Projection of economic growth in the long term is intricate as there is no useful model to conduct this kind of analysis. There is little information on future structural changes that may respond to economic growth and development policies. In this study, instead of using model-based scenarios for China's GDP growth, we adopt a more qualitative approach that takes into consideration the likely trends of the major driving forces of economic growth.
In the Eleventh Five-Year Plan, 2006–2010 and the strategies for long-term economic development, China has set ambitious goals to metamorphose the nation into a “well-off society” (Xaiokun Shehui) in the next 20 years: double GDP in ten years; smooth transformation of the economy from transition to development and from agriculture to industry and services; sustainable management of the environment; and other social and political targets.
In order to achieve these goals, China's leaders have been pursuing a more sustainable development plan, the so-called Five Balanced (or integrated) Developments (FBD); i.e. developments between rural and urban areas, across regions; between economic and social aspects; between human activities, natural resources and environmental conservation; and between internal (domestic) and external economies. This FBD plan is backed by policies to stimulate the development of new technologies, education and urbanization, to make optimum progress in controlling deterioration of ecosystems and to move the nation to a more market-oriented and open economy.
There is considerable potential for China's economic growth despite some development risks. Rapid growth is likely to continue in the coming decade though growth rates might decline gradually over time. New national leaders, who are strong reformists, took their positions in the government in early 2003. Several initiatives have been undertaken to boost China's economy. These include policies related to the strong implementation of macroeconomic stabilization, deepening market reforms, further liberalizing of the economy and emphasizing sustainable growth through increasing investment in R&D, education, health and infrastructure and resource and environmental protection. The following factors are generally considered to be the key driving forces underpinning China's economic growth in the future:
Macroeconomic stabilization. Macroeconomic stabilization is likely to be further strengthened. The national leaders consider that macroeconomic stability is one of the pre-conditions to generate long-term economic growth as it will provide a favourable environment for both domestic and foreign investment. A stabilized macroeconomic environment will also help the government to better foster development of the infrastructure and institutions necessary for sustainable growth. The stability system was well tested when China was seriously affected by the SARS epidemic and yet the economy recorded 9.5 percent growth in 2003.
Physical capital. A high domestic savings rate is likely to remain in the coming decade. Capital formulation was about 35 percent of the GDP in the 1980s and has increased enormously overtime, from nearly 40 percent in the 1990s to 44.2 percent in 2003 and 2004 (NSBC 2005). The Development Research Center of State Council (DRC) projects that the current rate of investment in the coming ten years will be maintained (DRC 2002). These high investment rates indeed have also been experienced for a sustained time period in several Eastern Asian countries or regions such as Japan, Republic of Korea and Taiwan Province of China. High domestic savings rates, stable macroeconomic environment, increasing inflows of FDI and large markets are fundamental bases for high level investment in China's current as well as future economy.
Labour force. Cheaper rural surplus labour has facilitated China's economic growth and structural changes. There is still an abundant and enormous pool of rural labourers who are seeking non-farm employment. This continued shift of labour from the agricultural to non-agricultural sectors will further accelerate the growth of labour-intensive industries and service sectors in the coming decade, and will continue to provide cheap industrial products to consumers in both China and the rest of the world. Export of labour-intensive products will expand under more liberalized world trade (Ianchovichina et al. 2004).
R&D spending. According to the recent Eleventh Five-Year Plan, 2006–2010 and the Long Term Development Plan (2006–2020), the Boosting China's Development through Science and Education programme (Ke Jiao Xing Guo) will be further strengthened. The government investment in R&D is planned to grow more than the average growth of government fiscal revenue (State Council 2002). The growth in public investment in professional education (i.e. colleges and universities) has also increased substantially since the late 1990s (NSBC various issues). We expect that the total factor productivity increase contributed by technology changes in the future will exceed that in the past.
Human capital. In additional to the Ke Jiao Xing Guo development programme, the national leaders decreed a new development plan, Yi Ren Wei Ben (or people-oriented development) in 2003. The new plan emphasizes overall human development (not only professional education), in particular rural primary education. In order to implement this new development plan, an ambitious programme has been proposed to reduce or eventually eliminate primary school education fees throughout China, including Western China and other less-developed regions. Other programmes aimed to improve primary, secondary and professional education are under consideration.
Market development and role of the government. Emerging markets and evolving institutions in China's economy also show that China is preparing for sustainable growth in the first half of the twenty-first century. As China enters the twenty-first century, the rural economy is evolving to the point that it is ready to help China make the next step in modernization. Markets for labour, agricultural commodities, many inputs for farmers and rural industrial managers have flourished in recent years and are increasingly competitive and rational (Rozelle et al. 1999 and 2000). The direct provision of goods and services will be handled increasingly by the private sector. Meanwhile, the government is planning to thoroughly reform its administrative system and shift its role to providing public goods, overcoming market failures, and providing services that the private sector will not provide, but which will serve to further the transformation of China in the coming years (State Council 2003).
Urbanization. Urbanization and newly initiated rural small-town development programmes will facilitate China's economic structural changes, create employment for rural and urban labourers, increase farmers' income and promote rural and urban demand for industrial commodities and services. The International Institute of Applied Systems Analysis (IIASA) projects that the level of urbanization will fall within a range of 50 to 55 percent in 2020 compared to 36 percent in 2000 (Toth et al. 2003).
Trade liberalization. China's gains from economic globalization and trade liberalization will further boost its economic growth. Expanding labour-intensive industries, fostered also by new export opportunities, can contribute to China's development strategy that includes labour absorption into industries outside primary agriculture. Merchandise trade in the future will grow much faster than in the past (Ianchovichina et al. 2004). Moreover, the static impacts (i.e. merchandise trade) are probably only a small part of China's gains from trade liberalization; the dynamic effects such as capital accumulation and technology spillovers will be more substantial (van Tongeren et al. 2003).
Foreign direct investment. Although the growth rates of FDI inflow may or may not be as high as those recorded in the past two decades, China will remain one of the most attractive countries for FDI in the post-WTO era and at least in the coming decade. China has attracted substantial FDI in past decades. After 2002 China has become the most important recipient of FDI in the world. In the past two decades, FDI has been pouring into the coastal regions. Recently, China's regional development plan and its increasing investment in infrastructure in less-developed regions have begun to impact the direction of FDI in China. Zhang and Post (2003) show that there is increasing FDI towards the western part of China to exploit its rich resources and stimulate domestic demand. Given the size of the market and the expectation of strong economic growth in the future, China is very likely to remain one of the most favoured investment destinations in the world.
Regional development programmes. Under the FBD strategy growth in less-developed regions is expected to accelerate in the coming decades. In order to pursue overall development of the country, the central government has initiated several regional development programmes, particularly the Great Western Development Plan, Central China Development Program, Northeast China Development Program and new National Poverty Alleviation Program, to redirect resources towards less-developed regions. According to the nation's development plan, in the first ten years of this century, the major investments under regional development programmes include infrastructure, ecosystem and environmental conservation, and human resource development (Du 2003). We expect that implementation of the regional balanced development strategy will help the less-developed regions to catch up with the national growth path. This will create local employment and demand for commodities from the coastal region, and help China reduce income disparity among regions.
