China's economic growth rate has been declining since 2010, falling to a six-year low of 7.3 percent in the third quarter of 2014. This has been the longest growth slowdown since the country adopted the reform and opening-up policy in 1978. In a recent article in the Reference News daily, Justin Yifu Lin, an economics professor at Peking University and former World Bank chief economist and senior vice president, attributed the slowdown mainly to external factors. Lin said China can still achieve a relatively fast growth of 7 percent or more by fully tapping its advantages as a latecomer. Edited excerpts of the article follow:

My co-authored book - The China Miracle: Development Strategy and Economic Reform - published 20 years ago forecast that China may surpass the United States to become the world's largest economy in 2015 in terms of purchasing power parity (PPP), if it continues to put forward reforms. At that time, most scholars didn't believe such a prediction. Yet, 20 years later, the forecast has been proven correct, as indicated in the data from the World Bank and the International Monetary Fund.

However, China's huge population means its per-capita gross domestic product (GDP) remains low compared with the United States. The Chinese population is four times that of the United States. Even if China's GDP surpasses U.S. GDP, the former's per-capita GDP measured by PPP is only one-fourth of the latter's. Moreover, measured by the exchange rate, China's per-capita GDP is only one-eighth that of the United States. Therefore, China still needs to maintain relatively fast growth for years in order to catch up with developed countries in terms of per-capita GDP.

Potential remains

When I finished my tenure with the World Bank in 2012, I predicted that the Chinese economy still had the potential to expand at an average annual rate of 8 percent for 20 years, starting from 2008. This prediction was again met with many questions and doubts from domestic scholars. They argued that since the reform and opening up began in the late 1970s, China had already maintained average annual growth of 9.8 percent for 35 years, which had never happened in history. After 35 years of high-speed growth, how could China still have the potential to maintain such momentum?

In fact, China's economic growth has been declining since the beginning of 2010, falling to 7.3 percent in the third quarter of 2014. Moreover, the downward pressure remains great. This trend appears to confirm their views initially.

What caused the GDP growth to continuously decline since the first quarter of 2010? Does it mean the country's growth potential has slid below 8 percent? Or is it caused by the so-called "intrinsic systematic problems" claimed by some doomsayers?

I believe the recent economic slowdown is mainly due to external factors. Similar slowdowns were seen in other emerging economies, including India and Brazil, as well as high-income East Asian nations like Singapore and South Korea (see graph). Therefore, it can only be international cyclical factors that weighed on these countries' economies. Moreover, China performed much better in comparison with those countries.

China cannot sustain its breakneck expansion in exports

Latecomer advantage

Putting external shocks aside, how much growth potential does China's economy still have? We need to take a closer look at the nature of economic growth and the decisive factors behind rapid growth.

The nature of economic growth is the continuous growth of per-capita GDP, which is based on rising levels of labor productivity. Meanwhile, continued technological innovation and industrial upgrading are the decisive factors behind the modern economy's rapid growth. Yet, unlike developed countries that had to rely on their own research and development starting with the industrial revolution in the 18th century, developing countries are able to imitate, introduce and integrate existing technologies at lower costs with lower risks. This is the "latecomer advantage."

Theoretically speaking, if a developing country can make use of this advantage to achieve technological innovation and industrial upgrading, its economic growth can be faster than that in developed countries. According to research by the Commission on Growth and Development (an independent body comprising policy makers, academics and business leaders formed to examine economic growth and development) led by Nobel laureate Michael Spence, after World War II, 13 economies utilized the latecomer advantage to achieve annual GDP growth of 7 percent or more for 25 years or longer - more than double the growth rates of developed countries.

The latecomer advantage was a major reason for the fast growth of China, which became one of the 13 economies after 1979. Whether it still has the potential for further rapid growth depends on how much of the latecomer advantage it can still harness.

Per-capita GDP, which represents a country's labor productivity and technological and industrial prowess, can be used to measure the extent of its latecomer advantage. The per-capita GDP gap between China and developed countries reflects a gap in technological and industrial development. According to data from the late British economist Angus Maddison, in 2008, China's per-capita GDP was about 21 percent that of the United States - roughly the gap between the United States and Japan in 1951, Singapore in 1967, and South Korea in 1977. Japan, Singapore and South Korea saw economic growth soar to 9.2 percent, 8.6 percent and 7.6 percent respectively over the following 20 years by making full use of their latecomer advantages. In this sense, China should also have the potential for 8-percent annual growth from 2008 to 2028.

From theory to reality

Of course, to turn growth potential into actual growth, China needs to continuously carry out technological innovation and industrial upgrading to make full use of its latecomer advantage.

To this end, an effective market is needed so that the right signal about prices can be sent to businesses for them to make decisions on which technologies and industries to invest in. Meanwhile, the government should play its due role by tackling the inevitable market failures during technological innovation and industrial upgrading, so as to guide the country's industrial upgrading in a timely fashion. It should refrain from "too much intervention" and it should also avoid "too little intervention."

To build an effective market, the double-track price system should be changed to a market-based price system. In this way, price can be a signal to reflect the relative scarcity of different production factors in China and the problems left behind by the double-track price system - such as income disparity, rent seeking and corruption - can be completely rooted out. An active government that makes the best use of the situation will enable the Chinese economy to fully tap the country's latecomer advantage and will also have more energy to deal with other internal and external challenges, such as the waning demographic dividend domestically and a fragile recovery of the global economy.

China has become an upper middle-income country whose products are competitive in both domestic and overseas markets, such as home appliances, automobiles, ships and large equipment. Government subsidies, while a necessity in the beginning of the reform and opening up, have become a dispensable supplement for businesses. Therefore, the market should play a decisive role in allocating resources and the government should play a better role, just as decided at the Third Plenary Session of the 18th Central Committee of the Communist Party of China. China can grant subsidies from fiscal revenue to a few necessary industries, a common practice among developed countries.

If an effective market and an active government can be built in China amid efforts to comprehensively bolster reforms, it can make full use of its latecomer advantage.

In that case, even if developed countries have yet to recover from the global financial crisis in 2008 and breakneck expansion in exports can't be sustained in China, China is likely to achieve 7 percent or faster growth, backed by boosting domestic consumption and investing in areas with high social and economic benefits, such as industrial upgrading, improvement of infrastructure, environmental protection and urbanization. If so, the per-capita GDP and per-capita rural income can double by 2020 from the 2010 level.

Coupled with the appreciation of the yuan, China is highly likely to join the ranks of high-income nations around 2020, which would make it the third to climb from a low-income economic entity to middle-income and finally a high-income one after World War II.