World Energy Outlook 2007

Sustaining productivity growth will be a major challenge for both
countries. A main uncertainty facing China’s economic prospects is the
extent to which heavy industry can continue to drive growth, in view of
rising raw-material costs, resource constraints and environmental effects.
The political leadership decided in 2004 to adjust the structure of the
economy in the medium to long term from investment- and export-led
growth to more consumption-led growth, with services and lighter
industrial activities playing a bigger role. Private domestic consumption is
expected to account for a growing share of GDP, reducing the reliance on
investment and exports. Household consumption, at barely 40% of GDP at
present, is low by international standards (in most other Asian countries
with high savings, the share is between 50% and 70%). High dependence
on investment and exports makes China vulnerable to the global economic
cycle. Industrial development is also placing strains on the availability of
natural resources and on the environment (see Chapter 5). Though savings
and investment rates are expected to fall from their current high levels, this
could be compensated by higher productivity resulting from institutional
and trade reform and from the continued migration of labour from
agriculture to services and industry.
The Chinese government has adopted several measures in pursuit of
structural adjustment, including raising minimum wages, reducing income
taxes and increasing public spending, as well as taking the steps needed to
contain rapid growth in investment and to promote consumption. The
government has lifted interest rates, imposed duties on some exports and
instructed state banks to rein back lending to overheated sectors. But these
efforts will take time to take effect. Both investment and savings have
continued to grow strongly in recent years, pushing the trade balance into
massive surplus (see below). Yet there are signs that production is starting to
shift towards less resource-intensive goods and higher-value industrial
products and services that generate better wages.
In contrast to China, India is faced with a need to increase the share of
investment in GDP and to relieve infrastructure constraints to sustain growth,
including inadequate roads and electricity networks. Low real interest rates in
recent years have driven consumption up more than investment. Another
major challenge is to develop human capital and provide job opportunities for
a large pool of underemployed and undereducated workers. The continued
movement of labour from the farming sector to urban industry and services
could underpin further advances in labour productivity. Faster and deeper
labour-market and product-market reforms, improved management of
government finances and more effective public sector administration could
boost the long-term rate of economic growth, but the pace of such progress
remains uncertain.
3
Chapter 3 - International Trade and the World Economy 139