Nation must be alert to middle-income trap
Finance Minister Lou Jiwei’s warning that the country has a “greater-than-50-percent” chance of falling into the middle-income trap in the next five to 10 years sounded sensational because he is the first at that level to say so. But, unlike some pessimistic forecasts about the country’s economic prospects, Lou’s apparent raising of the alarm was meant to underscore the vital importance of honoring the promise of “all-round” reforms and maneuvering decent growth. The country may get stuck in the widely feared trap if it fails to do all the necessary homework properly, Lou said.
It may be too early to say whether or not China will beat the trap; the economy is still in the painful process of shifting gear, and the 7 percent growth can hardly be termed stagnation.
While properly defining the state of our economy is of particular significance in certain circumstances, the foremost imperative for China is to translate the talk about transforming and upgrading its economy into sensible action. It is tempting to underestimate troubles. But a sane mind is essential to make sure macro decision-making does not go awry at such a crucial juncture.
The prospects for our economy can be very bright; but a host of key preconditions have to be met. While stagnation can loom around the corner, the rising cost of labor is neutralizing the Made-in-China label’s comparative advantages against lower-income economies, and when it comes to high-tech, we are way behind developed economies.
Lou blamed the country’s high vulnerability to the middle-income trap largely on its rapidly aging population. But there are many more contributing factors, the most evident being weak domestic demand, unfair income distribution and subsequent wealth gap, as well as inadequate innovation capabilities and lack of pro-innovation institutions.
After consulting 50 Chinese scholars, a magazine affiliated to People’s Daily listed 10 common characteristics of countries caught in the middle-income trap: growth slowdown or stagnation, democracy induced chaos, wealth polarization, massive corruption, over-urbanization, shortage of public services, tight job market, social instability, loss of faith, and weak financial system.
We are not falling into the trap yet. But to avoid ending up there, plenty of changes must be made. And those changes cannot be made without “all-round” reforms.