While we expect that high growth will remain in China for the next 20 years, there are other factors and uncertainties that may limit China's economic growth over time. These include:
There could be potential risks associated with internal macroeconomic stability if China's income disparity continues to widen;
The growth in labour supply will slow down in association with China's falling population growth rate and the changing age structure of the population (Toth, et al. 2003), which will lead to an increase in wages after certain years;
The aged population will grow faster, which will lead to a rise in the dependence ratio in coming decades;
As the dependence ratio rises, national savings propensity is likely to decline, which may impact the growth of domestic investment;
After ten to 15 years, China will have basically finished the major tasks of its economic reforms that were initiated in the late 1970s. The gains from further economic reforms will be weak;
With rapid economic growth, there will be considerable stress on environmental degradation if appropriate environmental protection policies are not emphasized; and
There may be political risk and tension in the external environment, which could affect China's economic and political stability in the future (although this is highly unlikely). In recent years, after China emerged as one of leading importers of natural resources such as timber, fish meal, energy and minerals, some claim that there will be concerns about global food security (if China imports enormous amounts of food from the international market) and the natural resource base, for China's long-term rapid economic growth.
Based on the above discussions, this subsection provides our prospects for China's economic growth in the first two decades of the twenty-first century. While our prospects are focused on the most likely growth scenario (baseline), we also formulate an alternative higher growth scenario (or high growth scenario) because one of the objectives of this study is to examine the local and global implications of China's rapid economic growth. The details of both the baseline growth scenario and high growth scenario for China from 2006 to 2020 are summarized in Table 8. For comparison, we also present the corresponding figures in the past 20 years (1985–2005).
Table 8. Projection of China's economy, 2001–2020
|Annual growth rate (%)|
|Per capita GDP||8.3||7.2||8.2||7.4||6.7||5.9|
|Per capita GDP||8.3||7.2||8.2||8.2||7.4||7.5|
|Per capita GDP in|
|RMB||7 086||10 528||14 974||20 612||27 454|
|US$||856||1300||1849||2 545||3 389|
|RMB||7 086||10 528||15613||22 331||30 638|
|US$||856||1300||1927||2 757||3 782|
Note: Values are in 2000 constant prices.
The baseline scenario assumes that the average annual GDP growth rates from 2001 to 2005 would reach 8.9 percent in 2001 to 2005 and then slightly fall over the entire projection period. The higher growth of GDP in 2001 to 2005 than that in 1996 to 2000 is because the average annual growth rate already reached 8.7 percent in 2001 to 2004 and China's economy is likely to grow at more than 9 percent in 2005. After 2005, the annual growth rate is assumed to decline from 8.9 percent in 2001 to 2005 to 8 percent in 2006 to 2010, 7.2 percent in 2010 to 2015 and 6.3 percent in 2016 to 2020 (Table 8). By 2020, China's economy will be more than four times as large as that in 2000, which also implies that China will meet its development goal of doubling its economy every ten years in 2001 to 2020. By 2020, the national GDP will be nearly RMB39 trillion (in 2000 prices, or about US$4.8 trillion converted at the current exchange rate).
In this study, we adopt a recent population projection conducted by IIASA (Toth et al. 2003). Toth et al. forecast several population growth scenarios for China from 2001 to 2030. One of their scenarios, the Central Line Scenario, has been adopted in our study. For per capita GDP growth, which is derived by deducting population growth from total GDP growth, the likely growth scenario presents an annual growth rate of 8.2 percent in 2001 to 2005. Average annual per capita GDP growth rates will remain at about 7 to 8 percent in 2010 and 6 to 7 percent in 2020 (Table 8).
The growths of total GDP and population assumed under this scenario imply that China's per capita GDP in 2000 prices will rise from RMB7 084 in 2000 to RMB14 974 in 2010 and RMB27 454 in 2020, an increase of 387 percent in 2020 over 2000 (Table 8). If we apply the official exchange rates in 2000 for the base year and the current rate for 2020, per capita GDP will increase from US$856 in 2000 to US$1 849 in 2010 and US$3 389 in 2020. If we further consider the purchasing power, the above projection would mean that China's per capita income will be in between the current incomes of the middle- and high-income countries in 2020 (World Bank 2002).
Higher growth scenario
For the aims of this study, we are interested in the implications of China's more rapid economic growth. Therefore, instead of formulating a low growth scenario, we assume that China would be able to better implement its future economic reform and create even more favourable internal and external development environments than those assumed under the baseline scenario. Under the high growth scenario, we assume that the annual GDP growth rate will be increased by 10 percent compared to that under the baseline scenario in 2006 to 2020. That is, the GDP growth rate under the baseline will be 8.0 percent in 2006 to 2010, the corresponding rate under the high growth scenario will be 8.8 percent (8.0 × 1.1) in the same period (row 4, Table 8).
Under the high growth scenario, GDP will more than double in the first ten years. By 2020, total GDP will be about 4.8 times more than the GDP in 2000. If growth continues at the rates estimated under the high growth scenario in 2020 (row 4, Table 8), per capita GDP will reach RMB30 638 (or US$3 782 at the current exchange rate) in 2020.
Comparisons with other projections
Table 9 compares our GDP growth projections with previous studies. The annual growth rates of our baseline projection are relatively close to the forecasts by Li (2001) and OECF (1995) but higher than the rest of other projections. A higher GDP growth rate in our baseline than that of many other projections is explained by the fact that we incorporated the most updated and actual GDP growth rates in the recent four years (8.7 percent in 2001 to 2004, Table 1) and predicted a growth rate of 9.5 percent in 2005. While none of the other studies predicted a growth rate of more than 8.5 percent in 2001 to 2005.
Table 9. Previous projections of China's GDP growth in China in the early 21st century
|Study||Projection period||Methodology||Assumption of annual GDP growth (%)|
|OECF (1995)||1995–2010||Expert justification||8.0|
|World Bank (1997)||1995–2020||General equilibrium model||6.0|
|IFPRI (2001)||1997–2020||Expert justification||6.0|
|LEI-CCAP (2003)||2001–2020||Expert justification||5.7|
|DRC (2002)||2001–2010||Model (not discussed) with expert justification||7.5|
|Li (2001)||2001–2010||Model (not discussed) with expert justification||8.1|
|This study (baseline)||2001–2010||No model but based on prospective of driving forces||8.4|
Earlier studies with 1995 as the base year and projected to 2020 seem to largely underestimate China's GDP growth. For example, World Bank (1997) forecast an average of 6 percent GDP annual growth in 1996 to 2020. Because China had already achieved 8.2 percent annual GDP growth in 1996 to 2000 and most likely reached 8.9 percent in 2001 to 2005, if 6 percent of the annual GDP growth is assumed for the average growth of the entire period of 1996 to 2020, this implies that China's annual GDP growth will be less than 4.4 percent in 2006 to 2020. Given the strong growth in 2001 to 2005 and the prospect of future growth driving forces discussed in the previous section, most observers are not expecting that China's economy will grow at a rate lower than 6 to 7 percent over the next five to ten years.
The recent performance of China's economy shows that China is on track towards its long-term goal. For example, the GDP grew 7.5 percent in 2001, and accelerated to 8.3 percent in 2002 and 9.5 percent in 2003 and 2004 (NSBC 2005). Recent various forecasts show that China's strong GDP growth will continue and there is no sign of deceleration of economic growth in the coming years (Ma 2004; Brandt et al. 2005). In sum, we believe that China can achieve its development goals for the next 20 years. Economic growth will remain high but will decline slightly after 2005.
The results of analyses presented in this section are based on the Global Trade Analysis Project (GTAP). A brief introduction to the model, improvements on data and parameters of the current GTAP model, and assumptions on macroeconomic development (e.g. GDP and population growth by country or region, total factor productivity [TFP] changes and factor endowments) are provided in Appendix 1.
