The \”middle-income trap\” is the phenomenon that once an economy has made the big leap from being a lower-income country to being a middle-income country, then it may find it difficult (although not impossible) to make the next leap from being middle-income to high-income. Matthew Higgins considers the situation of China in \”China’s Growth Outlook: Is High-Income Status in Reach?\” (Federal Reserve Bank of New York, Economic Policy Review, October 2020, 26:4, pp. 68-97).
Higgins provides the basic backdrop for China\’s remarkable economic growth in the last four decades.
China’s growth performance has been remarkable following the introduction of economic reforms in the late 1970s. According to the official data, real GDP growth has averaged 9.0 percent since 1978. … Rapid economic growth has led to a similar increase in living standards, lifting China out of poverty and into middle-income status. According to official figures, real per capita income has risen by a factor of 25 since 1978. Annual per capita income now stands at about $16,100 measured at purchasing power parity, in “2011 international dollars.” … This places China at roughly the 60th percentile of the global income distribution, though still slightly below 30 percent of the U.S. level.
A first question, of course, is whether we really believe the official growth numbers, and the answer is \”not quite.\” One difficulty with huge growth numbers over sustained periods of time is that you can project backwards to what the original level of income must have been at the start of the process. Thus, if current Chinese real per capita income is $16,100, and the growth rate has been 9% for (say) 40 years, then the real per capita income for China would have been about $500 before the reforms started. As Higgins spells out the implication:
Indeed, real per capita income [in China] at the start of the decade [the 1980s] would have been below that of most countries in sub-Saharan Africa as well as neighbors such as Bangladesh, Laos, and Myanmar. Although China was clearly a poor country at the time, few would have rated it as one of the poorest. Such a ranking is also inconsistent with data on life expectancy, literacy, and other quality-of-life indicators. Growth rates from the Penn World Table, more plausibly, place China at roughly the 30th percentile of the global income distribution in the early 1980s, ahead of most countries in sub-Saharan Africa but still behind neighbors such as Indonesia, the Philippines, and Thailand.
For comparison, here are China\’s official growth rates and those from the Penn World Tables:
As you might expect, there\’s been an ongoing controversy for a couple of decades now over what numbers are most accurate, which I will sidestep here (although other papers in this issue of the Economic Policy Review do address them). I\’ll just point out that if you start adjusting numbers for one country, you need to adjust them for all countries, and when all is said and done, it remains true that China has had decades of extraordinary growth and has become a middle-income economy.
Our middle-income category includes countries with per capita incomes at 10 to 50 percent of the U.S. level (at current purchasing power parities); our high-income category includes anything above that. … Out of 124 countries, 52 qualified as middle-income in 1978 and 49 in 2018. Of the original cohort of 52 middle-income countries, just 8 had advanced to high-income status by 2018.
Of course, if China can maintain a 6% growth rate for the next few decades, it will keep catching up to high-income countries like the US, Japan, Canada, and nations of western Europe. But for most countries reaching middle-income status, sustaining such high growth rates for additional decades doesn\’t usually happen. For example, Higgins point out that after Japan had several decades of rapid growth and reached China\’s current level of per capita GDP back in 1976, Japan\’s growth rate steadily dropped over time, and has been at about 1% per year in recent decades. Or after South Korea had several decades of rapid growth and reached China\’s current level of per capita GDP back in 1994, its growth rate has steadily decline to less than 3% per year.
decline by about 12 percent over the next twenty years even as the total population rises
slightly.\” As the figure shows, the share of China\’ population that is working-age started declining af ew years ago: for other rapid-growth cases like Japan or the east Asian \”tiger\” economies, the working-age share of the population was still rising when they hit China\’s current level of per capita GDP.
- \”How Stable Is China’s Growth? Shedding Light on Sparse Data,\” by Hunter L. Clark, Jeffrey B. Dawson, and Maxim L. Pinkovskiy
- \”Alternative Indicators for Chinese Economic Activity Using Sparse PLS Regression,\” by Jan J. J. Groen and Michael Nattinger
- \”China\’s Growth Outlook: Is High-Income Status in Reach?\” by Matthew Higgins
- \”The Impact of Foreign Slowdown on the U.S. Economy: An Open Economy DSGE Perspective,\” by Ozge Akinci, Gianluca Benigno, and Paolo Pesenti