This paper investigates how China's saving, investment, and saving-investment balance will evolve in the decades ahead. Household saving in China is relatively high, compared to OECD countries. However, much of China's high economy-wide saving, and the difference between China and other countries, are due to unusually high enterprise and government saving. Moreover, cross-country empirical analysis shows that economy-wide saving and investment in China are higher than what would be expected, even adjusting for differences in economic structure. Combined, these findings suggest that much of China's high saving is the result of policies particular to China. Looking ahead, the cross-country econometric results suggest that purely on the basis of projected structural developments-including development, changes in economic structure, urbanization, and demographics-saving and investment would both decline only mildly in the coming two decades, with ambiguous impact on the current account surplus. However, the potential effect on saving, investment, and the saving-investment balance of several policy adjustments could be large. These policies are identified and their likely impact assessed and quantified. This exercise suggests that rebalancing along these lines should reduce both saving and the current account surplus over time, although the surplus is unlikely to turn into a deficit soon.

This paper studies the sources and pattern of China's impressive economic growth over the last 25 years, and shows that key issues currently of concern to policymakers-widening inequality, rural poverty, and resource intensity-are to a large extent rooted in China's growth strategy, and resolving them requires a rebalancing of policies. Using both macro level and sector data and analyses, the paper extends the growth accounting framework to decompose the sources of labor productivity growth. We find that growth of industrial production, led by a massive investment effort that boosted the capital/labor ratio, has been the single most important factor driving GDP and overall labor productivity growth since the early 1990s. The shift of labor from lowproductivity agriculture has been limited, and, hence, contributed only marginally to overall labor productivity growth. The productivity gap between agriculture and the rest of the economy has continued to widen, leading to increased rural-urban income inequality. Looking ahead, we calibrate two alternative scenarios. We show that continuing with the current growth pattern would further increase already high investment and saving needs to unsustainable levels, lower urban employment growth, and widen the rural-urban income gap. Instead, reducing subsidies to industry and investment, encouraging the development of the services industry, and reducing barriers to labor mobility would result in a more balanced growth with an investment-to-GDP ratio that is consistent with medium-term saving trends, faster growth in urban employment, and a substantial reduction in the income gap between rural and urban residents.

I thank Bert Hofman for encouragement and comments, and Homi Kharas and Tao Wang for comments on an earlier draft. I also thank Pieter Bottelier, whose comments will be reflected in a revised version.

The views expressed in this Working Paper are those of thc author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the aUlhor(s) and are published to elicit comments and to further debate. This paper presents tbe results of an empirical analysis into monetary policy transmission mechanisms and inflation in the Slovak Republic. The estimated vector autoregression (V AR) model suggests tbat inflation is determined by changes in foreign prices, tbe exchange rate, and wage costs, witb a modest effect of aggregate demand, in line with theory for small, open economies. Monetary policy is shown to affect inflation via tbese channels. Changes in money supply seem to have a modest but rapid impact on prices. The measured effect of interest rate changes is modest and gradual, although it appears to have become more important in recent years.

This paper uses both macro level and sectoral data to study the sources and pattern of China's impressive economic growth over the last 25 years. Extending the growth accounting framework, we show that widening inequality, rural poverty, and resource intensity are to a large extent rooted in China's growth strategy, and resolving them requires a rebalancing of policies. We find that growth of investment in the industrial sector has been the single most important factor driving gross domestic product and overall labor productivity growth since the early 1990s. The shift of labor from low-productivity agriculture has been limited. The productivity gap between agriculture and the rest of the economy has continued to widen, leading to increased rural-urban income inequality. Continuing with the current growth pattern would further increase already high investment and saving needs to unsustainable levels, lower urban employment growth, and widen the rural-urban income gap. However, reducing subsidies to industry and investment, encouraging the development of the services industry, and reducing barriers to labor mobility would result in a more balanced growth and a substantial reduction in the income gap between rural and urban residents. Copyright Institute of World Economics and Politics, Chinese Academy of Social Sciences 2006.