Fallacy of the middle-income trap

China expected to complete transition to high-income country by 2025

In the past decade, the concept of the middle-income trap has attracted wide attention from economists, media, government officials, international organizations and even the general public worldwide.

If there are any traps in economic development, low income or poverty will no doubt be one of them. For the majority of the three million years of human history, people lived in poverty - except for a few wealthy ones - due to low economic growth rates and barely changing incomes.

It was not until the Industrial Revolution took place in the later half of the 18th century that there was an accelerated growth rate in some countries and regions.

In 1827, the Netherlands became the first country to cross over the low-income threshold to become a low-and middle-income country. In the half century afterward, the United Kingdom (1845), Australia (1851), Belgium (1854), New Zealand (1860), the United States (1860), Switzerland (1868), Uruguay (1870), Denmark (1872), France (1874), Germany (1874) and Austria (1876) joined the low-and middle-income club, one after the other.

Is there really such a thing as a middle-income trap? When reviewing the past journey traveled by the developed countries in the West, it is seemingly fair to say that the developed countries in the West all struggled to complete the transition from being middle-income to high-income for nearly a century or even longer.

However, their experience may not be applicable to emerging economies, at least not universally.

In an article published in Foreign Affairs in 2004, Geoffrey Garret, an Australian expert who was teaching in the United States, proposed that middle-income countries could neither race ahead of rich countries through technology, not could they compete with poor countries in offering low prices.

To support his point of view, Garret sorted the world's countries into three groupings - low, middle and high income - based on per capita income in 1980, and calculated their respective growth by 2000. The results suggested that the per capita income would increase by roughly 50 percent in high-income economies, 160 percent in low-income economies, but less than 20 percent in the middle-income economies.

In 2007, in a report titled An Eastern Asian Renaissance: Ideas for Economic Growth, two World Bank researchers cited Garret's article and used the term "middle-income trap" for the first time. The concept became popular several years later.

In fact, neither Garret nor the World Bank report referred to the word "trap" in a strict sense. The former never used the word at all, and the authors of the World Bank report, in an article 10 years later, explained that what they meant was that middle-income countries may enter a stagnant growth stage, not that they were more likely to fall into a growth trap compared with low-income and high-income countries.

So why did these researchers pay special attention to the middle-income economies? The reason can be partly ascribed to the lack of satisfactory theory to explain middle-income economies. By contrast, we have the Slow Growth Model to help understand low-income economies and the Endogenous Growth Theory for high-income economies. That's why the authors of the 2007 World Bank report said 10 years later that the middle-income trap was more an "ignorance trap".

When the People's Republic of China was founded in 1949, it was one of the poorest countries in the world. After 50 years' effort, in 1999 more than 700 million people had been lifted out of poverty and China became a low-and middle-income country, according to World Bank statistics. Since then, all we have heard is warnings that China will be caught in the middle-income trap.

On one hand, China does face a multitude of challenges in transforming from being a middle-income country to high-income country. On the other hand, China has the capability to deal with the various challenges.

This confidence is firmly grounded upon solid statistics. According to World Bank standards, China only spent 12 years in the low-and middle-income stage before it strode toward the next stage of middle-and high-income.

Although China's growth rate slowed down a bit in recent years, it still maintains a medium-high growth momentum. So we have every confidence that it will take China less than 15 years to become a high-income country. In other words, this transition should be accomplished by 2025.

Therefore, when it comes to China, the middle-income trap is a fallacy.

The author is professor of Tsinghua University and professor emeritus of Chinese University of Hong Kong. The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.

(China Daily 02/18/2019 page13)