Poor countries today have an advantage that rich countries
did not have when they were working toward economic development, and that is
the examples set and technologies created by rich countries today. This should mean that poor countries today have the
ability to catch up to the rich countries, however, this type of global
convergence does not always occur, there have only been 13 countries that have
succeed in this. These countries
tend to either, not grow at all, or to grow rapidly and then stop before
reaching the threshold of high-income countries. The case were they have rapid
growth up to a certain point is now being referred to as the Middle-Income Trap .
The Middle-Income Trap claims that when a country get to $15,000 GDP per capita or $11,000 GDP per capita, a decrease
in GDP per capita growth occurs averaging at about 2% per annum. These findings are supported by
Eichengreen, Park and Shin who claim that one of the factors that pays a role
in the inability of middle-income countries to overcome this trap is the lack
of secondary and tertiary education which creates high quality human capital and was one of the reasons that Korea had a successful transition to a high-income where as Malaysia and Thailand have not had the same success.
However, the Economist finds issue with the theory of the
middle-income trap because one of the theory’s components is that middle-income
countries do not have the technology of the high-income countries or the cheap
labor of the low-income countries and thus cannot effectively compete with
either. However, this is assuming that these countries have not been updating
their institutions continuously, but instead waiting for the last under
employed laborer to leave the farm before making changes, making them inefficient, which has not been found as the case.
Both sides give more points to support or deny the theory,
but neither is able to answer the question of whether or not the middle-income
trap will affect China in the coming years. In 2012 China’s Development Research Centre created a report for the World Bank stating all
of the reforms that China will need to make in the next few decades to become a
high-income economy and it was a shocking list. However, Greece, a country not
held highly on its past or present economy was able to cross this threshold and
overcome the middle-income trap, so what is stopping China, a country with an “awesome
economy” from escaping this trap as well?
I have typically considered the main components of what constitutes a “middle-income country” to be not especially abundant in labor, having a slowing manufacturing industry, and having not much economic diversification—this intuitively conflicts with the idea of China. That is to say, I was surprised to read that China is having difficulty “crossing the threshold” into a high-income country. Granted, areas in China like Hong-Kong certainly could be considered high-income while the more rural parts of the country still are not, but I would have considered a country like Greece more of a middle-income country than China. Stemming from the article we read last week about China having the power and the capital to buy natural resources from less-developed countries like those in Latin America, I find it hard to believe that the future does not hold a place for China among the high-income countries. If anything, the reason for China's middle-income status could be a simple matter of time.
ReplyDeleteI agree with Lizzy in that China's economy seems to be one that is well on its way towards a high-income economy. One factor that may contribute to China's staying in a middle-income economy would have to be the fact that it is more labor intensive manufacturing instead of high-end technology or luxury goods. As Lizzy said, however, this may just be a matter of time. What is a more pressing issue, is that of China's environmental threats that may hinder development.
ReplyDeleteI think that Greece's inflated economic status can be attributed to the questionable conditions in which it entered the European Union.
ReplyDeletePerhaps one of the reasons China has not achieved high-income status, despite having the largest population of billionaires in the world, is because just under 400 (30%) million Chinese subsist on less than $2 a day.
I think it is a little pessimistic to believe that there not only are low income countries destined to stay that way, but middle income countries are as well. And does the middle income trap only apply to the modern times? Because over centuries a country's status may go through huge fluctuations. I think it may be too soon to label these countries as being stuck. We will really see how their industrialization has paid off in a hundred or so years
ReplyDeleteThe notion of having a middle class is a capitalist ideal stemming from Marxists beliefs and attempting to prescribe China under this umbrella simply isn't feasible considering they still function as a communist society. Even though they have opened up to trade liberalization policies , China is still far from being considered a capitalist country .The Middle Income Trap itself occurs when a country's growth becomes stagnant after reaching middle income levels. The problem usually arises when developing economies find themselves stuck in the middle, with rising wages and declining cost competitiveness, unable to compete with advanced economies in high-skill innovations, or with low income, low wage economies in the cheap production of manufactured goods. China doesn't really fit any of these conditions. China still has relatively low wages and GDP per capita is also relatively low when compared internationally. China also continues to maintain high export growth and is active in many international markets , both of these factors ensure that they will not fall into the Middle Income Trap.
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