Zhao Yongsheng: China can escape the middle-income trap

The "middle-income trap" has become a much-debated topic since China joined the ranks of the world's middle-income countries according to World Bank criteria, with the country's GDP per capita having reached $6,807 in 2013.

Attention to the issue was renewed after a speech on April 24 by Minister of Finance Lou Jiwei at Tsinghua University. 

Obviously, it is good that China has become a middle-income economy. However, the question that follows is whether China will be able to maintain this rise, or if it will become stuck in the infamous middle-income trap, in which growth in incomes stagnates.

Historically speaking, this trap is not an absolute rule. It has applied to some economies, including various Southeast Asian and Latin American economies. But some countries have escaped it, including Japan, Singapore and South Korea.  

Furthermore, not all the academic theories in this field so far can justify in a convincing manner the correlation between the variable of middle income and that of the middle-income trap. Therefore, the trap is more of a hypothesis to be tested, rather than an inevitable conclusion.

The next question is how China can escape the trap. Innovation might offer a solution.

It is understandable that during the process of its industrialization, China has "copied" and absorbed some advanced technologies and inventions from Western countries. But after nearly four decades of reform and opening-up, China finds itself at the technological frontier in more and more industrial sectors and research fields, which means that in the future China will not have to "copy" anyone anymore.

Innovation will be the best way for Chinese industries to create sustainable growth, and supporting this should be the first priority for the central government.

Then we come to the question of how to spur innovation. This will depend on education, and the national educational system in China is in urgent need of reform, a fact made clear by comparing it with the systems in advanced economies such as the US and France.

The educational system in China is systematic and certainly well organized. It has trained millions of excellent graduate and post-graduate students. It is in line with the preliminary needs during the first stage of China's economic development and with a "low added-value" model of economic growth.

But it can no longer satisfy the updated requirements from different sectors and from Chinese society.

At the preliminary stage, the top qualities needed for students were obedience and respect. But in the second stage, or the stage of innovation, these qualities are not sufficient any more. This stage needs to foster a more creative mindset, in order to complement a higher added-value model of economic growth.

In order to ensure the sustainability of innovation, much attention should also be paid to the protection of intellectual property rights. It is true that the central government has signed numerous conventions and agreements with different international institutions regarding this. However, piracy and violation of intellectual property rights have become so frequent that Chinese industries and researchers have almost become discouraged from pursuing innovation.

The reason is simple: Research and development involves huge costs, and investors are often not able to get sufficient returns due to non-compliance with the rules.

Another factor often emphasized by policymakers and economists is the size of China's population. In the past three decades, the demographic dividend has contributed to China's economic boom. However, with the decline of fertility rates partly due to the family-planning policy and a rapidly aging population, the demographic dividend is gradually fading in China.

But logically, the demographic problem in China can not be settled in the short- or medium-term, even if the authorities loosen their birth policy in the near future. On the contrary, the demographic problem will make innovation even more necessary.

Getting stuck in the middle-income trap may not be inevitable, and China still has the chance to escape it if the government can cope with it in advance. Educational reform is urgently needed, more needs to be done to protect intellectual property rights, and policies that spur innovation are vital.

http://epaper.globaltimes.cn/2015-05-07/Biz06.htm