Efficiency, not speed must drive nation's next phase of economic growth

The global economy is at a crossroads. As the old engines of growth lose steam and new ones sputter to life, China finds itself in the thick of a structural transformation unlike any in its history. The consensus is clear that high-quality development is a necessity, but the real question is how to achieve it when resources are tightening, the population is aging, and the external environment grows more unpredictable.

At the heart of this challenge lies a deceptively technical term: total factor productivity. It's the economist's way of asking how efficiently a society turns labor, capital, and ideas into tangible progress. But in essence, TFP is about something deeper — how well an economy adapts, learns, and renews itself when its old advantages start to fade.

Growth, in the long run, comes not from working harder or investing more, but from doing things better. TFP captures this "doing better" — the part of economic progress that can't be explained simply by adding more workers or machines. Robert Solow, the Nobel laureate who formalized this concept decades ago, called it the "residual" of growth — the invisible residue of innovation, good governance, and smart organization.

For China, the relevance is hard to overstate. Over the past 40 years, China's growth was fueled by a demographic boom and capital influx, powering the country's ascent into the world's second-largest economy. But the population is aging, and land and energy are constrained. In this new era, efficiency, not speed, must drive the next phase of growth.

The story of China's rise is, in large part, a story of smart integration into global markets. Since the launch of reform and opening-up, China has adeptly leveraged its abundance of workers and welcomed foreign technology. Productivity surged as factories learned, adapted, and improved — and within just a few decades, millions were lifted out of poverty. TFP has been a pivotal force, enabling China to industrialize at a breathtaking pace.

But today's context is strikingly different. TFP growth has slowed. The easy gains from labor and investment have mostly been realized, while new constraints — environmental, geopolitical, and demographic — are tightening simultaneously. China's growth model, once driven by low-cost inputs and scale, is showing its age. Sustaining the momentum will depend on TFP enhancement.

The historical record offers useful comparisons. Since the 1960s, more than 100 economies have reached middle-income status. Fewer than twenty have managed to leap beyond it. What separates the success stories from the rest often comes down to TFP.

Japan and South Korea sustained high TFP growth long after industrialization, using technological innovation and industrial upgrades as twin engines. The United States, meanwhile, has maintained its edge by nurturing institutions that reward creativity — from research universities to open capital markets.

Contrast that with much of Latin America, where economies dependent on commodity exports and incremental imitation hit a wall. Without strong institutions or a culture of original innovation, TFP stalled and so did income growth. The message for China is plain enough: without encouraging genuine innovation and supportive institutions, the risk of stagnation looms large.

Improving TFP is not about one big reform, it's about pulling multiple levers at once. Four factors stand out as particularly important.

Innovation is paramount. For decades, China's growth in technology was built on a "learn and adapt" approach: import advanced equipment, digest it, then improve on it. That model worked — up to a point. But as competition shifts toward frontier technologies like AI, quantum computing, and renewable energy, catch-up is no longer enough. Sustained growth will require stronger basic research, patient funding for risky ideas, and institutions that protect and reward original innovation.

Institutional reform is also crucial. Technology alone doesn't raise productivity if systems don't allow resources to flow where they're most effective. Property rights, fair competition, and predictable regulation all matter because they lower the friction of doing business. A fairer, more transparent environment helps entrepreneurs focus on creating value instead of navigating red tape.

Developing human capital is another vital component. China's working-age population is shrinking, but its potential workforce could still grow more capable. Investing in higher education, vocational training, and digital literacy can transform demographic pressure into an asset. In knowledge-based industries, skill quality will count far more than headcount.

Finally, China must stay open, even in a fragmented world. Despite rising protectionism and geopolitical strain, engagement with global science, markets, and finance remains vital. Self-reliance and openness need not be opposites. By cooperating internationally where it is beneficial and focusing domestically where it is strategic, China can keep its innovation ecosystem both resilient and connected.

If TFP is the goal, certain policy priorities stand out.

First, empower private enterprise. Private firms are now the driving force behind China's technological progress — accounting for over 90 percent of high-tech companies and making major contributions in electric vehicles, solar power, and advanced batteries. Their energy and creativity depend heavily on clear rules, fair competition, and policy predictability.

Second, align finance with innovation. Research-driven industries often require patient capital — money that stays for years, not months. A financial system that serves innovation needs a mix of equity, venture capital, and debt instruments, all operating under sensible regulation. The goal is to prevent financial excesses without suffocating experimentation.

Lastly, adapt industrial policy to local realities. Not every region should chase the same trendy industry. The rush to build identical electric vehicle or AI projects across provinces can waste resources and distort markets. Local governments might better serve their economies by providing stable rules, good infrastructure, and supportive ecosystems rather than picking winners directly.

The next 10 years will reveal whether China can shift from fast growth to smart growth. The challenge is no longer how to make the economy bigger, but how to make it more efficient, innovative, and adaptable.

If the past miracle was built on expanding quantity, the future will depend on enhancing quality. TFP is much more than an academic measure, but it is the key to determining whether China breaks through its current ceiling or settles into slower, middling growth.

The writer is dean of Peking University's National School of Development and director of the Institute of Digital Finance.

The views do not necessarily reflect those of China Daily.