Can China avoid the middle-income trap?
China's economic development is the success story of recent decades, but the growth of the Chinese economy has lost momentum in the past few years. Such a slowdown is a normal phenomenon as a country becomes richer, and the question is therefore whether China can maintain its rapid convergence towards the advanced countries’ standard of living, or, in other words, whether China can avoid what is known as the “middle-income trap”.
The concept of the “middle-income trap” originated from the observation that a number of countries remained in the middle-income category for a long period on the basis of their GDP per capita, and did not join the group of rich, advanced countries. This shows that the transition from a middle-income country to a high-income country is much more difficult than the first development phase from low- to middle-income country. The underlying reason is that the initial development strategy based on labour-intensive production and the attraction of foreign technologies and capital runs out of steam after a while, whereas the new growth strategy, driven by productivity gains, is often difficult to establish.
Apart from the normal growth slowdown that accompanies economic convergence, correction of the unbalanced composition of expenditure and production, high debt levels and rapid population ageing will depress China’s future growth. Measures are necessary to avoid a financial crisis and curb the accumulation of additional debts, without jeopardising the growth potential. The challenge consists in finding the right balance in which rebalancing goes hand in hand with industrial upgrading. Demographic trends are also working to China’s disadvantage: never before has a country had to contend with population ageing at such an early stage of economic development.
Nonetheless, in other respects China has a sound basis for achieving future growth driven by productivity gains, such as its specialisation in relatively sophisticated export products, a modern infrastructure and substantial investment in human capital and R&D. The technological upgrading of the Chinese economy also opens up new opportunities. The strategy adopted aims at a continued growth of Chinese high-tech exports, on-shoring, the acquisition of technologies abroad via outward foreign direct investment, and the establishment of a domestic innovation policy. However, each of these strategies has its limitations: protectionist responses to a further growth of Chinese exports, legal restrictions (in the United States and a number of European countries) on the purchase of technology in strategic sectors by Chinese State-aided enterprises, and potential institutional obstacles concerning innovation.
In view of the many uncertainties, it is hard to say for sure whether China will avoid the middle-income trap. The authors conclude that their analyse allows to be cautiously optimistic on that score.