China's authorities are deeply worried at this stage about future growth prospects, labour-absorbing growth being the main legitimiser of the party's ongoing rule. The specific concern is that its rapid growth will soon slow down considerably and be trapped at middle income levels, as many in Arab, Latin American countries before, but also recently in Malaysia or Thailand. So I recently went the long way to the subtropical island of Hainan to give a keynote speech and debate at a policy panel at the conference "Surmounting Middle Income Trap - China in the Next Decade", International Forum on China Reform, organised by China Institute for Economic Reform (CIRD), with GIZ and UNDP participation, inter alia.
I learned that Chinese experts see the current state of China's economy and development very critically (indeed, in stark contrast to most foreign conference participants). Capital waste and overinvestment, speculation of policy bank funds on the real estate market rather than on innovation, high curb rates for nonpriviledged borrowers such as SMEs, or the distribution scramble for land use and other resources were often cited examples of structural failures that were adding to the current cyclical headwinds. China's growth has so far been fueled by capital accumulation and dual-sector shifts, but this could end eventually as the country's saving rates is 1/2 of its income and as the young-age cohorts in the rural hinterland – the potential migrants to the urban high-productivity sectors - run thin, not least as a result of the one-child policy.
Prominent economists are fanning China’s growth concerns. The new buzz word is “Middle Income Trap”. Eichengreen and co-authors[i], for example, produce evidence to suggest that rapidly growing economies slow down significantly, in the sense that the growth rate downshifts by at least 2 percentage points, when their per capita incomes reach around $17,000 US in year-2005 constant international prices, a level that China should achieve by or soon after 2015. But a look at the data would seem to suggest that escaping the “middle income trap” has not been a rare event recently.
Transitions from Middle-Income to Advanced-Country Levels
Hong Kong SAR
I have produced a table for all advanced countries (in the IMF WEO 2011 definition) that from 1980 went from middle income to advanced country status. The transition threshold is defined as in Foxley and Sossdorf[ii] for countries with a per capita income in terms of PPP (purchasing power parity) below $15,000 from 1980 as reaching a per capita income of the last country awarded that category by the International Monetary Fund (IMF)—Portugal, with a per capita income of $23,000 in 2008.
The table has sixteen economies that found ways around the middle income trap over the last thirty years, none of them in Latin America or the Midle East. The majority of the countries belong to Europe and/or are (now) OECD members, so they are members of at least one of the two (Beta-)Convergence Clubs that the world has (cough, had?). While - except during the 2000s - poorer countries did not grow faster on a global scale, they did when they belonged to either of the two convergence clubs. Some Asian countries did not need to be club member to make the transition, however.
The transition period and the transition speed has varied considerably among the sixteen countries, from five years to eleven, and from 3.6% to 9.5% per annum. The IMF estimates China to enter the transition threshold of ca $15,000_PPP/capita by 2015 or 2016. Despite the need to switch gradually to a new growth model, China has enough momentum to grow further, albeit at lower rates. My table suggests that China will enter the group of advanced countries as defined by the IMF between 2020 and 2027.
[i] Eichengreen, Park and Shin (2011), “When Fast Growing Economies Slow Down: International Evidence and Implications for China”, NBER Working Paper 16919.
[ii] Foxley and Sossdorf (2011), “Making the Transition: From Middle-Income to Advanced Economies”, The Carnegie Papers.