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Promising Outlook on the Chinese Economy

"Middle-Income Trap" Not a Stumbling Block of China's Development

Submit Time:11-10-2017 | Zoom In | Zoom Out

Author:Liu Cheng, Feng Ming, Zhong Chunping | Source:People's Daily (September 17, 2017)

Abstract:

Since China changed gears of economic growth in 2012, the rumor that the Chinese economy may fall into the "middle-income trap" has been swirling from time to time. China's per capita GDP reached 4,561 US dollars in 2010, joining the ranks of upper-middle income countries; the figure exceeded 8,000 US dollars in 2016, significantly surpassing the threshold of upper-middle income countries, but still lagging behind high-income countries. It can be said that China is currently in a critical period of advancing from an upper-middle income country to a high-income country. During this period, a correct understanding of the essence of "middle-income trap" and the prospect of China's economic development is of great significance to maintaining the strategic focus, eliminating all kinds of interferences, and joining the ranks of high-income countries smoothly. 

The "middle-income trap" virtually refers to some special difficulties middle-income countries may face in development 

The "middle-income trap" was first proposed by the World Bank in the Report of Economic Development in East Asia 2006. The report pointed out that the economic growth of middle-income countries is slower relative to poorer or richer countries. After that, the "middle-income trap" has drawn wide attention of the political and academic circles. 

In essence, the "middle-income trap" is more of a statistical phenomenon than a rigorous academic concept, and primarily indicates that a country's economy may face some special difficulties associated with the middle-income stage once it joins the ranks of middle-income countries. Specifically, middle-income countries may stand at a disadvantage in global competition as they do not have low labor cost advantages of low-income countries and lack innovation and technological advantages compared with high-income countries. These difficulties lie in three aspects: first, rising labor costs lead to declining international competitiveness of low-end manufacturing; second, lack of innovation capability weakens the development momentum; third, income inequality intensifies and economic vitality declines. These problems, if not handled properly, will hinder the development of middle-income countries, and even cause long-term stagnation in development. 

China has the ability to successfully stride over the "middle-income trap" 

The main argument holding that China will fall into the "middle-income trap" is that from 1960 to 2008, only 13 of the 101 middle-income countries and regions successfully developed into high-income economies. But such a statistical result is not convincing. Although it indicates that many middle-income countries are plagued by the "middle-income trap", it also shows that not all middle-income countries are stranded in the "middle-income trap." Actions speak louder than words. Not only is China's economic growth situated on the front row among the world's major economies, but also China has vigorously implemented the innovation-driven development strategy in recent years and taken practical measures to narrow the income gap, thus maintaining stable and sound economic development as well as social harmony and stability. This is clearly different from the stagnant state of development described in the "middle-income trap." In fact, no matter at the theoretical level or at the data level, and no matter based on normative study or based on empirical study, China is bound to join the ranks of high-income countries as long as it can maintain medium-to-high speed of growth in the medium and long term. 

The empirical analysis of transnational comparisons and econometrics shows that medium- and long-term economic growth at 4% is sufficient to support China's entry into high-income countries, and the actual growth rate of China's economy is much higher. China's economic growth has remained at the interval between 6.7% and 6.9% for eight consecutive quarters. Most studies suggest that China will maintain an average annual economic growth of more than 6% over the next 10 years or even longer. 

International comparative studies have shown that effective response to the special difficulties faced in the middle-income stage and successful entry into the high-income stage require a few special conditions: stable government; market-oriented economic policy; high-quality human capital; open to the outside world; no social unrest. China clearly has all these conditions. 

There is no doubt that China will successfully join the ranks of high-income countries in the future, but what more worthy of research and attention is when China will enter the high-income stage. Maintaining medium-to-high speed of economic growth is the key to early entry into the high-income stage. As a result, we should first create a sound environment for economic development, and should not be affected by "bad-mouthing" views. Second, we should constantly improve the socialist market economic system, in order to provide a good institutional guarantee for the long-term sustainable development. Third, we should increase the intensity of independent innovation and improve the contribution rate of technological progress and total factor productivity. Finally, we should deepen opening-up which is relied on to promote reform and development. 

(Author's affiliation: National Academy of Economic Strategy, CASS)


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