Will China fall into the 'middle income trap'?

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(Xinhua)
Updated: 2011-04-09 14:46

BEIJING -- The middle income trap encountered by some South American and Southeast Asian nations has become a great concern for China, as its gross domestic product (GDP) per capita last year topped $4,000 after decades of dynamic growth.

However, experts maintain that the country will manage to avoid the trap if the government directs the transformation of its economy toward a more sustainable path.

History shows that while many countries have been able to transition from low to middle income, relatively few have carried on to high income.

Countries, including Argentina, the Philippines and Malaysia, have been stuck in this type of dilemma when heading toward becoming high income nations, a situation the World Bank refers to as "middle income trap."
China's economy has maintained a strong momentum since the beginning of its reform and opening up policy in 1978. Data shows that its GDP per capita has grown from a merely $155 in 1978 to more than $4,000 in 2010.

However, the galloping economy has been accompanied by side effects like wide income inequality, relatively weak domestic demand and high environmental costs.

Wang Jun, a researcher with the China Center for International Economic Exchanges, a governmental think tank, said the key to avoiding the middle income trap is to accelerate the transformation of China's economy into a more sustainable pattern.

China's economic growth has been largely dependent on exports and investments, especially government investments, as the driving forces, whereas domestic consumption is seriously weak, said Wang.
"Due to inadequate domestic spending, our service sector is much weaker than developed economies'," Wang said.

To avoid the potential trap, the government should raise people's incomes and improve its social security nets to boost domestic demands, while also ensuring relatively fast economic growth in a sustainable way, according to Wang.

Zhou Tianyong, a professor with the Party School of the Communist Party of China Central Committee, echoed Wang's views, saying that the government had realized the problems with its economy and adopted measures addressing them.

In the country's 12th Five-Year Plan (2011-2015) for National Economic and Social Development, China sets the target for annual GDP growth at 7 percent, while aiming for an annual income growth of more than 7 percent.

"This is the first time that China has aimed at keeping residents' income increases in pace with its GDP growth, underlining its resolve to let all people share the benefits of development," said Zhou.

However, what matters more are the concrete measures taken by governments at all levels to reform the country's income distribution system, and there is still a long road ahead, he said.

Wang Jun told Xinhua that the government should establish relevant mechanisms to raise the proportion of residents' income in the GDP.

"If people feel confident about spending, they will be willing to consume more. The country has to boost domestic consumption to drive growth in the future," Wang said.

"Due to inadequate domestic spending, our service sector is much weaker than developed economies'," Wang said.

To avoid the potential trap, the government should raise people's incomes and improve its social security nets to boost domestic demands, while also ensuring relatively fast economic growth in a sustainable way, according to Wang.

Zhou Tianyong, a professor with the Party School of the Communist Party of China Central Committee, echoed Wang's views, saying that the government had realized the problems with its economy and adopted measures addressing them.

In the country's 12th Five-Year Plan (2011-2015) for National Economic and Social Development, China sets the target for annual GDP growth at 7 percent, while aiming for an annual income growth of more than 7 percent.

"This is the first time that China has aimed at keeping residents' income increases in pace with its GDP growth, underlining its resolve to let all people share the benefits of development," said Zhou.

However, what matters more are the concrete measures taken by governments at all levels to reform the country's income distribution system, and there is still a long road ahead, he said.

Wang Jun told Xinhua that the government should establish relevant mechanisms to raise the proportion of residents' income in the GDP.

"If people feel confident about spending, they will be willing to consume more. The country has to boost domestic consumption to drive growth in the future," Wang said.

platozy

"If people feel confident about spending, they will be willing to consume more. The country has to boost domestic consumption to drive growth in the future," Wang said.


If you allow greedy developers and property billionaires to push up housing prices which take out a big portion of an average person income, how do you encourage people to spend more ?

GoChina888

The key to make the transition successfully is to increase the average quality of population levels and this can only be achieved through the massification of education.

We must have a working mass more educated, and a distribution of national income in a more equitable so we can have a large middle class.

Due to the size of its population, I think China can still successfully continue to be the great export machine of the planet, ranging from low-end products till the high-end ones, these last due to the well educated people that at same time can be the people who will burst the internal consumption

Everynowhere

The key to make the transition successfully is to increase the average quality of population levels and this can only be achieved through the massification of education.

I don't quite agree on this. Education isn't key - it's only a mean. Most important is that China becomes inventive and even more innovative.
This includes opening up financial markets, allow junk bonds, foster venture capitalists and improve the knowledge exchange between the private sector and universities. But most important of all: teach Chinese students management skills. And this is exactly the point which I doubt China can master in the next 30 years:
Chinese students are tought knowledge - they're tought learning by heart, but they never really have to work in teams, found associations and fight for their interests. In contrary, if they do, they're not "guai" and will be blamed.