The implications of China's rapid economic growth on domestic agriculture and food economy as well as sustainable economic growth are examined through several key indicators we simulated for 2001 to 2020. These include self-sufficiency levels, import, export, net export and relative trade shares in China and the world economy. We use 2001 as the base year instead of a more recent year because the data for the most updated version of GTAP are in 2001.
The results of baseline scenario analysis show that China will play a greater role in the world economy. Because of higher economic growth in China than in the rest of the world, China's GDP shares in the world will rise gradually, increasing from 3.8 percent in 2001 to 5.5 percent in 2010 and further to 6.8 percent in 2020 (Figure 6). By 2020, China will become the third largest economy in the world, just behind the United States and Japan. Both import and export will continue to expand. There will be a few agricultural and food commodities that could experience significant decline in self-sufficiency, but they will not affect China's food security (Table 10). By 2020, China's total exports will account for 8.5 percent of the global trade (column 1 and last row, Table 11), which was 5.5 percent in 2001. Accompanying China's rapid economic growth and its rising importance in the global economy, China's agricultural and food as well as overall economy will also experience significant structural changes.
Figure 6. China's GDP share (%) in the world, 2001–2020
Table 10. Self-sufficiency level (%) in different scenarios in 2020
|Baseline||High GDP||High TFP|
|Beef and mutton||94||93||95|
|Pork and poultry||100||99||107|
Table 11. China's trade shares (%) in the world in 2020
|Export share||Import share||Net export share|
|Baseline||High GDP||High TFP||Baseline||High GDP||High TFP||Baseline||High GDP||High TFP|
|Food + feed crops||3.9||3.7||4.8||9.8||10.3||8.4||-5.9||-6.6||-3.6|
Agricultural and food economy
Baseline projections show that self-sufficiency of all land-intensive crops except for rice will fall, but the fall will be very moderate for most commodities in the projection period (2001–2020) (Figure 7). This is what we should expect as many land-intensive crops in China have a less comparative advantage in the world markets.
Under the baseline scenario, the most significant increase in imports will be oilseed. The imports are projected to increase from US$6.4 billion in 2001 to US$10.8 billion in 2020 (Panel A, Figure 8). Because their exports will be minimal (Panel B), by 2020 oilseed self-sufficiency will further fall from 70 percent in 2001 to about 50 percent. Increasing import of oilseed is mainly because of the rising domestic demand for both edible oils and feed. This should not be surprising given China's experience in soybean import in the past five years. After China liberalized soybean trade by eliminating nearly all its trade distortions (both tariff and non-tariff measures), annual import of soybean surged from virtually zero in the late 1990s to more than 2 500 million tonnes in 2005.
Figure 7. Self-sufficiency level (%) of agriculture under baseline, 2001–2020
Panel A: imports
Panel B: exports
Panel C: net exports
Figure 8. Agriculture and food trade (US$ billion) under baseline, 2001–2020
With rapid economic growth and trade liberalization, China's domestic sugar production will also fall far behind its domestic demand. Sugar imports will rise over time. Its self-sufficiency level will be the second lowest just after oilseed among all crops (Figure 7). Although the total import value of sugar will be much less than many other agricultural and food products (Panel A, Figure 8), sugar imports will account for about 30 percent of domestic consumption (Table 8).
The production of cotton and other plant-based fibre is projected to expand over time, mainly through their productivity growth, but it will also fall behind domestic demand. Similar to many other crops, fibre imports will rise with gradually falling self-sufficiency levels (Figure 7). More imported fibres are required to meet demand from China's rapidly expanding textile and apparel sector, which has created and will continue to generate employment for millions of rural people.
Among cereals, most of the imports are for feed grain (Panel A, Figure 8). By 2020, China will import nearly 20 percent coarse grains, mainly maize, to meet increasing demand from the expansion of the domestic livestock sector. Although China will continue to import wheat, its import will be minimal because per capita demand for wheat is projected not to increase in 2010 to 2015 and will fall thereafter (Appendix Table 4). Rice is the only cereal that will expand its export and maintain a net export commodity from 2001 to 2020. But rice export is projected to be only moderate. The average annual net export of rice will remain at about US$1 billion in 2010. For food grains (rice and wheat), our results show that China's rapid economic growth will not have any significant impacts on their trade.
On the other hand, China will export relatively labour-intensive products such as vegetables, fruits, fish and processed foods. The largest export will be recorded in processed foods (Panel B, Figure 8). While China may import many horticultural products, the exports will exceed the imports. Very low levels of net exports for horticulture and livestock products in the coming decades projected under our baseline differ from many other projections based on partial equilibrium models (Huang et al. 2003b; Rosegrant et al. 2001), but are consistent with several studies that applied CGE models (Li. et al. 1999; Ianchovichina and Martin 2004; Anderson et al. 2004). Although the basic conclusions are similar, the variations of magnitude need further investigation.
In terms of the importance of China's agricultural and food trade in global markets, it differs notably among commodities and between imports and exports (Figure 8). China will play a greater role in world markets for both importable commodities (e.g. oilseed, livestock products, processed foods, coarse grain, fibre, sugar) and exportable commodities (e.g. processed foods, pork and poultry, horticulture, fish). Some products figure significantly in both imports and exports due to the aggregation of commodity groups. For example, China imports large volumes of chicken feet and pig innards (or offal) but also export meats due to the price premium of animal feet/innards over meats in the domestic markets. Increasing imports of tropical and subtropical fruits will be associated with more export of Chinese vegetables and fruits to world markets (Figure 8). But in terms of net export or import of the aggregate commodity group, only edible oils (net import), processed foods (net export) and horticulture (net export) are significant. Net imports of oilseed reached 17 percent of world trade in 2001, which will be further raised to more than 25 percent in 2020 (Appendix Figure 1). Its net imports as a percentage of world production will also increase from less than 3 percent to nearly 5 percent over the same period (Appendix Figure 2).
In sum, China's economic growth and trade liberalization will facilitate domestic structural changes in agriculture. China's agriculture will gradually shift from land-intensive sectors with less comparative advantage to labour-intensive sectors with more comparative advantage. While self-sufficiency levels of many commodities will fall with economic growth under a more liberalized trade environment, food grain (excluding feed grain) and overall food self-sufficiency will remain high.
China has a comparative advantage in many non-agricultural sectors. This is particularly true in the textile, apparel and manufacturing sectors. Under the baseline scenario, we project that China will continue to dominate and play a greater role in the world textile and apparel sectors in the coming decades. Currently in this sector, China produces 30 percent more than its domestic demand and exports it to world markets (Figure 9). After 2010, the export as percentage of domestic consumption will further increase to about 40 percent (Figure 9). Its net export will reach US$20 billion in 2010 and about US$40 billion in 2020 (Figure 10). The export share of manufacturing goods will also increase rapidly from 5.5 percent in 2001 to 8.9 percent in 2020 (Table 11).
Figure 9. Self-sufficiency rates of non-agricultural sectors in China, 2001–2020
Figure 10. Net exports (US$ billion) of non-agricultural sectors in China, 2001–2020
As we would expect, the imports of forestry products, energy and minerals will rise (Figure 10) and their self-sufficiencies will fall (Figure 9) with economic growth. However, the projected increases in imports of these commodities are not dramatic but moderate and reasonable given the size of China's economy and its lack of these resources. It is worth noting that interpretations of self-sufficiency ratios for forestry should be viewed with caution. China imports large volumes of woods/timber but also exports substantial furniture and other processed wood-based products. However, these export products are not included in the “forestry” sector but in the “manufacturing” sector in the GTAP database and modeling. Despite this data grouping problem, our baseline projection shows that the self-sufficiency of the “forestry” sector will remain as high as 83 percent in 2020 (compared with 91 percent in 2001 (Figure 9). If we would include furniture and other wood-based processed products in the forestry sector, the net imports of forestry products would be minimal. Among all resource-based industries, a significant rise in energy imports projected in the coming decades is worthy of concern. Under the baseline, that is, if the government policy would not respond to the rapid increase of energy imports, the self-sufficiency of energy would fall from 92 percent in 2001 to less than 67 percent in 2020 (Figure 9). We will return to the energy import issue later in this section when we discuss the high TFP growth scenario.
