Will China Stumble Into The Middle-income Trap?

What is the Middle-income Trap? Middle income-trap identifies the situation where developing countries manage to move out of low-income position to reach middle-income position; however, getting there once, these countries have a problem to move up to the high-income bracket. From the chart Conspicuously, although in the 1960s, these national countries had an identical degree of income per capita, half of a century later, only South Korea, Hong Kong, and Greece have safely secured the high-income status.

For the other middle-income countries, not only do their overall per capita earnings stagnated, but their per capita incomes relative to the United States’ also languished. WHAT CAN CAUSE the Middle-income Trap? As low-income countries start their economies to integrate into the global market, traders from developed countries swarm directly into invest in these countries to take advantage of the reduced labor costs and abundant natural resources. The foreign-invested capitals give low-income economies a much-needed initial boost to develop their economies, build-up basic infrastructure, and improve their people’s living specifications. The neo-classical growth models produced by Solow (1956), Koopmans (1965) hypothesize convergence property.

These characteristics established countries apart, and those fail to acquire these features will finish up losing their development momentum of catching up and remain in their income bracket. In the article “Will income inequality result in a middle-income trap in Asia?” Akio Egawa used a cross-country empirical method to analyze the partnership between income inequality and the chance of tumbling into the middle-income snare. Hence, it is unsurprising that Taiwan and South Korea are two of the few countries that were able to get away from the middle-income trap and join the league of high-income countries.

Since China initiated its strong economic reform and applied market-opening policies at the start of the 1980s, the country’s overall economy has made incredible progresses, making it the next largest one in the global world. In 2014, its GDP reached USD 10.3 trillion, rating 2nd after the United States, but its GDP predicated on purchasing power parity exceeded that of the United States actually, ranking 1st in the world.

The country’s growth rate over the period from 1990 to 2010 averaged 10%/season, and development rate has continued to be above 7% for everyone years. China’s economic growth is driven by capital accumulation, labor accumulation, factor reallocation, and “catch up” mechanism representing by exchanges of knowledge and technology. Other factors detailing China’s development include high-keeping rate, low inflation rate, trade, and export openness, increased foreign direct investment and a low exchange rate.

In your opinion, will China fall in to the middle-income trap? See results Will China Stumble into the Middle-income Trap? Within this context of Chinese financial slowdown, the question arises whether China manages to flee the trap or meets the same fate that befell many other fellow middle-income countries. One-point value noticing is that income rate in China increased progressively, averaging 23%/calendar year over the period of 2004 – 2014, and workers in China began to demand higher benefit and wages and better working conditions.

Real wage development has outpaced development in labor efficiency. Consequently, some traders started transferring their investment out of China to invest in less expensive countries such as neighboring ASEAN countries, Bangladesh, and even African countries. Next, income inequality is increasing in China. China’s Gini coefficient, a commonly-used measure of income inequality has risen sharply within the last three years, from 29.11 in 1981 to 46.9 in 2014, among the most unequal countries in the global world.

The financial reform process in China benefited certain political elite group and state-owned businesses, giving these groups priority over usage of politics power and market, and thus resulting in large state – private sector wage disparity. Furthermore, the Chinese government’s developmental policies also favored some regions like the coastal provinces, while the interior provinces and mountainous areas received little attention and preferential treatment.

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Moreover, income inequality between your rural and urban areas was also pronounced. If the Chinese government had not been in a position to address this issue, income inequality can lead to massive internal migration within the country, resource under-utilization, and misallocation, and social unrest. Finally, as China’s overall economy expanded and its own people’s income grew, concerns about China’s institutions and development models were elevated more frequently. The greater developed a country becomes, the more freedom it requires to force its development through changes, innovation, and knowledge.

In the first stage of catching up, stimulating development was in the eye of the ruling elite. However, in the long run, the ruling elite might want to discourage further growth by halting growth-stimulating procedures for concern with dropping their privileges. Consequently, Chinese hybrid financial model might become an obstacle to China’s further financial growth, trapping the national country in its current middle-income position.