So here my theory:
If China wants to grow bigger than the USA or Europe, it will have to shift away from being the work bench of the EU and the US. But if it wants to do so, it must become innovative itself. To be innovative, people with new ideas and (!) the skills to put these ideas into reality and sell them are needed.

There are certainly enough people in China with new ideas. If you educate people, they will also get more new ideas - even if they're just learning by heart. Some even build prototypes - but that's it. There are various examples here - just listen around on your campus...

Only very few of these new ideas are really put into reality, only a few are really built. But even if they're built, most of them won't penetrate the market because they either don't fit the market or they aren't produced efficient enough. An example here would be the BYD F3DM or the stilt-bus in Beijing.

So only if skilled managers pick up those ideas that are put into reality, there might be a market penetration and really bring money. The only example I see here would be the BYD F3DM in the future, if BYD really manages to sell it to private individuals (I'd surly buy it, if they'd offer it in Europe - it's the perfect car for driving around in the city, e.g. from my appartment to my uni). But currently, I don't know any Chinese innovation that is really making money...

So the question should be:
How can China educate more managers? It already has enough inventors.

My answer to this (and this is just my personal opinion - I'm not a specialist in this field):
Give pupils more freedom. They should be able to plan their days more freely without preassure from either the parents or the teachers on one hand and have the ability to found small organisations or associations to develop organizational skills on the other hand.

Another solution I see is intercultural exchange:
While China is lacking managers due to its education system, Europe and the US are lacking experts. Bring Chinese experts and western managers together and you'll get your innovations at a very fast pace - and lots of development for the whole world.
But politicians in both, China and the west, won't be willing to do that... so I have little hope that this will be employed on a large scale. In addition, there is still the language barrier which is stopping westerns and Chinese from communicating... so there's still a lot to do.

GoChina888

I don't quite agree on this. Education isn't key - it's only a mean. Most important is that China becomes inventive and even more innovative.
This includes opening up financial markets, allow junk bonds, foster venture capitalists and improve the knowledge exchange between the private sector and universities. But most important of all: teach Chinese students management skills. And this is exactly the point which I doubt China can master in the next 30 years:
Chinese students are tought knowledge - they're tought learning by heart, but they never really have to work in teams, found associations and fight for their interests. In contrary, if they do, they're not "guai" and will be blamed.

If you spend a little time to read about the past's several examples of countries and their peoples feats, you'll realize that all of them were driven to their pinnacle by their mastery in the possible knowledge of their eras.
Well, actually it's another way to express education in the sense of schooling, or instruction, anyway.
And I can be more specific: a country that searches for being strong must master science, such as math, for example. You mentioned creativity. In what sense? Like Gates, Steve Jobs and their gadgets? You accredited them to creativity? : Creativity without their knowledge of science?  
Ok. Respect your viewpoint but I do not agree. If I could make a wish to a rubbed genius of a lamp, I’d tell to master all science of my time. :
Amid so many data about China, one that really made me is the the figure of Chinese majoring in science but I still hope for the increase in these figures. If I were a government deputy office in education issues I’d even push for the raise in the budget for the education. A country in which the illiteracy rate can be represented by a trace in charts
And a legion of mathematicians, physicists, engineers,…wow…make the Western intelligentsia gnawing their nails

Give pupils more freedom.

I guess you are one more strayed western here…you are welcome.
I’d not broaden the discussion about freedom for not hampering the focus, so keeping in the sense about pupils and freedom related to education matters. And about the matter I'd invoke the Ford's famous phrase about car's color that summarize my idea: "Any color you like, so long as it's black"

greendragon

Rubbish!

cheerios!

Green DRagon
Game Grandmaster

Everynowhere

You accredited them to creativity? : Creativity without their knowledge of science?  

Sure - every single person in this world is at least a little creative - this is what makes us human. And Steve Jobs is making a huge amount of money with his gadgets - so he must be doing a few things right and giving people what they want.

But what I am saying is not that scientific education isn't necessary - what I am saying is that management skills are ALSO needed, if you want to turn knowledge into innovation and ulitmately, wealth.

Of course, until maybe 50 years ago, a single person could invent something new and change the world. But nowadays, science is so advanced that you need teams of specialists - and these teams must work together efficiently.

So what I am saying is: China isn't lacking specialists (look at the low salaries Chinese specialists have - even Idian ones are better off) - but it's lacking managers who organize those specialists so new innovations can be made. In the west, at least in Europe, we have right the opposite problem: we have got those managers and the organizations already, but because our population is not so big, we're lacking physicists, engineers, economists, mathematicians, computer scientists and many other scientists.

That's also why I'm thinking that globalization just begun - and still has much more chances to improve this world, when those scientists in China and India get into organizations that allow them to entirely use their knowledge and creativity in teams to create innovation.
But because of the migration restrictions in our world, this also means that China needs to educate people who can set up organizations in which academians can turn their expertise into innovation.