Will China fall into the 'middle income trap'?

Updated: 2011-04-09 14:46
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BEIJING -- The middle income trap encountered by some South American and Southeast Asian nations has become a great concern for China, as its gross domestic product (GDP) per capita last year topped $4,000 after decades of dynamic growth.

However, experts maintain that the country will manage to avoid the trap if the government directs the transformation of its economy toward a more sustainable path.

History shows that while many countries have been able to transition from low to middle income, relatively few have carried on to high income.

Countries, including Argentina, the Philippines and Malaysia, have been stuck in this type of dilemma when heading toward becoming high income nations, a situation the World Bank refers to as "middle income trap."

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China's economy has maintained a strong momentum since the beginning of its reform and opening up policy in 1978. Data shows that its GDP per capita has grown from a merely $155 in 1978 to more than $4,000 in 2010.

However, the galloping economy has been accompanied by side effects like wide income inequality, relatively weak domestic demand and high environmental costs.

Wang Jun, a researcher with the China Center for International Economic Exchanges, a governmental think tank, said the key to avoiding the middle income trap is to accelerate the transformation of China's economy into a more sustainable pattern.

China's economic growth has been largely dependent on exports and investments, especially government investments, as the driving forces, whereas domestic consumption is seriously weak, said Wang.

"Due to inadequate domestic spending, our service sector is much weaker than developed economies'," Wang said.

To avoid the potential trap, the government should raise people's incomes and improve its social security nets to boost domestic demands, while also ensuring relatively fast economic growth in a sustainable way, according to Wang.

Zhou Tianyong, a professor with the Party School of the Communist Party of China Central Committee, echoed Wang's views, saying that the government had realized the problems with its economy and adopted measures addressing them.

In the country's 12th Five-Year Plan (2011-2015) for National Economic and Social Development, China sets the target for annual GDP growth at 7 percent, while aiming for an annual income growth of more than 7 percent.

"This is the first time that China has aimed at keeping residents' income increases in pace with its GDP growth, underlining its resolve to let all people share the benefits of development," said Zhou.

However, what matters more are the concrete measures taken by governments at all levels to reform the country's income distribution system, and there is still a long road ahead, he said.

Wang Jun told Xinhua that the government should establish relevant mechanisms to raise the proportion of residents' income in the GDP.

"If people feel confident about spending, they will be willing to consume more. The country has to boost domestic consumption to drive growth in the future," Wang said.

Wang believes that China is capable of achieving relatively fast growth as it boasts the world's largest consumer market.

"China's urbanization process will continue for at least another 20 to 30 years. There is great potential for further growth with the hikes of final consumption rate," Wang said.

Wang also said that China should encourage innovation and let innovation lead its economic growth, instead of just being the world's factory and market.

This coincides with the views of Martin Wolf, associate editor and chief economics commentator of the Financial Times.

"The danger of China falling into the middle income trap is quite small, but if that's going to be avoided, the aim for China over the next two or three decades is going to have to be very rapid increases in fundamental productivity and innovation," Wolf said in November at the annual Globalization and Economic Policy Center conference in Ningbo, east China's Zhejiang Province.

The Chinese government has made it clear in the 12th Five-Year Plan that technological advancement and innovation should be a significant pillar in accelerating the transformation of its economic development pattern.