Academic journal article World Review of Political Economy

A Marxist Approach of the Middle-Income Trap in China

Academic journal article World Review of Political Economy

A Marxist Approach of the Middle-Income Trap in China

Article excerpt

(ProQuest: ... denotes formulae omitted.)

I. Introduction

With a GDP growth of 7.8% in both 2012 and 2013, its lowest growth rate since 1999, China has undeniably been incurring an economic slowdown since the end of the 2000s (see Figure I). This turndown is often attributed to the international economic crisis, the trade dependence, and above all the weak global demand that may partially explain the fall in the export-to-GDP ratio (Zhu and Kotz 2011; Eichengreen, Park, and Shin 2011; Xing and Pradhananga 2013), down to 27% in 2013 against 39% in 2006. While in most cases the blame is put on external factors, it is also necessary to scrutinize the internal issues faced by China's economy, and the growing number of studies indicating that China is heading toward a middle-income trap (Woo 2012; Cai 2012; Eichengreen, Park, and Shin 2013) are the early signs of a real questioning about China's ability to sustain a growth level as high as it used to be over the last 30 years.

According to the middle-income trap theory that was first mentioned in a World Bank report dated 2007 (Indermit and Kharas 2007), emerging countries may indeed encounter a significant deceleration in their growth once they reach a certain level of per capita income, a level considered as "middle" by the World Bank, and estimated between US$1,036 (purchasing power parity [PPP]) and US$12,615 (2012 prices). Today, 86 countries, including China, belong to this income status, and according to this theory, it is very likely that only a few of them will reach an income level that can be viewed as high, that is, above US$12,616 (PPP). Since 1960, it is estimated that out of 101 "developing countries," only 14 have become "developed economies," that is, countries with high per capita incomes (Zhuang, Vandenberg, and Huang 2012).

China only became a middle-income country in 1992, and then an upper-middle-income country in 2009, with per capita incomes ranging from US$6,977 to US$12,615 (Felipe, Kumar, and Abdon 2010). Contrary to most studies on the middle-income trap, and instead of focusing on such forecasts that are merely supported by statistical assumptions, we shall thus try to better understand the reasons of this "middle-income trap" in the case of China, although the country has shown an average GDP growth of 10% over the last 30 years, and despite the fact that a brutal slowdown is still considered as most unlikely by a large number of economists.

In the first part of our article, we shall see how pay raises are often blamed for gradually threatening China's competitiveness and leading the country toward the middle-income trap. But in a second section, we shall highlight what in our opinion may be the main reason for this middle-income trap: the decline in capital productivity and the issues of technological catch-up. We shall first examine the various ways to interpret China's decline in capital productivity, to then focus on the explanation proposed by Karl Marx in the 19th century about the inevitable problems resulting from the accumulation process.

2. Increasing LaborCostsand Middle-IncomeTrap

2.1. Discussing the Lewis Turning Point in the Case of China

2.1.1. The Controversy over This Turning Point

In a paper dated 1968 (Lewis 1968), expert in development economics Arthur Lewis considered the eventuality that after providing a strong boost to investments thanks to low labor costs (Lewis 1954), surplus labor originating from the countryside would inevitably dry up in the long ran for countries that are beginning their industrialization process. Once this turning point has been reached, it would come together with an increase in labor costs generated by the growing expectations of urban workers: it would be the end of a dual economy whereby wages used to be determined by a weak productivity in the agricultural sector. For many economists, this turning point seems to be the main reason for the middle-income trap (X. …

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