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The potential growth rate is a crucial indicator for managing a country's economy. It represents the maximum sustainable growth rate without causing overheating or inflation. However, if the economy grows too slowly, below this potential, it can lead to high unemployment, which not only harms social stability but also results in economic inefficiency and wasted resources. Despite its importance, determining the potential growth rate is a complex and challenging task.
One common approach is to set a target based on income growth. For example, China aimed to double per capita income by 2020, implying an average annual growth of 7.5%. But this logic is flawed. If such a target were valid, why couldn't the U.S. or Japan achieve similar growth rates? Economic growth depends on more than just arbitrary targets—it's influenced by structural factors, labor markets, and global conditions.
Another method involves analyzing inflation as an indicator. However, in today’s globalized and liquidity-driven world, traditional inflation measures may not reflect true economic health. Asset prices, particularly in real estate, can rise rapidly due to speculation rather than real economic activity. In China, for instance, housing prices have increased by 15% annually, yet official inflation remains at around 6.3%. This discrepancy highlights the limitations of using standard inflation metrics to assess economic performance.
In a world with excessive liquidity and speculative capital flows, even floating exchange rates may not prevent currency over-supply. Countries that allow their currencies to float still face inflows of hot money, leading to asset price bubbles and financial instability. Thus, relying solely on inflation to gauge potential growth is no longer effective in modern economies.
An alternative and more reliable approach is to examine employment levels. The potential growth rate corresponds to the level of output achieved when the economy is at full employment. This method is especially useful in market-oriented economies. In contrast, developed nations like those in Europe and the U.S. often have high wages and strong welfare systems, which distort labor markets and make this approach less accurate.
China, however, has a relatively flexible labor market. There are no artificially high wages, and minimum wage laws often fall below actual market levels. Trade unions in China play a limited role compared to their Western counterparts, allowing the labor market to respond more freely to economic conditions. Therefore, China can better use employment data to estimate its potential growth rate.
That said, not all employment indicators are equally reliable. The employment status of college graduates, for example, may not reflect the broader economic picture. Many universities focus more on theoretical education than practical skills, making it difficult for students to find meaningful jobs. If graduates are struggling to find work, it might signal economic weakness—but if they are easily employed, it could indicate overheating.
The most accurate indicator of economic health is the employment situation of migrant workers. They represent a highly market-sensitive group, directly responding to changes in demand and economic conditions. Currently, despite a reported growth rate of 7.6%, there is still a shortage of migrant workers, and their wages continue to rise. Considering the context of ultra-liquidity, real estate bubbles, and heavy stimulus, this growth rate likely exceeds the true potential growth of the economy. In fact, the real potential growth rate may be lower than what is currently reported.