New growth drivers

China's economic growth has been slowing since 2010, a departure from the fast growth of the previous decade, mainly because of lower labor productivity growth. China is no exception to the rule in productivity changes compared with high-income economies at similar stages of development. That said, China is still on track to catch up with advanced economies.

China's labor productivity growth dropped from 9.7 percent in the first decade of the century to an average of 6.1 percent during the 2011-2018 period for two reasons.

First, China's productivity in the agricultural, industrial and construction sectors used to lag far behind that of advanced economies, hence the opportunity existed for it to absorb advanced technologies and managerial expertise and boost productivity instantly with huge investments and economies of scale. Productivity peaked when China's per capita annual income reached $8,000-$9,000, measured in purchasing power parity terms. Once these industries go past their prime period of productivity growth, there is diminishing space for further productivity growth.

Second, a slowdown in the economic transition from agriculture to industry and services, coupled with a shift from the industrial to service sectors, leads to a decline in aggregate labor productivity even if there is no change in productivity growth across sectors.

For similar reasons, Japan, the Republic of Korea and some European economies, including Spain, France, Italy and the United Kingdom, have all experienced slower growth in productivity with the rise in per capita income.

First, the agricultural, industrial and construction sectors have gone beyond the stage of fast capital accumulation. Productivity growth is now driven more by human capital.

Second, the labor force no longer contributes to productivity growth to the same extent as before since a large proportion of rural workers have already shifted from the agricultural sector to the industrial and service sectors. Both in absolute and relative terms, China's productivity growth is similar to the average level of high-income economies at similar stages of development. China's productivity grew at an average rate of 6 percent in the past five years; that of Japan and the ROK grew at 6 percent on average at similar income levels.

According to the experience of high-income economies, labor productivity in various industries has declined to varying degrees with the increase of per capita GDP.Productivity in the primary industry grows fast initially and then declines moderately to 4 percent to 5 percent even when per capita income exceeds $20,000. Productivity growth in the secondary industry is the highest in the initial stage before dropping significantly. The tertiary industry starts with not so high productivity that continues to fall later.

In recent years, productivity growth in China's primary industry stood at 5.1 percent, close to the average level of high-income economies at a similar stage of development; the secondary sector productivity grew at 4.8 percent, slightly lower than that of high-income economies; tertiary industry productivity increased at 5 percent, higher than the international average.

China's productivity growth has slowed for the same reasons the productivity growth of high-income economies slowed when they were at a similar development stage. How it has slowed is also similar. It is only natural that productivity growth decelerates as economic growth enters a more mature phase.

At higher income levels and a more mature stage of development, China is now driving productivity growth with knowledge and technology rather than tangible capital. China is upgrading from conventional industries to high-end agriculture and manufacturing, information technology, education and research, healthcare, financial services, business services and other knowledge and technology-intensive industries. There are fewer and fewer low-hanging fruits down the road.

China needs to incentivize learning and knowledge accumulation as these will be the new drivers of productivity growth. There is a lot for China to learn from advanced economies, but this will not be enough on its own. China needs to come up with more well-thought institutional arrangements and policies to tailor foreign experience to local circumstances for sustained productivity growth.

The author is deputy director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences. The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.