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China will Grow into a High-Income Country though Quality Development

Submit Time:05-03-2018 | Zoom In | Zoom Out

Author:Lin Yifu | Source:People's Daily (January 14, 2018)

Abstract:

As outlined by the 19th National Congress of the Communist Party of China, "This is China's strategic vision or roadmap: finish building a moderately prosperous society in all respects and realize the Chinese Dream of national rejuvenation by the middle of the 21st century." To this end, continuing to upgrade the economic structure, realizing more sustainable and inclusive quality development, warding off the middle-income trap, and joining the rank of high-income countries will be the primary tasks facing China in the upcoming period. Looking at the overall picture, China is well positioned to avoid the middle-income trap.  

Accurate grasp of the high-income threshold 

The World Bank introduced the term "middle-income trap" for the first time in its East Asian Visions: Perspectives on Economic Development that came out in 2006. The term depicts a phenomenon: some middle-income economies see their gross national income per capita ceasing to grow or even falling back, thus unable to join the rank of high-income countries smoothly.  

To accurately grasp the meaning of "middle-income trap," we have to learn about how the World Bank classifies economies all over the world into income groupings. In the late 1970s, the World Bank began to group countries in its World Development Report. Back at that time, the organization didn't introduce the clear-cut and fixed classification standards. Instead, it roughly referred to technological capacity, income level, economic system and other criteria to divide economies into the following categories: industrialized economies (members of the Organization for Economic Cooperation and Development back then), developing economies (further divided into middle-income and low-income economies), capital-rich oil exporters, and centrally planned economies.  

To facilitate analysis, the World Bank adopted the gross national income (GNI) per capita as the only criterion to classify different countries from 1989, by introducing a series of threshold values set forth as below. In terms of US dollar value in 1987, high-income countries were those with a GNI per capita higher than USD 6,000; upper middle-income countries were those with a GNI per capita between USD 1941 and USD 6,000; lower middle-income countries were those with a GNI per capita between USD 481 and USD 1,940; and low-income countries were those with a GNI per capita equal and below USD 480. Afterwards, the 1987 prices denominated in US dollars have been adjusted into the present USD prices year by year according to the price index of the currency in the Special Drawing Rights (SDR) basket. Considering the prices go up and down, the thresholds may do so with the passage of time, rather than straight climb as some people assume. For instance, the high-income thresholds for the five years from 2012 to 2016 were USD 12,615, USD 12,745, USD 12,735, USD 12,475, and USD 12,235, respectively.  

Even though the thresholds are adjusted with the prices, their "actual levels" are relatively fixed with the price element deducted. Since the world economy is developing to a higher level as a whole, the high-income threshold therefore takes on a downward proportion in the GNI per capita of the entire world and the developed countries. In the early 1990s, the high-income threshold was equal to about 30% of the US GNI per capita. But the ratio shrank into 22% in 2016. Over the same period, the coefficient between the high-income threshold and the world's GNI per capita went down from 1.8 times to 1.2 times.  

It still needs to be pointed out that the GNI per capita differs from the per capita disposal income. As two different concepts, they cannot be mixed in use. Gross national income (GNI) is composed of four parts: remuneration for workers, capital depreciation, capital return (profits) and indirect tax levied by government. In other words, four parts of GNI are incomes of enterprises, finance sector, government organs and residents. Therefore, GNI can be used to measure the overall economic development of a country. By contrast, disposable income is the amount of money that households have for disposal at their discretion. In this sense, the disposable income per capita is apparently lower than the GNI per capita.  

China's prospects for becoming a high-income country from the dimension of economic growth 

A quick look at "avoiding the middle-income trap and ascending to a high-income country" awakens us that to accomplish this task, what we need to do first is to realize economic growth. Then, what are the prospects for us to grow into a high-income country from the dimension of economic development?  

China had always been a low-income country until 1996. It joined the rank of middle-income countries in 1999 with solid progress. The year of 2010 witnessed the country moved to the rank of upper middle-income countries. China's GNI per capita accounted for 4.3%, 5.8%, 10.1%, 16.4%, 35.4% and 67.5% of the high-income threshold in years of 1990, 1995, 2000, 2005, 2010 and 2016, respectively. These figures reveal that China's GNI per capita was narrowing down its gap with the high-income threshold at an exponential rate.  

With various factors taken into account, a confident prediction holds that China is likely to enter the rank of high-income countries in few years. The prediction is made on the following grounds. Firstly, China's GNI per capita in 2016 reached USD 8,260 according to the statistic data released by the World Bank. Secondly, let's assume China's GNI per capita will grow at a rate of 6% over the upcoming period of time. Thirdly, given the high-income threshold rose by 0.98% averagely from 2007 to 2016, we suppose the threshold will climb at the rate of 1% in future. Fourthly, let's assume the prices in China will rise at the pace of 1% averagely over the next few years. Fifthly, assume the exchange rate of US dollar against Renminbi will stay at 6.7. Calculated with all these hypothetic figures, China will move to the rank of high-income countries by 2023.  