Several interesting results are generated from the comparison of the results of the high growth scenario with those of the baseline scenario. First, the simulations show that the higher growth of China's economy will not have significant impacts on overall food and agricultural economy in China. Although a higher growth of China's economy is associated with a lower rate of self-sufficiency in nearly all agricultural and food commodities, the changes will be minimal (Table 10). Rising domestic demand resulting from additional income growth in the future will be less than that of the past. Food income elasticities have been falling and will continue to fall with the rapid growth of China's economy. After 2010, all cereal grains will have negative income elasticities (Appendix Table 4). Increases in income will lead to decline in cereal consumption. Table 10 shows that, in comparing columns 1 and 2, the rates of self-sufficiency decline only 1 percent for all agricultural and food commodities except for coarse grain (2 percent) and wheat (3 percent). The small impact of the higher economic growth on agriculture and food security is also reflected in the small changes in China's net exports of food and feed (Figure 11), and very small changes in China's import or export shares of agricultural and food commodities in the world markets (Table 11).
Second, with higher GDP growth, China will further restructure its agricultural and food economy in favour of the commodities with a greater comparative advantage. For example, the export shares of the land-intensive food and feed crop sectors in world trade will decline and their import shares will rise (Table 11). The high GDP growth scenario reduces the export share of animal products (6.1 percent in the high GDP growth scenario, compared to 5.5 percent in the baseline) because of their positive income elasticities. As a whole, the net export (or net import) of food and feed will decline (increase) by about US$4 billion compared to the baseline in 2020 (Figure 11 and Table 13).
Third, China would further exploit its comparative advantage in textile and apparel and manufacturing sectors under the higher economic growth assumption. Table 11 shows that export shares of textile and apparel would increase from 34 percent in the baseline to 37 percent under the high growth scenario. As the import shares are similar to those of the baseline, the net export shares rise from 27 to 30 percent, and the net export value increases by about US$15 billion (Figure 11). Although the change is not as great as textile and apparel, the exports of the manufacturing sector change in the same direction (Figure 11).
Last but not the least, China's imports of energy and mineral products would further rise with higher economic growth. For example, the shares of China's net imports in world trade in 2020 for energy and minerals will rise from 6.9 and 21.4 percent in the baseline to 8.8 and 27.8 percent in the high GDP growth scenario, respectively (columns 7 and 8, Table 11). Whether or not such a high
Figure 11. China's net export change (US$ billion): high growth scenario compared to the baseline in 2020
Level of dependence on imports for energy and minerals would undermine the sustainability of the Chinese economy is an issue that has attracted much attention within and outside China.
The above two subsections have examined two of the major concerns for food security and the sustainability of natural resources under China's rapid economic growth. For the first concern, we seem to have reached a conclusion that China will be able to produce a sufficient amount of food to meet its increasing demand under an economy with rapid growth. Moreover, even if one would consider the levels of food imports for some commodities under both baseline and high growth scenarios to be too high for security, there are still alternatives such as productivity enhanced investment that will help China to further improve its production. The analyses presented above also show that rising dependence on natural resource imports could become a bottleneck for China's rapid and sustainable economic growth if there are no policy responses. However, the Chinese Government has recognized such problems and has taken various measures to improve the efficiency of resource use particularly through restructuring economic and technological changes in those sectors that intensively use the natural resources.
In this subsection, we explore the likely impact of technological changes on China's food security and its dependence on imports of natural resources with specific focus on energy and minerals. In this context, the high TFP growth scenario, is used. This scenario assumes that all assumptions for the baseline scenario in China and the rest of the world are maintained except for the TFP assumptions for China. In China, we assume that average productivity will be increased by about 5 percent in ten years. This is equivalent to additional productivity growth of 0.47 percent annually. Similar to other scenarios, productivity growth will also start in 2006 and continue to 2020. It is worth noting that this is a very moderate change in productivity growth. Under this assumption, by 2020 TFP will be only about 7.3 percent higher than that under the baseline scenario. More detailed discussions of the high TFP growth scenario are provided in Appendix 1.
The results from the high TFP growth scenario are compared with those simulated under the baseline scenario and are presented in Tables 12 and 13 and Figure 11. Our analyses show that China could substantially increase its food supply and reduce (increase) its food imports (exports) through a very moderate change in agricultural productivity (the last column, Table 10). Under the high TFP growth scenario, China could become a net food and feed exporter and the export value would reach US$11 billion in 2020 (Figure 12). It is worth noting that the additional assumption under the high TFP growth scenario (compared to the baseline) for agricultural and food production is that China's agricultural productivity would rise by 5 percent in ten years. This should not be considered as a strong assumption given the recent rapid growth of government investment in agriculture in general and R&D in particular (Rozelle et al. 2005).
Figure 12. Net export of food and natural resource products (US$ billion) under high growth and high TFP scenarios in China in 2020
China could also significantly reduce its dependence on imports of natural resources through innovations in input-saving technology. By 2020, energy imports will be reduced from US$29 billion (the baseline) to US$13 billion (the high TFP growth scenario, Figure 12). Similarly, the high TFP growth scenario will also substantially reduce the imports of minerals (Figure 12). Reducing energy and mineral imports under the high TFP growth scenario implies there will be a significant reduction in import dependence for natural resources. Table 11 further shows that the net import shares of China in world trade will decline to 4.1 percent only (from 6.9 percent in the baseline) for energy and 16.3 percent for minerals (from 21.4 percent in the baseline, Table 11).
The Chinese economy has been increasingly integrated into the world economy since its economic reform. The integration has occurred in both commodity trade and FDI between China and the rest of the world. In 2003, China ranked first in the world in terms of inward flows of FDI, second in terms of absolute purchasing power and sixth in terms of real GDP (United Nations 2005). The increasing inflows of FDI have stimulated China's economic growth and promoted China's international trade. In this section, we examine the impact and implications of China's economic growth on the rest of the world in the future. We will first discuss the implications of China's rapid growth upon the rest of the world from our baseline analysis. Then further implications from higher GDP and productivity growth scenarios will follow.
The main conclusions on the implications of China's rapid economic growth from our baseline analysis are that China's growth will provide more opportunities than challenges to the rest of the world, and overall the world will gain from China's economic expansion. As regards food and agriculture, China's economic growth under a more liberalized global economy will help countries with a comparative advantage in land-intensive agricultural products to expand their production and export additional agricultural products to the Chinese markets. China's economic growth will not affect the world's food security. For the natural resource sector, resource-rich countries can take advantage of China's increasing imports of energy and minerals to support their economic growth.
Agricultural and food security
Under the baseline scenario, China will significantly increase its imports of many land-intensive agricultural commodities (e.g. oilseed, feed, sugar, cotton) and also some labour-intensive products (e.g tropical and subtropical fruits, processed foods, some parts of pig and poultry) (Panel A, Figure 8). Increasing imports of these agricultural and food products will provide opportunities for many developing countries in South and Central America and some developed countries (e.g. United States, Canada and Australia) to expand their production and exports. For example, the exports of agricultural and food products from South and Central America to China will be more than doubled, from US$3.9 billion in 2001 to US$8.5 billion in 2020 (the row of SAM, Table 12). The North American Free Trade Area (NAFTA) can also gain substantially from rising Chinese imports of oilseed and feed. China's imports from NAFTA will rise from US$4.7 billion in 2001 to US$9.6 billion in 2020.
