I am fascinated by the “Middle-Income Trap,” particularly as it applies to China. The Middle Income Trap is used to describe a developing economy that stalls out after a period of rapid growth before it becomes a developed economy. My shorthand view of it is that it is relatively easy to go from being an extremely undeveloped country to becoming an emerging market company simply through dint of super low wages. The much tougher thing to do is to go from an emerging market economy to a developed one because doing that requires way more than being just a low cost provider of labor.
It is not yet clear to me whether China will be able to make the big leap to developed nation status or not. I wrote about this early last year in Will China Escape The Middle Income Trap?:
To me, the most important question is whether China will have what it takes to surmount the middle income trap.
I was on a panel this past weekend at the Wharton China Forum 2012 and while there I had the opportunity to listen to a great lecture by world-renowned economist, Augusto Lopez-Claros. I asked Professor Lopez-Claros whether he thought China would be one of the rare countries that breaks through the middle income trap and his answer was a resounding “it’s possible.” He then went on to note how only five countries have really done that and become developed: South Korea, Japan, Singapore, Hong Kong and Chile. I’m not even sure Singapore and Hong Kong are even large enough to count. I am not prepared to say that China will not be able to burst through the middle income trap, but I will say that I think those who just assume that it will are ignoring all sorts of things.
Will China ever become a developed country? If you think it will, what do you think China has that that will enable it to do so? Conversely, if you think it will not, please explain why you think that.
The Wall Street Journal’s Real Time China Blog just came out with a post, entitled, Four Ways Asia Can Avoid the ‘Middle-Income Trap’ setting out what Asia’s emerging economies (“defined by the International Monetary Fund as China, India, Indonesia, Malaysia, the Philippines, Thailand and Vietnam) must do to avoid getting “trapped.” The post is based on an IMF report that came out earlier this week in which IMF economists suggest four ways to avoid that”:
- Invest in infrastructure. IMF analysis suggests that subpar infrastructure is a key factor that can check an emerging economy’s growth. India, the Philippines and Thailand are particularly exposed in this area and should focus on building new and upgrading existing public transit systems, freight channels, ports and energy infrastructure.
- Guard against excessive capital inflows. Money flows from abroad can energize an economy and give domestic consumption a boost, but can send an economy south if investors retreat in a hurry. Policy makers should have macro-prudential controls in place to mitigate potential rapid outflows, the IMF said.
- Boost spending on research and development and post-secondary education. Both are needed to foster the innovation that’s a hallmark of advanced economies. Malaysia and Thailand have the highest college enrollment rates among emerging Asian economies, but China is rapidly catching up, according to IMF data. China far outstrips other developing Asian countries on R&D, with 2009 spending at more than 1.5% of GDP.
- Get more women into the workforce and raise the retirement age. Aging populations are a problem in much of Asia. Governments can take steps to reduce “dependency ratios” by raising the age when workers are eligible for pensions and encouraging girls to enter university and vocational training.
It is an interesting list, but I wonder how predictive it really is. If it is accurate, my sense is that China will do quite well over the next 50 years. But is it accurate? Are these four things really enough? And is China doing a good job with the above four things? What about economic reform? What about rule of law? What about IP protection? What about innovation? What do you think?