Struc­tural re­form to beat mid­dle-in­come trap

China is bet­ter po­si­tioned to over­come the mid­dle-in­come trap with a more di­ver­si­fied in­dus­trial struc­ture ...

China Daily (USA) - - VIEWS -

To­day China is seen as an “upper-mid­dle-in­come” coun­try. But only struc­tural re­forms will al­low it to avoid the mid­dle-in­come trap. A re­cent report by the Chi­nese Academy of So­cial Sciences says China has en­tered the ranks of the “upper-mid­dle-in­come” coun­tries. While most ob­servers agree the pace of trans­for­ma­tion has been ex­tra­or­di­nary in China, many re­main con­cerned about in­creas­ing wealth and in­come inequal­ity. Oth­ers point to suc­cess­ful in­dus­tri­al­iza­tion in East Asia— from Ja­pan to the Repub­lic of Korea— ar­gu­ing that im­prov­ing so­cial wel­fare will be crit­i­cal to avoid­ing the mid­dle-in­come trap.

These view­points are not mu­tu­ally ex­clu­sive. To­gether, they drive the re­bal­anc­ing of the Chi­nese econ­omy, and the as­so­ci­ated new ur­ban­iza­tion and in­dus­trial up­grad­ing that seeks to over­come the mid­dle-in­come trap in the next 10 to 15 years. But why do many coun­tries get stuck in the trap?

China has been a so-called upper-mid­dle-in­come coun­try for a fewyears. The CASS report re­lies on the­World Bank clas­si­fi­ca­tion, which groups economies based on gross na­tional in­come (GNI) per capita. Based on the­World Bank’s method, it groups coun­tries to four cat­e­gories: low-in­come economies ($1,025 or less); lower mid­dle-in­come economies ($1,026$4,035); upper mid­dle-in­come economies ($4,036-$12,475); and high-in­come economies ($12,476 or more).

In the early days of eco­nomic re­form, China was in the low-in­come group. In 2008, af­ter decades of in­vest­ment and ex­port-led growth, China joined the ranks of the lower-mid­dle-in­come coun­tries.

Ac­cord­ing to the CASS, China’s per capita GDP is cur­rently $8,016 (52,000 yuan). In ef­fect, China joined the ranks of the upper mid­dle-in­come coun­tries around 2012. As a re­sult, liv­ing stan­dards in China are ap­proach­ing those in Turkey, Brazil and South­ern Eu­rope. But these find­ings should be taken with a grain of salt.

To­day’s ad­vanced economies in­dus­tri­al­ized in the late 19th and early 20th cen­turies. So they have en­joyed the ben­e­fits of wealth and in­come for a long time. In China and other emerg­ing economies, pros­per­ity is still new— and thus far, far more frag­ile.

Just be­cause an econ­omy has great po­ten­tial does not al­ways mean that this prom­ise will be de­liv­ered. And yet that’s what Gold­man Sachs’ JimO’Neill, who cre­ated the “BRIC” con­cept in the early 2000s, seemed to im­ply. While O’Neill did won­der­ful work in pro­mot­ing emerg­ing economies, an­a­lysts fo­cus on ab­stract data rather than real life.

If the the­ory had been valid, we would con­tinue to see solid eco­nomic progress in China, In­dia, Brazil and Rus­sia.

But the re­al­ity is that we don’t. The emerg­ing and de­vel­op­ing economies have al­ways re­lied on di­verse sources of in­dus­trial ad­van­tages. Be­fore the global cri­sis, those BRIC economies that re­lied ex­ces­sively on their nat­u­ral re­sources en­joyed high growth as long as the prices of oil, gas and com­modi­ties con­tin­ued to soar. Con­versely, with the end of the “com­modi­ties su­per-cy­cle”, the very same economies have taken heavy hits.

What’s wor­ri­some, even though economies di­ver­sify their in­dus­trial struc­tures and get their poli­cies right, ex­ter­nal con­straints— in­clud­ing sanc­tions byWestern na­tions— ef­fec­tively un­der­mine the ben­e­fits of mod­ern­iza­tion.

It is for these rea­sons that I have ar­gued, for more than a decade, that the hopes as­so­ci­ated with some BRIC economies will prove in­flated. It was mis­guid­ing in the early 2000s to project glo­ri­ous fu­tures for economies that re­lied ex­ces­sively on re­source- and com­mod­ity-driven growth.

What re­ally mat­ters in eco­nomic de­vel­op­ment is not only in­dus­tri­al­iza­tion but how it ac­tu­ally ma­te­ri­al­izes. Once, when Imet the le­gendary in­vestor JimRogers and we talked about the fu­ture of emerg­ing economies, he re­ferred to some BRIC an­a­lysts as “num­ber crunch­ers.” It sounded pe­jo­ra­tive but, while Rogers is a com­mod­ity ex­pert, he started his ca­reer as a his­to­rian and knows too well that num­bers with­out his­tory and con­text are hol­low.

In this re­gard, China is bet­ter po­si­tioned to over­come the mid­dle-in­come trap with a more di­ver­si­fied in­dus­trial struc­ture, as long as re­gional re­bal­anc­ing can pro­ceed and the ex­ter­nal en­vi­ron­ment re­mains peace­ful.

How­ever, it does not fol­low that all, or even most emerg­ing economies can fol­low in the foot­prints. Suc­cess re­quires struc­tural re­forms. The au­thor is a guest fel­low at Shang­hai In­sti­tutes for In­ter­na­tional Stud­ies (SIIS), and founder of Dif­fer­ence Group. This com­men­tary is based on his SIIS project on “China and the mul­ti­po­lar world econ­omy”.

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