## **Figure 26 Government capital stock per worker**

(China’s general government capital stock per worker at historical levels of income per capita (red line) compared with 2014 levels in other countries, thousand 2011 international US dollars, log-scale) <!-- Start of picture text --> CHN<br>50 100 150<br>PPP GDP per capita in 2014 (thousand 2011 int'l USD)<br>150<br>100<br>50<br>Gov. capital stock per worker (thousand 2011 int'l USD)<br><!-- End of picture text --> Source: IMF; PWT 9.1; authors’ calculations. Note: OECD countries in orange.

## **Figure 27 Private capital stock per worker**

(China’s private capital stock per worker at historical levels of income per capita (red line) compared with 2014 levels in other countries, thousand 2011 international US dollars, log-scale) <!-- Start of picture text --> CHN<br>50 100 150<br>PPP GDP per capita in 2014 (thousand 2011 int'l USD)<br>250<br>200<br>150<br>100<br>50<br>Private capital stock per worker (thousand 2011 int'l USD)<br><!-- End of picture text --> Source: IMF; PWT 9.1; authors’ calculations. Note: OECD countries in orange.

# **4. Policy implications**

The macro- and firm-level evidence presented above identifies a sharp drop in productivity growth as an important driver of China’s declining economic growth. To enhance productivity growth in recent years, China’s policy makers have focused on fostering innovation. By some measures, China’s innovation capacity has improved steadily in recent years, placing the country 14<sup>th</sup> on the Global Innovation Index (Cornell University et al., 2019).

At the same time, China remains, on average, quite distant from the global technology frontier and thus has substantial remaining potential for catch-up growth. The adoption of more advanced technology and management skills from high-income countries, as well as improving the efficiency of resource allocation, can provide a less costly and more certain source of growth over the medium term.

However, China’s access to foreign technologies has become more challenging in recent years. The country’s overseas investment expansion has raised concerns in high-income countries over reciprocity in investment conditions. In 2017, China introduced a negative list for FDI which restricts foreign investment in listed sectors and requires equal treatment of domestic and foreign firms in the rest of the economy. In 2018, foreign ownership restrictions in financial services and car, ship, and aircraft manufacturing were reduced and, in 2020, a new FDI law will take effect. These measures address some of the concerns over market access, intellectual property rights, and foreign investor protection, but their impact will depend on successful implementation.

Achieving productivity growth through reallocation will require deepening reforms to increase the role of the market, the private sector, and competition. China has recently introduced policies to improve the business climate. Besides the above measures to allow more foreign investment, in 2019 China climbed up to 46th in the World Bank Ease of Doing Business rankings, gaining more than 30 positions from the previous year (World Bank, 2019). The 20