China: Overcoming the Middle-Income Trap with Structural Reforms

China: Overcoming the Middle-Income Trap with Structural Reforms
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According to the World Bank, China is an upper-middle-income country. However, only structural reforms will allow China to surpass the middle-income trap.
According to a recent report by the Chinese Academy of Social Sciences (CASS), China has entered the ranks of the so-called “upper-middle-income” countries. It has triggered a fair amount of interest among those Chinese who are concerned for the middle-income trap; that is, a status quo in which a country attains a certain level of income but gets stuck at that level.
While most observers agree that the pace of transformation has been extraordinary in China, many remain concerned about increasing wealth and income inequality. Others point to to successful industrialization in East Asia – from Japan to South Korea – arguing that improving social welfare will be critical to to avoid the middle-income trap.
These viewpoints are not mutually exclusive. Together, they drive the rebalancing of the Chinese economy and the associated new urbanization and industrial upgrading that seeks to overcome the middle-income trap in the next 10-15 years. But why do many countries get stuck in the trap?

Elusive categories
Actually, China has been among the so-called upper-middle-income countries for a few years. The CASS report relies on the World Bank classification, which groups economies based on gross national income (GNI) per capita. Based on the bank’s method, that generates four categories:
– low-income economies ($1,025 or less)
– lower middle-income economies ($1,026-$4,035)
– upper middle-income economies ($4,036-$12,475)
– high-income economies ($12,476 or more).
In the early days of economic reforms, China was still in the low-income group, which even today features countries, such as Senegal, Haiti, and Afghanistan. In 2008, after decades of investment and export-led growth, China joined the ranks of the lower-middle-income countries, which now include Tunisia, El Salvador, Sri Lanka and the Philippines.
According to CASS, Chinese per capita GDP is currently $8,016 (52,000 yuan). In effect, China joined the ranks of the upper middle-income countries around 2012. As a result, Chinese living standards are approaching those of Turkey, Brazil and Southern Europe. However, these findings should be taken with a grain of salt.
Today’s advanced economies industrialized in the late 19th and early 20th centuries. So they have enjoyed the benefits of wealth and income for a long while. In China and other emerging economies, prosperity is still very new – and thus far, far more fragile.

Potential is not reality
Just because an economy has great potential does not always mean that this promise will be delivered. And yet, that’s what my good acquaintance Goldman Sachs’ Jim O’Neill, who created the ‘BRIC’ concept in the early 2000s, seemed to imply. While O’Neill did wonderful work in promoting emerging economies, analysts focus on abstract data rather than real life.
If the theory had been valid, we would continue to see solid economic progress in China, India, Brazil and Russia – not to speak of the mini-BRICs, such as Nigeria, Saudi Arabia, Indonesia, Iran, Pakistan and so on.
Yet, the reality is that we don’t. The emerging and developing countries have always relied on diverse sources of industrial advantages. Before the global crisis, those BRIC economies that relied excessively on their natural resources enjoyed high growth as long as the prices of oil, gas and commodities continued to soar. Conversely, with the end of the ‘commodities super-cycle,’ the very same nations have taken heavy hits.
What’s worrisome, even if economies diversify their industrial structures and get their policies right, external constraints – including sanctions by Western nations – effectively undermine the benefits of modernization.
In many cases, their economic woes have been compounded by geopolitics and the new Cold War, including the US-EU sanctions against Russia, Washington’s tacit support for the ‘soft coup’ in Brazil, the spread of Boko Haram in and from Nigeria, and huge destabilization across the Middle East.

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History matters
It is for these reasons that I have argued, for more than a decade, that the hopes associated with some BRIC economies or mini-BRICs will prove inflated. It was misguiding in the early 2000s to project glorious futures for economies that relied excessively on resource- and commodity-driven growth.
There’s nothing new in this. In 1960, Ghana and South Korea were at similar starting-points and the conventional wisdom was Ghana would inevitably evolve faster than South Korea. Today, GDP per capita in South Korea is $36,600 but below $4,300 in Ghana. What really matters in economic development is not just industrialization but how it actually materializes.
Once, when I met the legendary investor Jim Rogers and we talked about the future of emerging economies, he referred to some BRIC analysts as “number crunchers.” It sounded pejorative but, while Rogers is a commodity expert, he started his career as a gifted historian and knows only too well that numbers without history and context are hollow.
In this regard, China is better positioned to overcome the middle-income trap with a more diversified industrial structure, as long as regional rebalancing can proceed and the external environment remains peaceful.
However, it does not follow that all, or even most emerging economies can follow in the footprints. Success requires structural reforms.

Dr Dan Steinbock is Guest Fellow of Shanghai Institutes for International Studies (SIIS). This commentary is based on his SIIS project on “China and the multipolar world economy.” For more about SIIS, see ; and Dr Steinbock, see

A slightly shorter version of the commentary was published by China Daily on November 4, 2016

Dr Steinbock is an internationally recognized expert of the multipolar world. He focuses on international business, international relations, investment and risk among the major advanced economies and large emerging economies; as well as multipolar trends in stocks, currencies, commodities, etc. Altogether, he analyzes some 40 major world economies and a dozen strategic nations, across all world regions.His commentaries are released regularly by major media in all world regions (see Dr Steinbock is CEO and founder of DifferenceGroup (for more, see In addition to advisory activities, he is affiliated as Research Director of International Business at India China and America Institute, and as Visiting Fellow in Shanghai Institutes for International Studies SIIS (China) and EU Center (Singapore). As a Senior Fulbright scholar, he is affiliated with Stern/NYU, Columbia Graduate School of Business and has cooperated with Harvard Business School. He has advised/consulted for the OECD, the European Commission, the Nordic Council and European government agencies, multinationals and SMEs, financial institutions, competitiveness and innovation organizations, and so on.
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