China needs to be more productive to boost its economy. It hasn't been very successful so far

A Chinese national flag flies in front of a building under construction in the central business district of Beijing, China.

Giulia Marchi | Bloomberg | Getty Images

With economic growth slowing down, China needs to increase productivity to boost its economy — but the country hasn't been very successful at doing that so far, according to a report by the World Bank and the Chinese government. 

China's economy has long relied on high levels of investments and an expanding labor force for growth. Those economic drivers are running out of steam, and Chinese authorities have identified innovation and productivity as the next growth sources.

But, productivity growth in China "has been slowing since the global financial crisis and has remained relatively low," according to the report, jointly released Tuesday by the World Bank, China's Ministry of Finance and China's Development Research Center of the State Council.

Estimates of China's growth in total factor productivity moderated from about 3.51% in the 10 years before the global financial crisis to 1.55% in the decade post-crisis, the report said. Total factor productivity measures economic efficiency and innovation.

China is not the only country that's facing a slowdown in productivity growth.

However, the sheer size of the Chinese economy — the world's second largest — and its increasing integration with the global economy, means that a growth slowdown in China could have worldwide implications.

Three ways to boost productivity

The report proposed three ways China can overcome the challenges it's facing to improve productivity.

1. Allocate resources efficiently: One way is to distribute resources across the economy more effectively, the report said. That means pressing on reforms at state-owned enterprises to make them more competitive on their own. It would also require the government to exercise greater discipline in its support for specific industries, said the study.
2. Accelerate the adoption of advanced technologies and innovation: One way to achieve that is to open up its economy further to foreign investment and competition, the report said.
3. Innovation and technology: That includes strengthening intellectual property rights and improving the quality of patents, according to the report.

To some extent, China is already undertaking these three steps. But the report said it needs to "strike a more balanced coexistence between the state and market" to reap the benefits.

"As China's economy becomes more complex and innovation driven, the market will need to play a more decisive role and the state to play a more market-supportive role," said the report. "The role of the state will need to evolve to focus on providing stable market expectations and the rule of law."

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