China as world largest economy ?

One would ponder on why China is experiencing the economic growth that has been witnessed since 1980. Economic theory argues that the output of the economy can be enhanced by increasing the inputs of the physical and human capital. Furthermore, the output of the economy can be bolstered productivity gains, and that can be derived by adopting technological advances or improvement in managerial practices. Subsequently, more output can be accomplished through utilization of the same level of labor and capital inputs.

A number of economists have attributed the fast growth of the Chinese economy since 1979 to a massive capital accumulation and broad improvement in the productivity courtesy of the economic reforms (Dic & Guicai, 2006). Improvement in productivity causes a rise in economic growth and produce funds that are utilized for creating fresh investment. The large pool of domestic savings worked to advantage China in the sense that it acted as the main source of finance for investment at time reforms begun to be initiated. For instance, the percentage of domestic saving in China was 32 percent. The economic reforms also play a crucial role in encouraging household savings. And by 2006, savings hit 51.1% mark putting the country among the highest saving rates globally. In comparison, the rate of saving in the United States in 2005 was 10.2 %.

Additionally, economic opening-up by the China government has enhanced trade and investment reforms as well as incentives resulting to increment in foreign direct investment. The FDI has been very instrumental in advancing the China’s capital growth. In the period 1995 to 2005, the China’s annual foreign direct investment stood at $72.4 billion, depicting the fastest growth than even the United States. According to Elwell, Labonte & Morisson (2006), capital is utilized very efficiently and effectively in China than many countries and therefore enabling it to contribute significantly to the economic growth of its country.

Many emerging economies China included are set to surpass the G7 nations such the United States in terms of the growth and their overall size by 2050 (Ding, 2010 p72). The GDP per capita of China as a proportion of the United States is anticipated to go up from 18 percent in 2011 to 44 percent in 2050. The justification given for this prediction is that most of the Western companies are relocating to China and leaving their home markets especially in the United States.

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