The Middle-Income Trap

27 Feb

Despite its unprecedented economic growth China is still classed as a middle-income-country. This classification has come from China’s GNI per capita being $8500 whereas the threshold for a high income country is $12,616. It is uncertain as to when or if China will achieve the transition to a high income country and join the likes of Germany and the USA.  

Often countries find the step from being a low-income-country to a middle-income-country easier and more achievable than the subsequent step, as illustrated by China. The abundance of low cost labour, a large population, access to imported technologies and a transfer from low to high productivity agriculture propelled high growth and rapid development, as did joining the World Trade Organisation. However, these are things that can only happen once which is why the second transition to a high income country is more of a challenge.

Furthermore, as China continues to develop wages are likely to increase which may have implications for businesses choosing to locate within the region. China will also need to continue to decrease inequality and improve standards of living, especially in rural areas. Achieving this will allow China to improve its HDI ranking where, due to being ranked 101, it is trapped within the medium development classification and currently behind even some developing countries.

In order to achieve the transition economists have said there must be improvements in the quality of the labor, which essentially means improving education. This will allow China to maintain high rates of growth through technical innovation and a more skilled labor force.

References:

http://europe.chinadaily.com.cn/business/2013-07/30/content_16851878.htm

http://www.worldbank.org/content/dam/Worldbank/document/China-2030-overview.pdf

http://hdr.undp.org/en/countries/profiles/CHN

 

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