China's rapid economic growth will not be associated with a significant rise in imports of many staple foods. As China's economy grows, demand for rice, wheat and other cereal foods will not increase or even fall after 2010. The only major cereal that will experience a growth in import is maize used as feed. These results imply that China's rapid growth will not affect world food security.
Table 12. Agriculture and food trade in other countries/regions with China, 2001–2020 (US$ billion)
|Regional aggregations*||Import from China||Export to China||Net export to China|
|2001||2020||Change in 2020 over 2001 (%)||2001||2020||Change in 2020 over 2001 (%)||2001||2020|
|China: HK + TW||1.7||2.1||23||0.1||0.2||177.3||-1.6||-1.9|
|Japan + Republic of Korea||6.7||6.6||-1||0.5||1.5||217.3||-6.2||-5.1|
* Details in Appendix Table 2.
Horticultural products are the most heterogeneous commodities that China will both export and import in large volume. The countries that are projected to have a significant increase in vegetables and fruits exported from China are mostly the developed countries and regions such as Japan, Republic of Korea, European Union and North America, and some relatively developed countries in Southeast Asia. On the other hand, China will also import substantial horticultural products, particularly tropical and subtropical fruits, from Southeast Asia, South and Central America, NAFTA, Australia and New Zealand. Their production and export to China will expand with China's economic growth.
China's economic development and trade liberalization also provide great opportunities for multilateral trade with China in the livestock sector (Figure 8). While China may increase exports of pork and poultry to East Asia (e.g. Japan and Republic of Korea), European Union and NAFTA, imports from Australia, New Zealand, NAFTA and Southeast Asia are expected to rise substantially.
China has been a net food exporter since the late 1980s (Table 7) and contributed significantly not only to its own domestic food security but also to that of the rest of the world, particularly the developing countries. In future, although we project that for food and feed as a whole China will shift from its current status as a net exporter to a net importer, net imports will be only about US$7.8 billion in 2020 (the last column, Table 12). South and Central America (SAM) is the region that will have the largest net export value to China. The net export from SAM to China will reach US$8.2 billion in 2020 (Table 12). Besides the SAM region, the net export from NAFTA (US$7.5 billion) and Australia/New Zealand (US$4.1 billion) to China will also be substantial. China will also export food and feed to many other Asian countries valued at about US$10 billion in 2020 thus contributing to food security in the region.
In sum, the shifting of China's agricultural structure in the coming decade under rapid economic growth will generate more trade in the agricultural and food sectors. This will provide opportunities for many countries to adjust their production structures in order to reap the benefits of expanded markets in China. Due to trade liberalization (not China's economic growth), rising exports of several agricultural commodities in which China has a comparative advantage will challenge countries that are exporting the same commodities to the world markets. The impact of China's rapid economic growth on world agricultural and food markets is smaller that what many may have expected. Finally, China's rapid growth will not result in any significant increase in imports of rice, wheat and food maize, which are the most important crops for food security in developing countries.
As projected under our baseline scenario, China will become more competitive in the manufacturing and textile and apparel sectors. The trade surplus of these two sectors will increase over time (Figure 10 and Table 13). However, the trade flows differ between these two sectors. As Table 13 has shown, China is a net exporter of textile and apparel products with all trade partners. NAFTA, European Union, Japan and Republic of Korea, as well as Hong Kong Special Administrative Region and Taiwan Province of China are six main economic regions that will import large amounts of textile and apparel products from China (Table 13). Total imports of these five regions will account for nearly 80 percent of China's exports. This could challenge the local textile and apparel sectors in these regions if they do not adjust their economic structures to better cope with China's rapid economic growth and trade expansion. With respect to manufactured goods, China has a trade surplus and will continue to increase the surplus with its major trade partners except for three regions (Japan and Republic of Korea, Russian Federation and Southeast Asia) (Table 13). By 2020, China will have a trade deficit (net import) of US$70 billion in manufactured goods from the above three regions. By contrast, NAFTA, European Union, Hong Kong Special Administrative Region and Taiwan Province of China are the three largest importers of Chinese manufacturing products (more than 80 percent in 2020), which could also have important policy implications for structural changes in these regions.
In the next two decades China will significantly increase the import of natural resource products (Table 13). Oil imported from the Middle East (including in the rest of the world, ROW, in Table 13) and the Russian Federation and minerals imported from Australia, NAFTA and South America will rise substantially (Table 13). Increases in energy and mineral imports would further trigger the pressure for their rising world prices, which would impact not only the world's economic structure, but also world agriculture through its effects on key agricultural inputs (e.g. fertilizer, agricultural machinery). But as we will show in the next subsection, these impacts should not be exaggerated because China's total imports of energy and minerals account for only a small share of the global production.
Table 13. Net export of energy, minerals, textile and apparel, manufactory and services to China (US$ billion)
|Regional aggregations||Energy||Minerals||Textile & apparel||Manufactory*||Services|
|China: HK + TW||-0.6||-0.1||-0.1||-0.1||-9.2||-14.6||-7.6||-11.7||13.4||43.2|
|Japan + Republic of Korea||-2.1||-0.3||0.1||0.8||-11.2||-15.7||26.7||43.9||-0.8||-0.9|
* Details in Appendix Table 3.
Under the high GDP growth scenario, China will generate more trade and nearly all countries or regions will gain from the faster growth of China's economy. The signs and sizes of gains for each region from additional growth in China depend on the nature of its economic structure. Those countries that are largely complementary to China's economy will gain more from China's growth. Otherwise, when a country has a similar economic structure as that of China, adverse consequence could occur. Detailed comparisons of impacts on output, trade and corresponding welfare due to China's higher economic growth (compared to the baseline) are presented in Table 14, Figure 11 and Table 15, respectively.
Table 14 shows that all regions will gain in terms of food and feed production from China's faster growth (the first three rows, Table 14). With further restructuring of China's economy and rising food demand resulting from higher economic growth (compared to the baseline), the imports of food and feed in China will rise. A 10 percent increase in the annual growth rate of the GDP (e.g. from 8 percent to 8.8 percent) and holding all other factors constant, China's food and feed net imports (exports) will increase (decline) by about US$3 billion in 2020. The rising imports in China will push the world price upwards and increase production of food and feed in all countries, particularly exporting countries (Table 14).
Table 14. Percentage output changes in different regions in 2020 due to China's higher economic growth (compared to baseline)
|HK + TW||India||SE Asia||Japan + Republic of Korea||Other Asia||AusNzl||NAFTA||SAM||Enlarged EU||Russian Federation||ROW|
|Food + feed crops||0.4||0.1||0.4||0.3||0.1||0.5||0.4||0.5||0.3||0.5||0.3|
|Textile & apparel||-3.6||-1.0||-3.3||-2.5||-2.0||-3.5||-2.6||-2.6||-2.6||-2.6||-2.6|
Table 15. Welfare change in different regions in 2020 due to China's higher economic growth (compared to baseline)
|Aggregate welfare effect (EV) US$ billion||Change in welfare|
|The rest of world||14.8||0.09|
|China: HK + TW||1.3||0.22|
|Japan + Republic of Korea||1.4||0.07|
While higher economic growth in China will generate more domestic demand for final consumer goods, it will also result in both higher exports and imports of manufactured and textile and apparel products. The world prices of these commodities are projected to fall accordingly. The consumers in large importing countries or regions (i.e. NAFTA, European Union, Japan and Republic of Korea, Hong Kong Special Administrative Region and Taiwan Province of China) will gain from the lower world prices. For those countries or regions that export manufacturing products to China (e.g. Japan and Republic of Korea, Southeast Asia), their production will rise (Table 14). However, countries with the same export structures to China may be hurt by lower prices. This may explain why India and some other Asian countries will incur slightly negative effects (ranging from 0.01 percent to 0.02 percent in 2020) from China's higher economic growth (10 percent increase in the annual growth rate, see Section 4.3).
