Avoiding snares of conventional wisdom

[LI XIN/FOR CHINA DAILY]

Following reports of China's robust 8.1 percent economic growth in 2021, some Western analysts and commentators have returned to the frequently posed question: Can China avoid the middle-income trap?

On the surface, this question seems innocent enough, probing China's ability to become a high-income nation according to the World Bank's threshold, a feat that appears out of reach for many middle-income nations. On closer examination, however, one can see that the question embodies several threads of conventional wisdom that are not only theoretically dubious, but also practically harmful if taken too seriously.

The term "middle-income trap "first appeared in the World Bank's 2007 publication, An East Asian Renaissance, by economists Indermit Gill and Homi Kharas. In that book, the authors explored the economic potential of East and Southeast Asian countries in the context of historical development experiences around the world, and noted a common pattern: Many nations that had raised themselves successfully from low-income to middle-income status, primarily through the comparative advantage of low wages in basic manufacturing, were unable to make the necessary transition through enhanced economies of scale and technological innovation to compete with the products and services of high-income economies. Countries that appeared to be stuck in this intermediate phase for relatively long periods of time were viewed as victims of the aforementioned trap.

Since 2007, the idea of a middle-income trap has generated extensive economic and political discussion, as well as numerous articles in scholarly and policy-oriented publications. Conceptually, it is viewed by many economists as a type of suboptimal equilibrium in which the principal market players--government, domestic and foreign investors, corporations, labor, etc--are unable to find a sufficiently rewarding path away from the trap, even after accounting for the long-term benefits of high-income status.

In some cases, an economic equilibrium certainly may be considered a trap. For example, scenarios like the suboptimal solution to the well-known Prisoners' Dilemmain which two criminal partners, when questioned separately by police, both confess their crime as a means of reducing punishment--is a snare from which the prisoners cannot escape because there is no way to ensure each other's silence. However, as long as the major players in a nation's economy are able to communicate and enforce mutual agreements, they should be free to escape the middle-income trap.

Not surprisingly, most difficulties that arise in this context are attributable, at least in part, to political instability or cultural obstacles that interfere with the ability to make and keep agreements. In fact, many of the commonly cited victims of the middle-income trap have experienced considerable political turmoil over the years, either through a sequence of elected leaders with widely divergent economic views or more profound regime changes.

Perhaps the greatest practical danger of uncritical acceptance of the middle-income trap is its implied benchmark for economic success: gross national income per capita. Currently, the World Bank assigns countries whose GNIPC is less than or equal to $1,045 to the low-income group; those whose GNIPC lies between $1,045 and $12,696 to the middle-income group; and those whose GNIPC is greater than or equal to $12,696 to the high-income group.

Although relatively easy to compute, GNIPC is a crude, often misleading measure of national wealth. Defined as a simple average over a country's entire population, it is easily inflated by a small number of very rich individuals. Clearly, a better measure of a country's typical wealth is the median income, which--although not computed by the World Bank--should be the principal focus of analysts and policymakers concerned with economic development.

Given the above considerations, it appears that the question "Can China avoid the middle-income trap?" may be answered in more ways than one.

To be rigorous, we could say that the question is not well defined because no such trap exists. Clearly, as a major economic power with a stable political system and effective coordination of resources, China is extremely unlikely to become stuck in a suboptimal economic equilibrium. Furthermore, there is no urgency for the country to achieve a specified level of wealth within any predetermined time frame.

More pragmatically, it is worth noting that China's transition from a middle-income to high-income nation is likely to occur sometime within the next five years. This conclusion is supported by a number of economic indicators, most importantly: the country's sustained, approximately linear growth in GNIPC over the past two decades; and its domestic savings rate, which, like those of other high-income East Asian jurisdictions, is well above the world average.

Finally, it is important to keep in mind that the World Bank's definition of a high-income nation is not equivalent to a society enjoying "common prosperity". There are many high-income nations with large degrees of income inequality--most notably the United States, which stands out among the wealthiest--and one should not let excessive focus on the middle-income trap distract from that reality.

The author is the Zurich Group chair professor of finance at the School of Economics and Management at Tsinghua University. The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.