Looking Ahead: China Becoming a High-Income Economy

Nearly four decades of reform and opening-up shows that China is one of the few successful cases of development. First, sustained high growth became a reality in China. China’s GNP grew by 32.19 times from 1978 to 2016 at constant prices, that is, an annual increase of 9.6%, of which the annual GDP growth hit 9.9% and 7.8% from 1978 to 2010 (high-speed growth) and from 2011 to 2016 (moderately high-speed growth) respectively on average.

Will China Fall into the “Middle Income Trap”?

As the 2008 financial crisis unfurled with its impact on global trade and economy, China also saw a transition. The country’s high (even super high) speed growth, which peaked at 14.2% in 2007, slackened to medium-to-high growth, thus entering the new normal era of economic development. In response, international organizations such as the International Monetary Fund and the World Bank began to adjust downward projections of Chinese economic growth. In some international media, the prevailing sentiment toward China’s economic development was one of pessimism.

How Did China Overcome the “Poverty Trap”?

Throughout the development cycle of a country, major tasks and challenges may arise during various stages of development and the possibility of a period of stagnation exists in each stage. In the low-income stage, anemic economic growth, lagging human development, political instability and social unrest often lead to a vicious cycle in national development. For instance, many countries in Africa have so far failed to fight poverty effectively and remain mired in the “poverty trap”. In the middle-income stage, many countries fall into the “middle income trap”. Even if countries succeed in overcoming the “middle income trap”, their economic growth may still be plagued by the “high income trap”, with Japan being one such example.

How Can China Overcome the “Middle Income Trap”?

Whether a country can overcome the “middle income trap” is a test of its governance capability. The above comparative analysis of the practices in various countries shows that tackling the “middle income trap” is only possible when certain conditions are met, which may be summarized as follows.

What Is the “Middle Income Trap”?

In 2007, Indermit Gill and Homi Kharas (2007), two World Bank economists, published a report titled An East Asian Renaissance: Ideas for Economic Growth, which suggested that East Asia would soon develop into a middle-income region and proposed the concept of the “middle income trap”. It should be noted that the report did not provide an in-depth interpretation of the concept, nor did it offer a clear income range for the “middle income trap”. In 2011, Homi Kharas and Harinder Kohli (2011) further elaborated on the concept, specifying that when a country escapes the poverty trap in the low-income development stage and enters into the middle-income development phase, the country may face growth stagnation and inability to further move up the ladder into the high-income range.