Expecting Convergence, Finding Divergence

Is China about to defy the conditional convergence hypothesis? Or, will (conditional) convergence be a cake walk for its economy? The financial crisis of 2007-08 and its impact on asset prices in China, has made researchers conclude that the interactive relationship between financial development and economic growth, suggests long run divergence.

Economic growth coupled with a steady rate of population growth and technological advancement (rate of growth), is what China has achieved since 1990. Especially since that decade, the economy has experienced convergence more towards the middle income and upper income strata. One reason for this may be liberalisation, decrease of state control (decentralisation) over private businesses, considerable economic growth, the like; simultaneously, there was a pandemonium of corruption, climbing inflation, and the need to consider state level administration.  Nevertheless, from 1993 onwards, significant reforms, conducted experimentally and otherwise, occurred, and by 2005, the private sector in China contributed to around 50 percent of GDP. Per capita GDP growth between 2000-2015 was 8.6 percent. Infact, the only country out of 105[1]which has consistent growth performance for 3 decades, was China.  An average economic growth of 9.3 percent in 35 years from 1980, and the impending status of a market economy is what makes China an economy to reckon, in this decade. Closing the income gap between itself and the rich developed (richer) economies has been purposefully done by China, through two significant activities: its openness to trade, and creating a favourable environment for new businesses. In 2016, China ranks 84 in 189 countries[2]. Paying taxes was made easier by making procedures electronic, and the minimum capital requirement was reduced to encourage new enterprises. Continuing its journey towards establishing a liberated economy, it joined the WTO in 2001, by showcasing its exports. 35 years and a stupendous performance has made researchers concede to the idea that China, once a poor economy (pre-1989, 1990), is about to achieve conditional convergence.

However, a sluggish performance in 2015, evident from an economic growth of around 7 percent, has raised questions about the economy’s growth path. To comprehend the situation, some researchhas been conducted in decomposing growth rate by considering four productivity factors (Solow’s model). The method of growth accounting used in this particular study reveal that this medium term convergence was possible because of increase in total factor productivity and physical capital accumulation, and growth of human resources, with human capital growth declining over the last 20 years. The period of 1980 to 2010 saw drastic structural changes in the economy: increase in employment in the services sector, and decrease in employment in the agricultural sector. Accompanying this is the existing financial repression scenario are its serious worries about debt. The prevalent shadow banking system and the potential fear of more financial innovation also provides a good reason for the economy to slow down and re-examine itself in terms of institutionalisation and regulation.

[1]World Bank Database: World development indicators: GDP PPP constant

[2]World Bank’s annual ‘Doing Business’ report – 2016

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  1. China: Get, Set, Slow, Repair – The Radical economist
  2. China: A Crisis in the Shaping? – The Radical economist

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