Why is China following a capital-deepening development path?

This paper summarises and evaluates some of the most important features of China’s development strategy. It looks at recent trends in China’s development thinking and discusses future implications of the current strategy.

After the East Asian financial and economic crisis, during 1998-2002, Chinese economic policies began to clearly diverge from orthodox market reforms. Subsequently, governed by a general policy line focused on “constructing a harmonious society”, Chinese policymakers have emphasised a pattern of economic growth based on enhancing the compensation of labour instead of constraining it.

Key points include:

• after the mid-1990s, China’s growth became more ‘capital-deepening’ in character - increasingly, capital began to substitute for labour in the modern sectors of the economy
  
• one of the chief aspects of recent globalisation trends has been the dramatic expansion of the world labour market. China alone now accounts for about one fourth of workers producing for the global market
  
• China cannot continue basing its growth on the cheapening of labour - capital deepening that implies broad-based increases in labour productivity, and therefore in real wages, represents the most promising basis for China’s development, enabling it to close the gap between its low income levels and developed-country levels.