Can China avoid the middle-income trap?

China has achieved miraculous economic growth during the last 35 years with the average annual growth rate of roughly 9%. As the Chinese per capita income approaches $10,000 per person, however, there is a concern whether China can avoid the so-called ‘middle-income trap’. It means that the advantage of backwardness the Chinese economy has enjoyed so far has been exhausted, and China needs to find a way to achieve a self-sustainable growth path in the future.

Unfortunately, however, many developing countries after the World War Two have failed to escape the middle-income trap after they reach a certain level of income. Generally speaking, these countries have reached 30% level of the U.S. per capita income level successfully, but their catch-up processes have been stagnant afterward. These countries share common characteristics like the followings: lack of highly educated human capital, lack of self-innovation capability, high degree of income inequality, inefficient investment, heavy dependence on primary industry and/or failure to upgrade its industrial structure. Even though China does not share all of these characteristics, China still has problems such as rapidly aging population, deteriorating income distribution, and inefficient allocation of capital.

There are only handful number of countries who have escaped the middle-income trap successfully after the World War Two. They are Japan, Korea, Taiwan, Singapore, and Taiwan. These countries have passed the threshold of 30% of the U.S. per capita income level, and have reached 60 to 80% of the U.S. per capita income level. Out of these countries, however, Korea and Japan would be the only countries China can draw policy implications as the other three countries differ vastly from China in terms of its industrial structure and economic size. According to the Penn World Table, the Chinese per capita real income measured at ppp as of 2010 is approximately $7,100. Korea and Japan had similar level of income at 1985 and 1963 respectively. Therefore, China needs to bench-mark Korea and Japan around the late-1980s and mid-1960s, respectively, in order to draw policy lessons for the near future. This paper will find common features of the Korean economy in the late-1980s and Japanese economy in the mid-1960s, and will compare them to the presence of the Chinese economy. Also, this paper will review theoretical background of the middle-income trap, and will introduce existing literatures as well.