Cross-posted from Investing in Chinese Stocks.
China would need to royally screw up its economy in order to get stuck in the middle income trap. History and the performance of Taiwan show China will certainly become a high income country. The path may or may not be straight, but the destination is not in doubt unless new leaders decide Maoism and policies such as the Great Leap Forward will work better next time.
US scholar says China will not get stuck in middle income trap:
China’s per capita income is currently about one quarter of the US, when it reaches half this level, its growth rate is likely to drop to a “lower new normal,” Sachs added.
“You need to make breakthroughs in innovation-based economy, which is not simply using technology from outside,” Sachs said, adding that the transition was as much dependent on structural transition to quality growth.
“Don’t expect 7% growth to be permanent. This is gradually decreasing,” the professor said, adding that other countries that had not been able to maintain such a growth level have been caught in the middle income trap.
A paper from the Asian Development Bank also favors an optimistic view: The Middle-Income Transition around the Globe: Characteristics of Graduation and Slowdown
Corroborating evidence: Taiwan, South Korea, Hong Kong, Singapore and Japan made it into the high income countries. China would be the outlier of East Asia if it failed to reach high income status.
At least one Chinese economist, who also happens to be the finance minister, isn’t entirely optimistic though. Lou Jiwei thinks China has better than 50% odds of sliding into the middle income trap over the next 5 to 10 years due to demographics: the rapidly aging population will cause China to grow old before it grows rich.
Lou proposes 5 policies to avoid the trap.
1. End agricultural subsidies and encourage imports. Chinese are always worried about war and losing access to food, but the bigger worry is wasting human capital in agriculture.
2. Hukou reform to allow for greater mobility. Government should help the transition by subsidizing social expenses.
3. Labor reform. Companies and individuals should make their own decisions, instead of labor unions or industry groups.
4. Land reform. Government should allow rural areas to decide how land is developed and money from land sales is spent.
5. Social security reform. Cut social insurance rates and create a new system of “pay more, get more.”
While Lou believes China will avoid the middle income trap, he said the largest problem at the moment is deleveraging. He said leverage ratios cannot move higher, otherwise when the crisis breaks out, it will be uncontrollable.
iFeng: 财政部部长：中国有50%以上可能滑入中等收入陷阱