Our simulations also show that the production structure in other countries will adjust accordingly as China's economic growth accelerates. This is reflected in the differences of production changes across sectors in each region (Table 14). Whether a country or region can reap gains from China's economic expansion as those presented in this section will depend on how flexible and efficient their economies are in responding to world market changes triggered by China's economic growth.
One concern that might arise from China's more rapid economic growth is the corresponding increase in the imports of products in the forestry, energy and mineral sectors (Figure 11). While rising resource imports may further provide economic growth opportunities for countries exporting these products, it could also challenge the conservation efforts in these countries. In addition, there may be potentially negative effects on other resource-importing countries as world prices will rise with China's imports.
To have a better understanding of the overall impact of China's rapid economic growth on the rest of the world, welfare analysis is applied. Table 15 shows that global welfare will increase by about US$241 billion in 2020 under China's high growth scenario (compared to the baseline), of which about US$226 billion (93.7 percent) occurred in China and nearly US$15 billion in the rest of the world (6.3 percent). In terms of the GDP, the rest of the world (the whole world excluding China) will have additional annual growth of 0.12 percent in 2020 (compared with the baseline). Therefore, rapid economic growth in China is an important engine of world economic development.
Table 15 also shows that nearly all regions could gain from China's economic expansion. India and other South Asian nations are exceptions. The changes of welfare indicate that regions that are complementary with China will gain more from China's higher economic growth (Table 15). For example, the Russian Federation, Australia, South America and the Middle East (including the ROW group) will gain more than many other countries because China will significantly increase its imports of energy and minerals as well as many agricultural products from these regions compared to other regions. The exporting countries gain from increases in both price and volume associated with China's commodities. This will further expand welfare gains by raising the return of endowments, enhancing efficiency of allocation etc.
On the other hand, countries seeking to expand exports of products similar to those of China would be adversely affected. India and other South Asian countries such as Bangladesh and Sri Lanka belong to this group. Like China, these countries are also major exporters of textiles and apparel. Textile and apparel exports accounted for 24 percent (India) and 54 percent (other South Asian countries) of their total exports (Appendix Table 8). Moreover, manufacturing products exported from India and some other Asian countries have a high degree of substitutability with those from China. Therefore these countries would encounter increasing competition from China in the world markets in the coming decades.
The key issue analysed in the higher TFP growth scenario is the extent to which China could lower its imports of food and feed as well as products related to natural resources through technological changes. The analysis hereunder reveals that China could significantly ease concerns with respect to both food security and resource dependence.
Under China's high TFP growth scenario, our analysis shows that the rise in China's agricultural productivity and nature resource-use efficiency will considerably reduce imports of these products (Figure 10). With a very moderate change in agricultural technology, increases in domestic production could shift China from a food and feed net importer to exporter. While China will continue to import forest products under the high TFP growth scenario, their import will be reduced by more than half (Figure 12). For the energy and mineral sector, the high TFP growth scenario will enable China to save these inputs substantially. Net imports of energy will be reduced by nearly 60 percent and account for about 4 percent of total world production in 2020. This level of import should not seriously affect China's economic growth and the world's energy security. Similarly, for minerals, imports will be reduced by nearly half (Figure 12) and their share of net imports will fall to 3.2 percent of the total world production in 2020 (Figure 13).
Reducing imports of food, energy and minerals in China under the high TFP scenario will lower world prices of these commodities and therefore adversely affect production and export among exporting countries. By 2020, the world prices of food and forestry will have dropped by about 2 to 3 percent and energy and mineral products by 3 to 7 percent (Table 16).
Figure 13. Percentages of China's net export in world total production under high GDP growth and high technology scenarios in 2020
Table 16. The world price change in 2020 (compared to baseline) (%)
|High GDP growth||High TFP growth|
|Food + feed crops||0.54||-1.66|
|Textile & apparel||-0.72||0.18|
Two and half decades of economic reform in China have achieved remarkable economic growth. During the 1980s and 1990s, China has become one of the fastest growing economies in the world. The GDP grew at about 10 percent annually in the past 20 years. Over the course of the reform period, both rural and urban incomes have increased noticeably. Rising income has also been associated with a substantial reduction of poverty and significant improvement in food security.
China's experience shows the importance of both domestic and external policies in achieving sustainable growth. China's rapid growth would not have been possible without its domestic economic reforms, macroeconomic stability and its “open-door” policy. The rapid economic growth has been realized through high capital investments, gradually releasing constraints for abundant rural labour for non-farm employment, technological changes and external economic expansion. High growth of investment has been possible because China has high domestic saving rates and also enjoys a massive inflow of FDI. The institutional and market-oriented reforms improved economic efficiency and facilitated economic structural changes in line with shifts in market demand. A stable internal and favourable external environment also provided better prospects for China's economic growth and market expansion. The successful growth in the agriculture sector facilitates the economic transition from agriculture to industry/services and from the rural to the urban economy. The growth in agricultural productivity enabled China to release its large pool of abundant rural labour, providing cheap labour for the nation to industrialize its economy.
China's experience also shows that institutional innovation (particularly land tenure), technological changes and market reform and infrastructure development are critical to the improvement of the nation's food security. China's experience further shows that overall economic growth is a primary and essential condition for poverty reduction, but not a sufficient condition for continuous reduction of poverty. Important factors shaping trends in China's poverty reduction are agricultural growth in the initial stage of economic development and the subsequent growth in non-farm employment with the expansion of industry.
While there are a number of challenges related to economic growth, we are still very optimistic about China's future growth. With rapid growth of its economy which is increasingly dependent on the external sector, China needs to continue to enhance its long-term partnership with trade partners. A stable and favourable external economy and political environment will be critical for the sustainable development of China's economy. On the other hand, any country that is seeking to embrace globalization cannot afford to ignore this “rising dragon” economy in Asia.
The high level of China's food security, even under a rapid economic growth scenario, suggests that China's massive import of food is not likely to occur. China can still significantly increase its food production through new technological innovations. However, more effort will be needed to cope with the increasing scarcity of water in many parts of Northern China.
In restructuring its agricultural economy China will need: (i) to create better R&D and technology innovation systems, (ii) better management of water resources, (iii) to avoid environmental degradation and (iv) support institutions, such as farmers' associations. China should also increase its efforts to improve the quality of all agricultural products and capacity to effectively implement and regulate quality standards to meet increasing demand from own domestic consumers and better compliance with international standards. Meanwhile, policy-makers should be concerned about the poverty and equity effects of trade liberalization and the need to encourage farmers in poorer agricultural and inland areas to shift their production (where appropriate) to more competitive agricultural products and/or to take other off-farm jobs to improve their livelihoods.
It is also worth noting that gains in non-agricultural sectors from trade liberalization far surpass those for agriculture. On the other hand, China's rising dependence on forestry products, energy and minerals presents one of the biggest challenges that China will face in the coming decades. The challenge exists even if the imports of these commodities are not projected to be too spectacular. Meeting this challenge will require substantial and long-term efforts in technological innovation, economic restructuring, investments, seeking new resources and establishing strategic partnerships with major trade partners.
