Xiong Xianliang

The decline in economic growth in recent years involves not only the policy on aggregate demand but also the aggregate supply and accumulated structural problems. After using the moderately expansionary currency and fiscal policy, it is necessary to have greater leeway for policy choice and fully consider the role of structural policies in promoting economic growth.

I. To examine the downward trend of the growth rate from the perspective of the new features of structural changes in the mid-1990s.

Table 1. The Expenditure Structure of the GDP of China (%) 

	Gross capital formation	Urban households’ consumption	Rural households’ consumption	Government consumption	Changes in inventory	Net exports
1978	29.6	18.4	30.2	13.2	8.4	0.2
1980	29.2	19.7	31.6	14.6	6.0	-1.4
1988	30.9	20.7	29.3	11.3	5.5	0.5
1990	25.5	21.5	27.7	12.1	9.2	4.0
1998	35.4	25.1	22.4	11.7	1.7	3.7

 Source: Calculated at current prices according to the figures of China Statistics Digest: 1999

Firstly, to proceed from the perspective of the expenditure structure of the GDP. Under the condition that the proportion of government consumption and that of the net exports in the GDP remain basically unchanged, a necessary factor to keep the economy firmly on the track of fast growth is to maintain the balance between the two "wheels" -- capital formation and households’ consumption -- which are the driving force of economic growth, As indicated in Table 1, the fact that the proportion of the rural households’ consumption in the GDP fell at a greater pace than the increase of the urban households’ consumption in the 1990s has aggravated the imbalance between the households’ consumption and capital formation, particularly the formation of fixed capital, which was shaped during the period of the planned economy. In 1998, the proportion of the households’ consumption in China was 47.5%, lower than that in 1978, 1980 and 1988. It was below the world average which was 63% in 1995, below the level of low-income countries which was 59%, below the level of upper-middle income countries which was 61%, as well as the level of high-income countries which was 63%. [1] The inadequacy of the households’ consumption as against capital formation has not only directly affected the absolute level of aggregate demand, but also left a negative impact on the rate of return of investment of enterprises as well as their impetus and capabilities for long-term investment. This will not be helpful for the realization of a virtuous cycle of the economy and a stable economic growth rate.

Secondly, to proceed from the perspective of the industrial structure in output and employment. During the 1990s, the output share of the primary industry fell while that of the secondary and tertiary industry grew. But the output of the secondary industry grew faster than that of the tertiary industry, which reversed the downward trend of the output share of the secondary industry in the 1980s. Moreover, the employment in the secondary industry grew at a slower rate than in the 1980s. That had to do with the faster growth of the labor productivity of the secondary industry. Another important reason was that the secondary industry which was capital-intensive grew faster than the tertiary industry which was labor-intensive, restricting the capacity of the secondary industry to absorb surplus labor. Although the development of the capital-intensive secondary industry will benefit the upgrading of the structure of the secondary industry, the large-scale development of the secondary industry will hinder the absorption of surplus labor in urban and rural areas, the increase in the income share of the labor force and the expansion of the households, consumption when the per capita capital stock is relatively scarce. Therefore, the allocation of the factors of production also contributes to the scant consumption demand.

Table 2. The Output and Employment Structure of China

	Primary industry		Secondary industry		Tertiary industry
	Output	Employment	Output	Employment	Output	Employment
1978	28.1	70.5	48.2	17.3	23.7	12.2
1980	30.1	68.7	48.5	18.2	21.4	13.1
1988	25.7	59.3	44.1	22.4	30.2	18.3
1990	27.1	60.1	41.6	21.4	31.3	18.5
1998	18.0	49.8	49.2	23.5	32.8	26.7

 Source: China Statistics Digest: 1999

In the 1990s, the output share of the tertiary industry fell against that of the secondary industry, and both the output and employment share of the tertiary industry remained lower than those of the countries at similar development level. That was closely related to other two "old problems": Firstly, the labor force of the primary industry in the rural areas shifted to the local secondary industry. Although this can increase the proportion of the secondary industry nationwide, it usually cannot creates much space for the growth of the tertiary industry as in the case when the labor force of the primary industry directly shifted to urban areas. The rapid decrease in the growth rate of township industries and the large-scale reduction of employment opportunities over the past two or three years have actually indicated that the lack of support of the tertiary industry would restrict the development of the secondary industry in the rural areas. The precondition for sustained development of the secondary and tertiary industries is the flow of farmers into the urban areas instead of the mode of " departure from the soil without leaving the hometown". Secondly, the high value-added tertiary industry (such as finance, insurance, telecommunications and media) failed to open wider to non-state-owned enterprises, continuing the situation in 1980s. As a result, the new labor force employed by the tertiary industry was mainly concentrated in commerce, catering and entertainment sectors, where adequate competition already existed.

Thirdly, a further examination of the pace of urbanization of the rural population since the 1990s revealed that when the urbanization process during this period should have been accelerated it actually slowed down compared with the 1980s: the urban population accounted for 30.4% of the total population in 1998 , 4 percentage points up over 1990, 1.6 over 1994 and 6.4 over the period between 1980-1988. The average annual growth rate of urban population was 2.9% between 1990 and 1998, 2.6% between 1994 and 1998, 5.2% between 1980 and 1988, and 5.5% between 1978 and 1986. There are at least four ways that urbanization will contribute to economic growth: first, labor productivity is increased after the rural population is shifted from the local primary industry to the secondary and tertiary industries in urban areas; second, the consumption of rural laborers is higher than that when they live in the rural areas because their income increases when they have jobs in urban areas; third, there are usually agglomeration economies in urban areas where various factors of production are congregated; fourth, those farmers who still stay in rural areas can give full play to their labour force and raise their income and consumption level as a result. The history of developed and newly-industrialized countries has shown that economic development is a process of urbanization of the rural population over quite a long time, a process in which the secondary and tertiary industries in urban areas absorb the surplus rural labor force and increase the output and employment proportion of the two industries. It is also a process in which the gap of productivity between the primary, secondary and tertiary industries is constantly been narrowed. In 1990, the average disposable income of urban households in China was 2.2 times of the net income of rural households, and the average consumption expenditure of urban households was 2.2 times of that of rural households. The labor productivity of the secondary and tertiary industries was 4.3 and 3.8 times of that of the primary industry, respectively. In 1998, the figures were 2.5, 2.7, 5.8 and 3.4 respectively. This indicated that there was much room for farmers to raise their income and consumption level in the 1990s by shifting from the primary industry to the secondary and tertiary industries in the urban areas. The obvious slowdown of the urbanization process since 1995 has inevitably affected the pace of economic growth.

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