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Productivity and long term growth

Going for Growth 2016: China

 

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Following decades of strong growth, China needs to shift to new sources of growth to continue catching up with advanced economies. ‌The rapid gains in productivity driven by the move from agriculture to manufacturing, strong investment in physical capital, the integration into the global trade system and the associated technology transfer have largely run their course. China needs to step up investment in knowledge-based capital, allocate resources more efficiently across firms and encourage a more widespread development of skills and human capital.  Chinese firms are relatively well integrated in global value chains (GVCs), but the value added generated could be raised by a stronger involvement in knowledge-based and skill-intensive service activities, which currently comprise only a small share of value added in China’s manufacturing exports.

1. The index of GVC participation consists of backward participation, which is the share of foreign value-added embodied in a country’s exports, and forward participation, which is a country’s value-added embodied in other countries’ exports, as the share of its exports. Backward participation tends to be higher for small countries or those engaging heavily in assembly of final goods (ex: China, Mexico and some central European countries).  Forward participation tends to be higher for countries exporting natural resource and base material (ex: Norway or Australia) and those participating in GVC as providers of core components (ex: the United States or Japan).

Source: OECD-WTO Trade in Value Added Database (TiVA), October 2015.

Previous Going for Growth recommendations include:

  • Reduce state involvement in business operations and encourage private entry by replacing price controls with market-based mechanisms and reducing regulatory barriers to firm entry while adopting regulation that creates a level playing field, ensures product safety and protects consumer interests. 
  • Ensure a better match between skills available and those demanded in the labour market by improving the tertiary education curricula and by making vocational education more attractive.
  • Strike a better balance between liberalisation and regulation in financial markets by enhancing risk pricing by financial markets through the removal of implicit state guarantees, and by ensuring access to credit for a wider range of borrowers, in particular small- and medium-sized enterprises.   
  • Reduce barriers to labour mobility by ensuring equal access to education regardless of registration status, and by unifying healthcare insurance at the national level so that services can be obtained country-wide.
  • Further enhance the rule of law by identifying non-compliers in a more rigorous manner to enhance the perception of fairness and by increasing transparency in business operations.

 

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Recent policy actions in these areas include:

  • Price controls on 24 commodities and services were lifted, including for some categories of freight and passenger transport. Over 350 administrative approval processes have been abolished or delegated to the sub-national level.
  • With the removal of the ceiling on short-term deposits, interest rates have been fully liberalised except for some policy rates. 
  • Residential permits have been issued to migrants in a number of cities, enabling access to education and healthcare services.
  • Transparency in business conduct has been enhanced by requiring all enterprises to disclose an annual report.

The report also discusses the possible impact of structural reforms on other policy objectives (fiscal consolidation, narrowing current account imbalances and reducing income inequality). In the case of China, a gradual extension of social services to migrant workers in more cities would unleash their consumption potential, thereby supporting economic growth, and help make growth more balanced and equitable. 

Economic Policy Reforms 2016 

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