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Chi on China: China’s Growth Beyond the Middle-Income Trap

Regional perspectives

Chi LO
 

We know what we are, but know not what we may be - William Shakespeare   Summary China could avoid falling into the middle-income trap if it could break the economic constraints of population, capital and productivity on growth.  But can it realistically do that and what will it look like in the post-middle-income environment? Consumption-led growth and industrial upgrading will be two of the key emerging themes for China’s structural change story in the next 30 years when President Xi Jinping’s “Chinese Dream” is supposed to yield some tangible results. The structural switch from quantity to quality growth has just begun.  The ultimate question is who will benefit from China’s transition to a high-income, high-tech and consumption-led economy from being the world’s factory?

China’s annual GDP growth has fallen from double-digit rates between 1980 and 2012 to around 7% since President Xi Jinping took office in 2013.  Growth is now expected to fall below 6% in the coming years.  This declining trend seems to vindicate warnings of the dreaded middle-income trap – the tendency of fast-growing developing economies to revert to a much weaker growth trajectory, and stagnate when per capita income approaches the upper bound of the middle-income range between USD6,000 and USD12,000 a year, according to the World Bank.  China’s per capita income in 2018 was already USD10,200.

Economic growth is a function of the two factors of production – labour/population and capital – and a residual factor – productivity.  When a country’s grows towards its production possibility frontier (PPF)[1] which defines the size of the economy, diminishing marginal returns set in (Chart 1).  If there is no growth in productivity, overall economic growth will stagnant and eventually decline.

 

[1] A production possibility frontier is a curve that shows all the possible combinations of output for two products that can be produced using all factors of production, where the given resources are fully and efficiently utilised.

 

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