What is the Middle-income Trap? Middle income-trap identifies the situation where developing countries manage to re-locate of low-income status to reach middle-income position; however, getting there once, these countries have a problem to go to the high-income bracket up. Conspicuously from the chart, although in the 1960s, these countries had an identical level of income per capita, half a century later, only South Korea, Hong Kong and Greece have safely secured the high-income status.
For the other middle-income countries, not only do their overall per capita incomes stagnated, but their per capita earnings in accordance with the United States’ also languished. WHAT CAN CAUSE the Middle-income Trap? As low-income countries start their economies to combine into the global market, traders from developed countries swarm in to invest in these countries to consider advantage of the reduced labor costs and abundant natural resources. The foreign-invested capitals give low-income economies a much-needed initial boost to grow their economies, build up basic infrastructure and enhance their people’s living criteria. The neo-classical growth models produced by Solow (1956), Koopmans (1965) hypothesize convergence property.
These characteristics established countries apart, and those neglect to acquire these features will finish up losing their development momentum of catching up and stay in their income bracket. In this article “Will income inequality result in a middle-income snare in Asia? ” Akio Egawa utilized a cross-country empirical method of analyze the partnership between income inequality and the risk of tumbling into the middle-income trap. Hence, it is unsurprising that Taiwan and South Korea are two of the few countries that were able to escape the middle-income snare and join the group of high-income countries.
Since China initiated its strong economic reform and implemented market-opening policies at the start of the 1980s, the country’s economy has made remarkable progresses, making it the second largest one in the world. In 2014, its GDP reached USD 10.3 trillion, ranking 2nd following the United States, but its GDP predicated on purchasing power parity exceeded that of the United States actually, rating 1st in the world.
The country’s growth rate over the period from 1990 – 2010 averaged 10%/year, and development rate has remained above 7% for all years. China’s economic growth is driven by capital accumulation, labor deposition, factor reallocation, and “catch up” system representing by exchanges of knowledge and technology. Other factors explaining China’s development include high saving rate, low inflation rate, export and trade openness, increased foreign direct investment and low exchange rate.
In your opinion, will China fall in to the middle-income trap? See results shall China Stumble in to the Middle-income Snare? Within this context of Chinese financial slowdown, the question arises whether China manages to flee the trap or meets the same fate that befell many other fellow middle-income countries. One point well worth realizing is that wage rate in China gradually increased, averaging 23%/yr over the time of 2004 – 2014, and employees in China started to demand higher benefit and wages and better working conditions.
Real wage growth has outpaced development in labor efficiency. Consequently, some investors started transferring their investment out of China to purchase less expensive countries such as neighboring ASEAN countries, Bangladesh and African countries even. Next, income inequality is on the rise in China. China’s Gini coefficient, a commonly-used measure of income inequality has increased sharply over the past three years, from 29.11 in 1981 to 46.9 in 2014, being among the most unequal countries in the world.
The financial reform process in China benefited certain political elite group and state-owned companies, giving these organizations priority over usage of political power and market and thus resulting in large state – private sector income disparity. In addition, Chinese government’s developmental policies favored some regions like the coastal provinces also, as the interior provinces and mountainous areas received little attention and preferential treatment.
- 01-07-2019, 08:12 PM #88
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Moreover, income inequality between your rural and cities was also pronounced. If Chinese government had not been able to address this problem, income inequality can lead to massive internal migration within the country, resource misallocation and under-utilization, and social unrest. Lastly, as China’s economy expanded and its people’s income grew, concerns about China’s institutions and development models were elevated more frequently. The more developed a national country becomes, the more freedom it needs to power its growth through changes, knowledge and innovation.
In the early stage of getting up, stimulating development was in the interest of the ruling elite. However, in the long run, the ruling elite might want to discourage further growth by halting growth-stimulating guidelines for fear of losing their privileges. Consequently, Chinese hybrid economic model might become an obstacle to China’s further economic growth, trapping the country in its current middle-income position.