The results from this study also provide significant policy implications for many countries that are currently China's major trade partners or those seeking greater economic and trade relations with China. The main conclusions on the implications of China's rapid economic growth are that China's growth will provide more opportunities than challenges to the rest of the world. Overall the rest of the world will gain from China's economic expansion though this general conclusion may not hold for some countries. China is set to play an increasing role in international trade, which should benefit both developed and developing countries.
For those countries whose economic structures are complementary to China, there will be emerging opportunities offered by China's increasing imports due to its rapid growth and integration into the world economy. While countries that have similar export structures to that of China and are competing for the same export markets will have to make extra efforts to restructure their economies and invest more in domestic infrastructure to lower production and marketing costs.
The rapid growth of China's economy will help those countries with a comparative advantage in many land-intensive products to expand their production and increase their exports to China. Developing countries can export agricultural products to China, particularly soybeans, other oilseed, maize, cotton, sugar, tropical and subtropical fruits, as well as some livestock products (e.g. milk, beef, mutton), although they have to compete with other exporters from developed countries such as the United States, Canada and Australia.
While we recognize a number of limitations in using GTAP to simulate the impacts of China's rising economy, we believe the major trends and results that are generated from this study. We also recognize that there are many challenges such as tourism, educational services, agricultural technology transfer and policy responses that cannot be analysed under the current framework.
The main analytical tool used in this study is a model for global trade, which is based on the GTAP. In this Appendix, after a brief introduction of the model, the efforts to improve GTAP's database and parameters for China are discussed. Finally, assumptions on macroeconomic development such as GDP and population growths by country or region, TFP changes and factor endowments are discussed.
We used the well-known GTAP as our analytical framework to assess the implications of China's rapid economic growth for agriculture and food security in both China and the rest of the world. The GTAP is a multi-region, multi-sector computable general equilibrium model, with perfect competition and constant returns to scale. The model is fully described by Hertel (1997). It has been used to generate projections of policy impacts in the future (Arndt et al. 1997; Hertel et al. 1999; van Tongeren and Huang 2004).
In the GTAP model, each country or region is depicted within the same structural model. The consumer side is represented by the country or regional household to which the income of factors, tariff revenues and taxes are assigned. The country or regional household allocates its income to three expenditure categories: private household expenditures, government expenditures and savings. For the consumption of the private household, the non-homothetic Constant Difference of Elasticities (CDE) function is applied. Firms combine intermediate inputs and primary factors, land, labour (skilled and unskilled) and capital. Intermediate inputs are composites of domestic and foreign components, and the foreign component is differentiated by region of origin (the Armington assumption). On factor markets, the model assumes full employment, with labour and capital being fully mobile within regions, but immobile internationally. Labour and capital remuneration rates are endogenously determined at equilibrium. In the case of crop production, farmers make decisions on land allocation. Land is assumed to be imperfectly mobile between alternative crops, and hence allowed for endogenous land rent differentials. Each country or region is equipped with one country regional household that distributes income across savings and consumption expenditures to maximize its utility.
The GTAP model includes two global institutions. All transport between regions is carried out by the international transport sector. The trading costs reflect the transaction costs involved in international trade, as well as the physical activity of transportation itself. Using transport inputs from all regions, the international transport sector minimizes its costs under the Cobb-Douglas Production Function. The second global institution is the global bank, which takes the savings from all regions and purchases investment goods in all regions depending on the expected rates of return. The global bank guarantees that global savings are equal to global investments.
The GTAP model does not have an exchange rate variable. However, by choosing as a numeraire index of global factor prices, each region's change of factor prices relative to the numeraire directly reflects a change in the purchasing power of the region's factor incomes on the world market. This can be directly interpreted as a change in the real exchange rate. The welfare changes are measured by the equivalent variation, which can be computed from each region's household expenditure function.
Taxes and other policy measures are represented as ad valorem tax equivalents. These create wedges between the undistorted prices and the policy-inclusive prices. Production taxes are placed on intermediate or primary inputs, or on output. Trade policy instruments include applied most-favoured nation tariffs, antidumping duties, countervailing duties, export quotas and other trade restrictions. Additional internal taxes can be placed on domestic or imported intermediate inputs and may be applied at differential rates that discriminate against imports. Taxes could be also placed on exports and on primary factor income. Finally, relevant taxes are placed on final consumption, and can be applied differentially to consumption of domestic and imported goods.
The GDP can be treated either endogenously or exogenously in simulations. Normally, the GDP is treated as an endogenous variable when analysing the impacts of trade liberalization or other policy shocks (e.g. technology changes, resource endowment changes and fiscal or financial policy changes). However, the GDP also can be treated as an exogenous variable when one uses the GTAP to analyse the impacts of overall economic growth on the performance of individual sectors, trade and others. In this case, technology variables become endogenous if capital investment is exogenous, or capital investment become endogenous if technological change is exogenous.
The GTAP database contains detailed bilateral trade, transport and protection data characterizing economic linkages among regions, linked with individual country input-output databases which account for intersectoral linkages among the 57 sectors in each of the 87 regions. The database provides quite detailed classification on agriculture, with 14 primary agricultural sectors and seven agricultural processing sectors. All monetary values of the data are in US$ million and the base year for the version (Version 6) used in this study is 2001. For the purposes of this study, the GTAP database has been aggregated into 14 regions and 18 sectors. The regional and sectoral aggregations are summarized in Appendix Tables 2 and 3.
Before we applied the GTAP Version 6, we carefully examined its database and parameters for China and made substantial improvement to several aspects related to agricultural input and output ratios, demand parameters, trade policies and production values. For a global model such as GTAP, some data defects for a country like China are not surprising. Major data improvements to GTAP Version 6 include:
Input-output tables in the agriculture sector. In this study, we overcome some of the shortcomings in the GTAP database by taking advantage of data that have been collected by the National Development and Reform Commission (NDRC) and government organizations. Using a sampling framework with more than 30 000 households, the NDRC collects data on the costs of production of all of China's major crops and livestock. The data set contains information on quantities and total expenditures on labour and material inputs as well as expenditure on a large number of miscellaneous costs such as tax, transportation and marketing costs. Each farmer also reports output and the total revenues earned from the crops or livestock. The data have previously been used in analyses on China's agricultural supply and input demand (Huang and Rozelle 1996; World Bank 1997). The comparison of the input shares of agricultural production in the original database and improved ones are summarized in Appendix Table 4. In doing so, we also ensure the balance and consistency of overall input-output relationships among sectors.
Demand elasticities in the base year. A major effort has been made to improve income and price demand parameters in the base year (2001). We incorporated the most updated and empirically estimated price and income elasticities of demand for various foods in China for the base year (2001) into GTAP Version 6. For comparison, Appendix Table 5 summarizes major adjustments that have been made in this study. In general, the original GTAP has much lower own-price elasticities of demand for various foods than those that we found in the empirical studies (Fan et al. 1995; Huang and Bouis 1996; Huang and Rozelle 1998). We also find that the income elasticities of demand for cereal, edible oils, livestock products and fish are relatively high in the GTAP's original database, while they are relatively low for other commodities such as sugar, horticultural products, processed foods and most non-agricultural products and services (Appendix Table 4).
