Academic journal article The European Journal of Comparative Economics

Structural Change and Mid-Income Trap-Under Which Conditions Can China Succeed in Moving towards Higher Income Status?

Academic journal article The European Journal of Comparative Economics

Structural Change and Mid-Income Trap-Under Which Conditions Can China Succeed in Moving towards Higher Income Status?

Article excerpt

1. China's Recent Development Success

China's development during the last three decades has been very successful and admirable. China was a very poor country in 1978 when it decided to reform its country towards a modern, more efficient economy. China's per capita GDP in purchasing power parity (PPP) terms was then lower than India's per capita GDP. It was only in 1992 that China overtook India in terms of GDP per capita. Since then, the country developed in an astonishingly quick and positive way. (3) The following summarizes progress from 1990 until 2014: (4)

* Real income (on a PPP basis) increased by more than 14 times.

* Real income per capita (on a PPP basis) increased nearly twelve-fold.

* Poverty headcount ratio declined significantly from 60.73 per cent in 1990 to 6.26 per cent in 2011.

* Number of poor at $1.25 a day (on a PPP basis) was reduced from 689 million to 84 million during the same period.

* In 2014, China represented 16.48 per cent of global GDP--more than four times as much as it did in 1990--making China the worldwide No. 1.

* Exports of goods increased by almost 2677 per cent from 1992-2014.

* Annual FDI flows to China grew from $2bn in 1985 to (an estimated) $127bn in 2013.

* The secondary gross school enrollment ratio rose from 37.77 per cent in 1990 to 88.98 per cent in 2012.

This shows: China is on its way to regaining its old strength. According to a study by Maddison, China was the world's largest economy in 1820, accounting for an estimated 32.9 per cent of global GDP. By 1952, China's share of global GDP had fallen to 5.2 per cent and by 1978 to 4.9 per cent. (5) Since then, China has started to reform and restructure its economy and to catch-up so that it has regained global economic power, and in 2014 it succeeded in becoming again the world's largest economy (see above).

Therefore, China has succeeded in developing from a very poor country in the 1970s/80s to a relatively rich mid-income country or Emerging Market Economy (EME) within an astonishingly short period of time. Of course, China can be proud of having reached this. Indeed many countries which were as poor as China was 30 years ago would be more than content with this development. But China is still 'hungry' and wants more, since it regards itself not as being any emerging economy country. China has a great history/past. It was in former times one of the richest countries in the world, not only absolutely but also in per capita measures. And it wants to reach this level again.

There are at least two understandings of a positive or successful future development for China, namely:

a) A rise in absolute wealth (or eradication of poverty) = a modest goal

b) Catching-up to Advanced Market Economies (AMEs) such as the USA in output/income per capita = an ambitious goal

China aims at reaching the ambitious goal b), and it wants to reach it as soon as possible. But, in order to reach b), a country has to overcome the mid-income range significantly and durably. That implies, in order not to stay caught in (or fall back to) the so-called 'mid-income trap' (MIT) (6), it has to undertake sustainable reforms. (7) According to the empirical literature, there are several factors of success (for escaping or avoiding the MIT). Eichengreen et al. (2013) show that growth slowdowns are less likely in countries with a high share of population with secondary and tertiary education and where high-technology products account for a large share of exports. Aiyar et al. (2013) identify several determinants such as institutions, demography, infrastructure, the macroeconomic environment, output structure and trade structure (among others).

2. The Challenge of Overcoming the Mid-Income Trap

Surpassing the mid-income range (MIR) or, catching up to advanced countries in income per capita, is a very ambitious goal, since many or most former developing countries which had reached a development level which is comparable to China's current development level, have failed to overcome this range and have stayed caught in this trap. …

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