Ways Round the Middle Income Trap

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

Country	Growth Phase in Transition	Y/cap_PPP at Start	Y/cap_PPP at End	Time in Years	Growth p.a. in Transition
Cyprus	1994-2004	15,002	23,736	10	4.8
Czech Republic	2000-2007	14,960	24,279	7	7.2
Finland	1988-2000	14,920	24,441	12	4.2
Greece	1995-2004	14,957	24,059	9	5.4
Hong Kong SAR	1988-1996	15,044	23,354	8	6.0
Iceland	1986-1997	15,694	23,157	11	3.6
Ireland	1993-1998	14,934	23,520	5	9.5
Israel	1993-2005	15,097	24,222	12	4.0
Korea	1999-2005	14,964	22,783	6	7.3
New Zealand	1994-2004	15631	23,813	10	4.3
Portugal	1997-2008	15,574	23,093	11	3.6
Singapore	1989-1994	15,603	23,976	5	9.0
Slovenia	1998-2005	15,412	23,388	7	6.1
Spain	1991-2001	15,027	23,421	10	4.5
Sweden	1987-1998	15,722	23,468	11	3.7
Taipei, China	1995-2004	15,067	24,942	9	5.8

Source: http://www.imf.org/external/pubs/ft/weo/2011/01/weodata/

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.

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