending the growth accounting framework, we show that widening inequality, rural poverty, and resource intensity are to a large extent rooted in China’s growth strategy, and resolving them requires a rebalancing of policies. We find that growth of investment in the industrial sector has been the single most important factor driving gross domestic product and overall labor productivity growth since the early 1990s. The shift of labor from low-productivity agriculture has been limited. The productivity gap between agriculture and the rest of the economy has continued to widen, leading to increased rural–urban income inequality. Continuing with the current growth pattern would further increase already high investment and saving needs to unsustainable levels, lower urban employment growth, and widen the rural–urban income gap. However, reducing subsidies to industry and investment, encouraging the development of the services industry, and reducing barriers to labor mobility would result in a more balanced growth and a substantial reduction in the income gap between rural and urban residents.