China’s new goal of growing productivity at a higher rate than GDP depends on rural education

After the recent ‘two sessions’ in Beijing, a series of high-level meetings which determine the economic and social policy for the next five years, the Chinese government announced that there will not be a specific target for productivity growth. Instead, there is the simple aim of beating the overall growth level in the economy, measured by GDP.

This has been the case for the last few years, with labour productivity growth in particular remaining in line with GDP growth. In 2020, despite the upheaval caused by Covid-19, labour productivity grew by 2.5%, slightly higher than the 2.3% GDP growth for the year.  

There are concerns about the future of Chinese labour productivity though as the country grapples with an aging population and a shrinking labour force. This could result in less investment throughout the economy and a stifling of capital growth. On the one hand, a smaller workforce could mean lower productivity. On the other hand, if that smaller workforce is more skilled and better educated, it could lead to higher levels of productivity.

The key to improving labour productivity across China is the hugely untapped resource living outside of the major cities. In recent years, it is estimated that less than 50% of students in rural China went to high school. This is in stark contrast to the 90% of students attending high school in the big cities. According to one study by Professor Scott Rozelle at Stanford University, only 30% of China’s current workforce have completed high school. If the country is to avoid the middle-income trap, they will need to increase this to at least 50%.

If the Chinese government is able to greatly improve educational attainment outside of the major cities, they will undoubtedly see a huge increase in labour productivity in the years to come. There are already signs that this is a priority, with a plan coming out of the two sessions to increase the average number of years spent in school from 10.8 to 11.3.

As well as increasing labour productivity through improved education, the Chinese government also recognises the need to enhance total productivity by investing in the research and development of new technologies which can boost domestic innovation.