Although these hypothetic conditions may be varying from the actuality, it is still probable for China to cross the high-income threshold in 2030. From 2010 when China entered the list of upper middle-income countries, we predict that it will take the country 13-20 years to reach the high-income threshold. The prediction suggests that China won't need longer time than the countries which managed to move to the rank over the past three decades. As depicted by the report to the 19th National Congress, China will basically realize modernization by 2035. At that time, its GNI per capita will be much higher than the high-income threshold, which consolidates the country's position as a high-income country.  

Only with quality development can China grow into a high-income country. 

The ascent from middle income to high income is a task only concerning economic development seemingly. However, it actually involves an array of structural issues. Only with these structural issues solved properly and quality development attained, can China join the rank of high-income countries smoothly and steadily. Doing so involves a threefold task.  

Continuing to promote the technical and industry upgrade. China is more populated than a continent, and the Chinese economy is so huge that a wide range of technologies and industries can find their way to the country and thrive there. Among the extensive spectrum of technologies and industries available in China, only a few of them are of a world leading standard, and many of the rest ones including machine tools, complete equipment, core components and parts, biology, pharmaceuticals, medical equipment, and materials are still lagging far behind the countries at the vanguard of technologies. To narrow down this gap and develop the total factor productivity is the source of power for China to secure the medium-to-high growth rate. In the report to the 19th National Congress, China proposed to apply a new vision of development and develop a modernized economy, and rolled out a host of major plans like furthering supply-side structural reform and making China a country of innovators. The efforts to turn these plans into reality will lift China's technologies and industries to new heights. This accomplishment will further expand the room for more workers of the non-agricultural sectors to move to the sectors featuring high productivity, against a backdrop where the shift of labor from agriculture to non-agricultural industry has slowed down remarkably. Ultimately, it will boost the Chinese economy towards quality development.  

Bridging the income or wealth gap, stimulating the social mobility, and seeking for more inclusive development. As revealed by the international practice, the shrink of income or wealth gap is a necessary condition for a country to make its way to the list of high-income countries. The expansion of income or wealth gap can be attributed to a number of reasons. Of these, some reasons like natural endowment, diligence and risk appetite are reasonable and conducive to the progress of the entire society. But some of them are unreasonable and harmful to the development of the society. Domestically, these reasons are mainly about undue taxations and charges, institutional deficiencies in protection of farmers' rights and interests, soaring housing prices in some cities, and profit seeking in breach of laws and regulations by some individuals. The report to the 19th National Congress put forth the feasible solutions to narrowing down the income gap from the three aspects: providing equal opportunity for all, improving the structure of primary income distribution, and bringing the government's function of adjusting redistribution into full play. As the country is convinced, the implementation of these measures and the introduction of better macroeconomic policies will make the relative prices of commodities and factors more equitable, and drive down the income or wealth gap to a comparatively acceptable range.  

Making improvement in environment and pursuing sustainable development. Fairly polluted environment has become a prominent concern that impacts the Chinese people's living standards. As the Chinese economy develops, the people demonstrate ever-growing needs for good environment. The measures taken to improve the quality of environment, including air, water and soil, will inevitably increase the cost of economic and social operation, and curb the investment activities or output increase in the high-polluting and high-emission industries. At the same time, they will also boost the economic growth, because the stringent environmental regulation can fuel the development and application of eco-friendly technologies and hence drive the related investment activities. According to some research findings, the turning point of the Environment Kuznets Curve has emerged in China. In future, economic growth and pollution discharge will become not necessarily correlated with each other any longer. As proposed in the report to the 19th National Congress, China will create a market-based system for green technology innovation, develop green finance, and spur the development of energy-saving and environmental protection industries as well as clean production and clean energy industries. It will promote a revolution in energy production and consumption, and build an energy sector that is clean, low-carbon, safe, and efficient. The steps China takes to fulfill these arrangements, develop a modernized economy that fully embodies the requirements of ecological civilization, and meet the people's needs for sound ecological environment are inherently essential for the country to move to the rank of high-income countries.  

Overall, the efforts to solve these structural problems won't hold back the development of the Chinese economy. Instead, they will create favorable technical, environmental and social conditions for its sustained development. More importantly, the structural objectives are not just the approaches to stimulating the economic growth. In essence, they are inevitable tasks for the Chinese economy to conquer for better development.  

Absolutely, even though China would cross the high-income threshold one day, it will find itself at the low end of the spectrum. Under such a circumstance, the country needs to draw upon others' lessons, and prevent itself from falling back to the upper middle-income level due to the strategic or policy errors. As an old Chinese saying goes, "When we row against the current, we must make headway or we'll be driven back." So China must work hard to make sure its economy can grow at a pace faster than other high-income counterparts. At the same time, it will also make its economic development more inclusive and environmentally sustainable, continue to upgrade technologies and industries, and catch up with those at the vanguard of technological development in the world.  

China's ascent to the rank of high-income countries means the proportion of the world population that live in the high-income economies will more than double to around 35% from the present 16%. By then, the 1-billion-plus Chinese population will see their living standards improved substantially. At the same time, they will bring larger market space and richer sources of technologies to the 5-billion-plus people who still reside in the low- and middle-income countries, and offer more Chinese experience to help them better manage their course of development. This will be a huge contribution China is to make to the entire mankind.  

(Author's affiliation: Peking University)


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