Surpassing middle income trap a great challenge for China

He Jun

In the process of moving towards developed countries, developing countries inevitably would go through the phase of middle income traps. With China’s economic growth and rising national wealth, the nation attempts to bypass the middle income trap to become a developed country.

In the process of moving towards developed countries, developing countries inevitably would go through the phase of middle income traps. With China’s economic growth and rising national wealth, the nation attempts to bypass the middle income trap to become a developed country. This has also become China’s national development goal. China stated in the 19th National Congress that on the basis of building a well off society, its next development should be carried out in two phases.

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The first phase is from 2020 to 2035, where basic socialist modernisation will be realised. The second phase from 2035 to the middle of this century, China will become a strong, democratic, civilised socialist modern power. Although the 19th National Congress did not mention China becoming a developed country, the nomenclature “modern power” actually implies this goal.

There are different views on whether China can bypass the middle-income trap. In 2010, such issue was raised in China, and has caused much heated discussions. Former Finance Minister Lou Jiwei once analysed that if no reform is done, a possible pessimistic scenario is that China has 50 percent probability of falling into the middle-income trap. Therefore, it is only through structural reforms, increasing labour productivity, and total factor productivity which would get China out of the middle-income trap. When talking about the Chinese economy, Nobel laureate in economic science Michael Spence said China is surpassing the middle income trap and it needs to continue its structural reform for further development. If China wants to overcome the middle income trap, it needs a higher level of human capital. It also needs the government to invest in science and technology or support investment in these areas, and achieve higher levels of innovation.

Chinese state-owned entrepreneurs are more optimistic about the middle income trap than scholars. At the summer Davos in Dalian last July, Ning Gaoning, Sinochem Group chairman, optimistically said the middle-income trap is not mentioned much now, and that China has surpassed it.

He believed that the Chinese economy has gone through the industrialisation that has not been seen in Chinese history or in other developing countries. After entering the phase of industrialisation, the development of China’s economy is no longer linked to environmental pollution, high energy consumption, and low labour costs, but is closely connected to technology and becomes a research and development drive.

Many Chinese enterprises are pursuing industrial progress, technological advancement, and pursuing product competitiveness. They are putting themselves in comparison with other best companies in the world. These factors have made China surpassing the middle-income trap.

So can China bypass the middle-income trap?

In 2018, China’s GDP reached 90.03 trillion yuan, according to the average exchange rate of the yuan (6.6174 yuan to $1), a total of about $13.6 trillion, with the GDP per capita reached about $9780 (Chinese National Bureau of Statistics reveals that its per capita national income has reached $9,732, which is higher than the average of middle-income countries). The International Monetary Fund states that China’s GDP per capita was $9,630 in 2018.

Regardless of that, if measured by GDP per capita or by the Human Development Index (HDI), China is a middle-income economy.

But World Bank data reveals that China is an “upper middle-income economy” ($3,976 to $12,275 per capita). The statistics last year show that China is still a middle-income economy and has not surpassed the middle-income stage.

In relation to the issue of bypassing the middle-income trap, the decision-making authorities in China appear to be more direct in their understanding in this matter, and are more objective as well, compared with the academic scholars.

On November 10, 2014, when President Xi Jinping attended the meeting between APEC leaders and representatives of the Business Advisory Council in Beijing, he said China will surpass the “middle-income trap”. The key questions are when, and how can China be better developed. The thing is, China is able to balance between reform, development, structural adjustment, steady growth and stability.

Xi’s statement highlights two piece information. One is that China is still in the middle-income trap stage, though it will definitely surpass that in the future. Two, even if China surpasses the middle-income trap, there will be problems in future development.

This means that even after the surpass there will be more challenges. This differs from what some scholars have said that even in high-income levels there could very well be a trap of stagnation.

As an independent think tank, Anbound’s researchers believe that one should not underestimate the difficulty for China to surpass the middle-income trap. Historically, many countries in the world have tried to bypass the “middle-income trap”, but most have failed. Countries that have been able to grow past the middle-income trap after the World War II are rare. Technically, there are 11 countries (Equatorial Guinea, Greece, Ireland, Israel, Japan, Mauritius, Portugal, Spain, Puerto Rico, Singapore, South Korea) that have entered the ranks of high-income economies, but most of them are not stable in their subsequent performance. There are only four countries that are stable high-income countries, they are Japan, Israel, Singapore and South Korea. After more than half a century of efforts in development, hundreds of other countries around the world are still unable to bypass the middle-income trap. Even if some countries are lucky enough to temporarily escape it, they would soon fall into the trap again.

Studies show that countries that have successfully escaped the middle-income trap have one common feature, there is a lot of technology transfer and technology absorption occurring in the process of surpassing the middle-income trap, and the resulting high-end industrial upgrading. It is worth noting that the four high income nations are beneficiaries of the US technology transfer.

If China seeks to overcome the middle-income trap, it will be hard for the country to avoid the process of absorbing technology and upgrading its industry. Overcoming the middle-income trap will not be easy for China, and there are several factors to consider.

Firstly, the growth rate of income per capita is slowing down. According to World Bank, high income nations should have an average income per capita of $12,000. If China maintains its growth rate as that in 2017, it will enter the ranks of world high-income countries around 2022. But as China’s economy slows down, it will take longer to reach the target. If we take into account the national income distribution structure in the Chinese economy, it may take longer to reach the target.

Secondly, China’s technological upgrading has not gone smoothly. Technological upgrading is an indispensable key condition for a country to become a developed country. The technological gap between China and developed countries is quite large, and it will not be easy to catch up with the higher level and support the economy with advanced sciences and technologies. This is especially true with the rising tide of anti-globalisation, as well as the trade and technological war initiated by the US against China, it is more difficult for China to obtain technology transfer.

Thirdly, China needs sustainable and effective institutional reform. Economic development and technological progress ultimately depend on institutional arrangements, especially after the fading of all kinds of dividend factors, new development impetus often comes from institutional reform. Objectively speaking, China’s market-oriented reforms still lag behind.

In conclusion, China’s development is advancing to surpass the middle-income trap, but to achieve this goal, China still faces many challenges, such as sustained economic growth, continuous technological progress, institutional reform, and the gap between rich and poor.

If these challenges are not managed, it would be extremely difficult for China to surpass the middle-income trap in order to reach the level of a developed country.

He Jun is a master in the Institute for the History of Natural Sciences, Chinese Academy of Sciences, majoring in intellectual history of science and is a senior researcher at Anbound Consulting, an independent think tank with headquarters in Beijing. Established in 1993, Anbound specialises in public policy research

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