Income elasticities in the projection period. We assume that income elasticities of demand for various foods and non-food commodities will change with income growth. This is a reasonable and essential assumption for a study that makes a long-term projection/simulation. In general, we assume that food income elasticities decline with income growth (Appendix Table 4), which is based on several empirical studies in China by researchers (Huang and Bouis 1996; Huang et al. 1991; Huang and David 1993; Huang and Rozelle 1998) and has also widely been applied in other simulation models (e.g. Huang and Chen 1999; Huang and Li 2003).
Trade distortions. A number of studies have estimated the magnitude of agricultural price distortions using the available series on domestic and international prices. Unfortunately, the results obtained have varied widely. Huang, et al. (2004) adopted a new approach based on policy impacts from detailed interviews with participants in China's agricultural markets and trades rather than on readily available price series. This approach provides a much clearer indication of the implication of agricultural trade policies than would otherwise be possible. Their results have been used in several recent studies on the impacts of the WTO on China's economy (Bhattasali et al. 2004; Anderson et al. 2004; Ianchovichina and Martin 2004). We adjusted both import and export tariff equivalents of agricultural commodities in the base year (2001) based on results from the Huang et al. (2004) study. Detailed adjustments are provided in Appendix 5.
The central issue of this study is to assess the implications of China's rapid economic growth in China and the rest of the world, particular in the Asia and Pacific region. Towards this end three scenarios have been developed. They are baseline (A), China's high growth scenario (B) and China's high productivity growth scenario (C).
Initial GDP growth. For initial assumptions on GDP growth over the next 20 years (2001–2020) for all countries except China and India, we adopted World Bank projections. World Bank projection on global and regional GDP growths has been widely used in many similar studies (e.g. Walmsley et al. 2000; van Tongeren and Huang 2004). In the meantime, we also incorporated economic growth prospects for Asia with information from Economic outlook (Asian Development Bank 2002). The assumptions on annual growth of the GDP for 2001 to 2020 are based on the prospects of China's economic growth presented in Section 3. Initial GDP growths for all countries are used to calibrate the implicit assumptions of technology changes (e.g. TFP) embodied in these initial GDP growths given the input-output tables for individual countries or regions. After the embodied TFP growths are estimated and used as exogenous assumptions in the model, the GDP is treated as endogenous in the final analysis.
Population and labour. Population data for 2001 to 2020 for all countries except for China are from the United Nations' population projection. China's population projection is from a recent study by IIASA (Toth et al. 2003). We apply IIASA's population projection for China as it provides more detailed structure of population by age for the period we studied. Assumptions on skilled and unskilled labour forces are presented in Appendix Table 6.
Natural resource endowments. No effort has been made to develop a comprehensive database on natural resource endowments for China and the rest of the world. In this study, we directly adopted those assumptions that were embodied in a recent LEI-CCAP's study (van Tongeren and Huang 2004). They assumed that the annual growth rate of natural resource endowment will be 0.3 percent for all countries, including China.
Physical capital. Assumptions of physical capital growth are from Wellesley et al. (2000) and van Tangerine and Huang (2004). There are several methods to keep the capital endogenously based on the static model (Francois et al. 1996; Walmsley 1998). However, it usually assumes the initial and final results are stable states and the return rates of capital in the beginning and the final stage equally. Therefore it was not suitable to simulate short-term steps (five years) in our simulations. Moreover such a method also assumes that capital is freely mobile among countries and does not trace the ownership.
Recursive dynamic simulation. The baseline is constructed through the recursive dynamic approach. We implemented the simulation using four steps (2001–2005, 2006–2010, 2011–2015 and 2026–2020) to reflect the change of endowment in different countries and periods. This procedure has been used in several other studies (Hertel et al. 1999; van Tongeren and Huang 2004). Comparing these methods, we keep the long-term trade balance of different countries as fixed. The basis for this assumption is that investment must be financed solely from domestic savings and thus capital is not mobile across regions (Walmsley 1998). If we do not trace the ownership and pay the foreign capital inflow back, this will cause large foreign capital inflow via trade deficits. Although it is not as perfect as the recent dynamic GTAP model, which allows capital free mobility among countries and traces the foreign ownership, there is no public version available, and it requires the creation of a new accounting database to reflect the foreign capital inflow, which is beyond the scope of this study. On the other hand, under our approach, the equivalent variable (EV) can be directly interpreted as a change in welfare.
Trade and other policies. The baseline projection also includes a continuation of existing policies and the effectuation of important policy events related to international trade as they are known to date. The important policy changes are: implementation of the remaining commitments from the GATT Uruguay Round agreements; China's WTO accession between 2001 and 2005; global phasing out of the Multifiber Agreement under the WTO Agreement on Textiles and Clothing (ATC) by January 2005; European Union enlargement with Central and Eastern European Countries (CEECs); and possible trade agreement in Doha negotiations from 2005 to 2010. For the baseline projection, this results in a number of assumptions with regard to import tariffs, TRQs, production and export subsidies. Because there are still high uncertainties about the results of the current Doha Round negotiations, we assume the possible outcome by simply averaging the offers provided by the United States, European Union and CAIRNS proposals in 2004. Details of these assumptions are adopted from van Tongeren and Huang (2004); some of key parameters on China's trade liberalization are provided in Appendix Table 7.
Under China's high GDP growth scenario, all assumptions under the baseline scenario are held except for China's GDP growth and physical capital investment in the whole projection/simulation period. For China's GDP growth, the baseline GDP growths are replaced by those associated with China's high growths (row 3, Table 8; Figure 14). We analysed China's high growth scenario (compared with the baseline scenario) in order to examine questions such as: What will be the likely impacts of more rapid growth in the Chinese economy on other countries? Which countries or regions could benefit or might lose from China's growth? What are the implications of more rapid economic growth in China on agriculture and food security in China and the rest of the world.
For physical capital, given exogenous assumptions of GDP and TFP growths, China's capital investment could be determined endogenously. For other countries, the GDP growths are endogenous and capital grows similarly to the baseline.
Under China's high TFP growth scenario, all assumptions for the baseline scenario in China and the rest of the world remain except for the TFP assumptions for China. There are several logical processes underlining this scenario. China's strategies to simulate its economic growth and sustainable development may be further reinforced in the future (see Section 3.2). To minimize any potential or perceived risks associated with domestic food security and resource constraints for its rapid economic growth, China may make more effort to improve its production of food and other sectors that use large shares of natural resources such as land, water, forestry, energy and minerals. If China's rapid economic growth results in significant implications for the world's food security or surges in imports of natural resources from the rest of the world, it is unlikely to assume that there would be no policy response from China's leaders in the long term.
Figure 14. Annual growth rates (%) of GDP in China, 1981–2020
To understand the implications of technological changes on food security and other aspects of the economy, under the high TFP scenario we assume there will be a small increase in the productivity of several sectors. This is formulated as follows: On the top of the baseline scenario, we assume that: 1) agricultural and forestry sectors will experience neutral productivity-enhanced improvements; 2) the manufacturing sector will have biased energy-saving technology improvement; and 3) the service sector will follow a similar productivity improvement as that in the manufacturing sector. We further assume that average productivity will be increased by about 5 percent in ten years. This is equivalent to additional productivity growth of 0.47 percent annually. Similar to other scenarios, productivity growth will also start in 2006 and continue to 2020. It is worth noting that this is a very moderate change in productivity growth. Under this assumption, by 2020, TFP will be only about 7.3 percent higher than that under the baseline scenario. However, the implications for further TFP increase are straightforward.
Appendix Figure 1. Net export of agriculture as percentage of world trade under the baseline, 2001–2020
Appendix Figure 2. Net export of agriculture as percentage of world output under the baseline,2001–2020