CHina is haunted By the ghost of the “middle-income trap”, the notion that emerging economies grow rapidly out of poverty only gets stuck before they become rich. In 2016, Chinese Premier Li Keqiang said, “Over the next five years, we must take special care not to fall into the trap of middle-income earners.” The then Chinese Finance Minister Lu Jiwei once created the possibility of trapping China. At 50%.
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The trap was named by two economists, Homi Kharas and Indermit Gill, in 2006, when they were both at the World Bank. This raises an obvious question: what counts as middle income and what will qualify to exceed it? Mr. Kharas and Mr. Gill adopted the bank’s own income classification. These were established in 1989 when the bank drew a line separating the high-income countries from the rest. The line had to accommodate all countries then considered “industrial market economies”. It was drawn in 1987 at the current price of $ 6,000 per capita, which is low enough to include Ireland and Spain. That line is now 12,695. It grows step by step with weighted average of prices and exchange rates in five major economies: America, Britain, China, Eurozone and Japan. 80 countries met this quarter in 2020, three less than the previous year. The epidemic has sent Mauritius, Panama and Romania into the middle zone.
Despite the fears of its leaders, or perhaps because of them, China is now on track to become a high-income country by this definition (see chart). Based on Goldman Sachs’ recently available forecast, we calculate that China may cross the line next year, partly with its strong currency. (This transformation will not be officially announced until mid-2024, when the World Bank will update its classification based on previous year’s data.) If we are right, 2022, the year of the tiger, could be China’s last year as a medium. Country of income. After that it would be a fat cat.
Thresholds, of course, are arbitrary. Several countries (including Argentina, Russia and even Venezuela) have surpassed it in recent years simply for Flanders or failure. Long-term escape from the middle-income trap requires more fundamental change. Countries in this middle stage of development may face various losses. They may lose capital. They usually run out of workers to move away from farming. And they must invest heavily in education, following the instructions of a factory hand outside of elementary education. The real test for a high-income country is how well it copes with such threats to its growth. How is China doing on these three issues?
China is still accumulating capital at a rapid pace. It has invested 43% of it GDP Five years before the epidemic. High-income countries average half that percentage. But China’s high investment rates are probably not as fruitless as is often thought. Its investment is as high as the value of rich countries, so it does GDP Growth rate. In fact, the ratio between the output’s share of investment and its growth rate (sometimes called the increased capital-output ratio, or ICOR) Still looks favorable compared to high-income countries.
What about other sources of growth? In the annual check-up of the Chinese economy, published on January 28, IMF Concerned neo-hippies and their global warming, i’ll tell ya. It has blamed this relaxation on structural reforms, especially the “stagnation” of state-owned enterprises. “Market dynamics have recently lost steam,” it argued. But such productivity is notoriously difficult to measure. And according to a gauge from the conference board, a business group, it is growing significantly faster in China than in high-income countries (see chart).
The pattern of employment in China is still clearly different from that of the more affluent countries. Surprisingly, perhaps, its share of the workforce in construction is lower than the high-income average. The percentage is higher in production (19% than the 13% average) and the share in agriculture is still much higher – about 25% above the 3% higher income average. From one point of view, this remaining rural workforce is a cause for optimism. If China could achieve a higher level of income by keeping one-fourth of its workers engaged in agriculture, imagine what it would do to escape to more productive employment? However, the concern is that these workers did not leave the farm because they could not. Perhaps they do not want to lose their claim to communal land. Or perhaps they are too old or too educated to take advantage of better opportunities in the cities.
China’s human capital reserves are a real concern. According to its latest census, the average adult population in 2020 was 9.9 years of schooling. This would bring down the pile of high-income countries, with an average of 11.5 years, according to Harvard and Robert Barrow, Jung-wa Lee of the University of Korea.
High income trap
This problem can only be corrected one at a time. China’s senior citizens grew up in many poor countries and were educated accordingly. According to the World Bank, children entering the Chinese school system now can expect 13.1 years of education. Standards still don’t match quantity: Based on how well children score on standardized tests, 13-year-olds in China are less than ten years old in a country like Singapore, the bank calculates. Still, things have improved.
The “stock” of human capital reflects China’s poor past, but the “flow” of investment in new human capital is more appropriate for a high-income future. The problem is that this costly investment of money and time is preventing parents from having children, a demographic stagnation that sadly characterizes many rich parts of the world. Last year, China’s population grew by just 0.03%. In Japan’s experience, an aging, declining population could contribute to depressing spending, low growth and low interest rates. Chinese policymakers now have to think of a different kind of trap. 3
Read more from the Free Exchange column:
Quantitative austerity is not a substitute for high interest rates (January 29)
Economists revise their views on robots and jobs (January 22)
Will remote work be stuck after the epidemic? (January 15)
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This article was published in the Finance and Economics section of the print edition under the title “High States”.