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FT: How To Blow Away China's Gathering Storm Clouds

Author: Martin Wolf
March 20, 2012

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In this Financial Times article, Martin Wolf suggests China should raise its total factor productivity to meet the challenges it will face in the future because of labor shortage.

China is entering upon a difficult transition to both lower growth and a different pattern of growth. This is the conclusion I drew from this year's China Development Forum in Beijing. Moreover, it is likely to be a political as well as an economic transition. These two transitions will also interact with one another in complex ways. The past record of economic success, under Communist party rule, does not guarantee a comparably successful future.

Readers do not need to take my word. They can take those of the outgoing premier, Wen Jiabao, who said on March 14: "The reform in China has come to a critical stage. Without the success of political structural reform, it is impossible for us to fully institute economic structural reform. The gains we have made in reform and development may be lost, new problems that have cropped up in China's society cannot be fundamentally resolved and such historical tragedy as the Cultural Revolution may happen again."

These political questions are of great importance. But the economic transition, in itself, will be hard enough. China is coming to the end of what economists call "extensive growth" – driven by rising inputs of labour and capital. It must now move to "intensive growth" – driven by improving skills and technology. Among other consequences, China's rate of growth will slow sharply from its average annual rate of close to 10 per cent of the past three decades.

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