Excerpt from a paper by Israel Malkin and Mark M. Spiegel at the Federal Reserve Bank of San Francisco. The two believe that China’s richest provinces, Beijing and Shanghai, are experiencing a slow-down in GDP growth (per capita) as they experience a classic middle-income trap, while China’s poorer provinces continue to experience high GDP growth rates.
What evidence exists for middle-income traps in a group of Asian economies that, like China, experienced episodes of rapid growth? We pool data for Hong Kong, Japan, Korea, and Taiwan from 1950 to 2009……. growth of these economies slowed markedly after they reached middle-income status.
Growth rates for these economies are highest just below the $10,000 per-capita-income level and then slow down rapidly as income increases. …..[the] economies grew on average at a 4.8% rate when per capita income reached $17,000, down from a high of 7.2% at the $7,800 level.
Interestingly, the middle-income trap appears to arise in Asia at lower income levels than has been found for broader groups of emerging-market economies. It may be that large Asian countries with relatively low prevailing wages cause the dynamic of the middle-income trap to shift. In Asia, countries may begin to become uncompetitive for certain labor-intensive activities at lower income levels than in other parts of the world……
via FRBSF Economic Letter: Is China Due for a Slowdown? (2012-31, 10/15/2012).
The arc of China’s development is not that different from the rapid industrialization phase of countries such as South Korea, Japan or even, much earlier, western Europe and the U.S., even if the magnitude of China’s arc is on an unprecedented scale. The country’s well of cheap labor, transferred from farm to factory, is starting to run low. Demographics, too, are working against growth. The value of foreign-developed technologies diminish as they age. Most of all, the economy needs to move up the value chain if it is to clear the barrier at which so many developing economies fall, that point where per capita income reaches at $10,000-12,000 a year. Vault it, and a nation becomes a middle income country on the road to being a rich one. Fail, and the country ends up stuck on a plateau of disappointed expectation.
….It is the politics that is the quagmire. There are clear implications for the Party in adopting market reforms. No country has done so successfully and remained a one party state.
….Reining in the power of the SOEs provides a particular challenge to the reformers. SOEs, like the military, are a source of power, money and influence for the princelings, the descendants of Mao’s original revolutionary leaders, an elite collective dynasty of some 400 families who hold extensive sway over the Party, army and the economy.
via China Bystander | 中國外人.
Ambrose Evans-Pritchard: China remains poor, with a per capita income of just $7,000. It faces the classic “middle income trap” in a few years time when the low-hanging fruit of catch-up growth is exhausted. The country will soon have to make the switch from copying technology to cutting-edge invention, the challenge that has defeated so many economies over the years and made a mockery of so many extrapolation curves.
As the World Bank warns in its latest report (out Monday), China risks coming down to earth with a thud unless it breaks the state stranglehold on investment.
My own guess is that China will go through a nasty little hangover as it purges toxins from the great credit boom of the last five years, before settling down to more pedestrian growth rates. It will be a big economic power, but not so vast it upturns the whole global system. It risks becoming old before it is rich.
via Treating China as an enemy – Telegraph Blogs.
Comment:~ The main threat from China is not military but economic. It has the potential to destabilize the global economy through its aggressive currency/trade policies. If the major players are able to resolve this, we are likely to see a scale-back of current tensions.
An exclusive preview of an economic report on China, prepared by the World Bank and government insiders considered to have the ear of the nation’s leaders, offers a surprising prescription: China could face an economic crisis unless it implements deep reforms, including scaling back its vast state-owned enterprises and making them operate more like commercial firms.
……The report warns that China’s growth is in danger of decelerating rapidly and without much warning. That is what has occurred with other highflying developing countries, such as Brazil and Mexico, once they reached a certain income level, a phenomenon that economists call the “middle-income trap.” A sharp slowdown could deepen problems in the Chinese banking sector and elsewhere, the report warns, and could prompt a crisis, according to those involved with the project.
via New Push for Reform in China – WSJ.com.