Pay rise doesn't necessarily hinder growth

A Chinese scholar has sparked a fierce public debate by saying that the rapid pay rise will hinder China's economic growth. The remark and the subsequent debate are suggestive of a big problem China is facing: the middle-income trap.

The middle-income trap is a phenomenon that occurs in countries whose economic growth relies on cheap labor to produce goods for exports. With increase in wages, these countries lose their cost-based competitiveness. The countries ultimately fall into the trap if the wage levels increase beyond the critical point before they manage to transform the economic development model - and their products cease to be cheap for the global market and they cannot find any higher value-added alternative.

The trap occurs roughly when a country's per capita GDP is between $6,000 and $10,000, a point at which economic development falters and per capita GDP tends to flatten. China has reached such a point in its development cycle. So, what can it do to avoid the trap?