A Middle-Income Trap Only Few Could Overcome
GNI per capita has been used by the World Bank long ago for internal analysis purposes to reflect a country's level of development. During the late 1980s and early 1990s, the World Bank developed the methodology of categorizing economies into four categories based on the GNI per capita: LOW INCOME, LOW-MIDDLE INCOME, HIGH-MIDDLE INCOME & HIGH INCOME, publishing benchmarking figures and results every July. For these four categories, the GNI per capita in 2023 was $1,135; $4,465; $13,845 & above.
Among more than 200 economies under evaluation, China ranks 71 in terms of GNI per capita with $12,597 in 2023. As a single entry, there was no special alert for the year figures. The figures, however, raised concerns when compared with historical trends. Queries such as “Will China fall into the Middle-Income Trap?” surfaced as the gap bounced back to 2019 levels while 2022 was a stone's throw away from HIGH-INCOME status.
Year | 2019 | 2020 | 2021 | 2022 | 2023 |
HIGH-INCOME $ (World Bank) | 11,514 | 11,040 | 12,117 | 12,872 | 13,846 |
China ($) | 10,310 | 10,520 | 11,950 | 12,850 | 12,547 |
Gap to become High Income Economy % | 10.4% | 4.7% | 1.4% | 0.2% | 9.4% |
In 2007, the World Bank economists first proposed the concept of a middle-income trap. The finding showed that an emerging economy could have rapid growth from Low-Income to Middle-Income economy because they could benefit from comparative advantages such as low wages, basic technology catching up, low switching costs from low-productivity/low-profitability sectors to high-productivity/high-profitability sectors, etc. However, as time progressed, the strength of comparative advantages would wane and costs would increase, causing the GNI per capita to stagnate (or, in worst-case scenarios, fall). They are likely to be trapped in between, competing with Middle-Income economies dominating mature industries and High-Income economies dominating innovative, high-tech industries. In order to avoid or break through the Trap, a Middle-Income economy must seek out new growth sources. Only a few countries have successfully escaped the trap, according to research. For reference: South Korea, Taiwan, and Singapore spent 23, 27, & 29 years as Middle-Income economies before breaking through to become High-Income economies.
More Than 2 Decades As a MIDDLE-INCOME ECONOMY
With a GNI per capita of around $1,000 in 2001, China was classified as a LOW-MIDDLE INCOME economy. Since 2010, China has become one of the HIGH-MIDDLE INCOME economies, and GNI per capita has steadily increased and the gap between China and the World Bank’s definition of HIGH-INCOME has narrowed year by year.
The Middle Income Trap was first brought to the attention of policymakers as soon as China achieved the status of HIGH-MIDDLE INCOME in 2010. In 2012, Beijing University and the Asian Development Bank published a joint research paper that revealed the risks and challenges associated with escaping the trap, including: widening productivity and technological gaps; rising wages; imbalances in growth sources; increasing income inequality; natural resource and environmental constraints; and challenging external economic conditions.
In order for the state to fulfill its political and economic agendas, it was critical to move from the MIDDLE-INCOME ECONOMY to the HIGH-INCOME ECONOMY as soon as possible. Therefore, economic policies that leaders have made and presented in the last two decades are always evidently influenced by addressing the challenges mentioned above directly and indirectly. Despite this, although some policies eased the pressure of these risks, many remained fundamental issues for the Chinese economy. Moreover, economic policymakers need to address new challenges recently: an aging population, real estate bubbles popping, and heavy municipal debts. Pessimistic critics believe China has already entered the Middle Income Trap, while those who are optimistic believe China still has the potential to break through and reach the HIGH-INCOME classification.
New Productive Forces: Slogan or New Solution?
News media found that President Xi used a new term “New Productive Forces ” (新质生产力 “Xin Zhi Sheng Chan Li” in Chinese) during his opening speech at the People’s Congress held in early March this year. Chinese official news agency Xinhua reported in September last year that President Xi first used the term “New Productive Forces” in a speech during a visit and inspection tour of the North East region: a major hub of traditional heavy industry. Before the official term in English was released, it was called “New Quality Productive.” Xi has mentioned in his speech that “With innovation leading, New Productive Forces included any advanced productivity freed from tradition economic growth models. It features high technology, high efficiency, and high quality and align the country's new development philosophy”. The Agency further elaborated that New Productive Forces emerge from continuous breakthroughs in science and technology, driving strategic futures and emerging industries that may introduce disruptive technology advancements in an era of intelligent information.
It was unclear what industry segments the "New Productive Forces" would focus on, but in his annual report to the same People's Congress in March, Premier Li Qiang mentioned the nation's strong support for developing sectors and industries, such as Electric Vehicles, New Materials, Commercial Aerospace, Quantum Technology, and Life Sciences. According to the media, this echoed President Xi's initiative and these segments would receive high priorities for resource allocation. Since "New Productive Forces" is a new term, many state-owned enterprises and local municipalities have expanded the concept to any area that fits. The new concept has the advantage of benefitting many segments, but the Christmas Tree Effect would kick in sooner or later as a con. In addition, some worried that no detailed plan had been launched and no answers to 6W1H had been provided.
It’s All About Domestic Consumption Boosting
A major source of China's income was derived from exports of manufactured products. Approximately 20 years after the Open Door Policy was launched, the country's GNI grew rapidly, and it shifted from a low-income economy to a middle-income economy. In order to reach the upper bound of the MIDDLE-INCOME ECONOMY group, the country spent another 25 years.
Recently, China has been accused by the US and EU of dumped Chinese products into their territories due to overcapacity; tariffs and other trade barriers have been imposed and very likely further measures are in the pipeline. Besides exploring other potential markets, boosting domestic consumption would also play an important role in maintaining the nation's income. The desire to consume domestically is highly influenced by factors such as improving purchasing power and reducing lifetime uncertainty. Consumption power is determined by disposable income and lifetime uncertainty, as reflected in a person's confidence in welfare and social security programs. There may be a need for policymakers to focus on how to unleash these two aspects' potential. This objective will be addressed with more policies and guidance in the upcoming months.
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