By Liu Shijin, Development Research Center of the State Council (DRC)

Research Report No 237, 2011

How long can China maintain its growth momentum after experiencing a 30-year-long fast growth? To answer this question, the first thing we must do is to ascertain when the period of fast growth will come to an end. China has been fortunate to maintain such a long period of fast growth, but it cannot keep such a growth forever. This is a logic inference and easy to understand. The question now is in what form this period of fast growth will come to an end, and with what possible implications. From this question arises another concern: whether China will fall into the so-called "middle income trap". When China"s per capita GDP exceeds 4,000 dollars at market exchange rate and when the country faces diverse contradictions and challenges, there are growing concerns and discussions on whether China will fall into the "middle-level income trap". It is against this background that the Development Research Center of the State Council (DRC) has launched a research project entitled "Surmounting the Middle-Level Income Trap". While reviewing the major views in the research findings, this paper makes some in-depth analysis on this issue.

I. Two Important Tasks of Far-Reaching Significance

Economic growth is always a hot topic in economic research. With an unprecedented deepening of globalization, China"s economic growth in essence is vitally important to global growth. So relevant research may and must be based on extensive international comparisons. When we began the research, we did two things that now seem to have far-reaching implications. One was to establish a database that contains hundreds of major economic indicators related to dozens of countries and regions that have successively entered the process of industrialization. As the data came from different sources, we had them categorized in light of the need of our research. This was a meticulous and elaborate work, which required patience, seriousness and professionalism and for which some members of the research team contributed a great deal of time and energy. The establishment of the database facilitated our research immensely. After large amounts of data were unfolded, some typified or regular phenomena that had never been observed appeared. This groundwork has provided important support for ensuing research activities. Another thing was to select yardsticks for international comparisons. For example, should the dollar at current price or the purchasing power parity be selected? Even the latter also involves different parameters and calculating methods. After repeated comparisons and discussions, we selected the long-term economic growth data of various countries developed by renowned economic historian Angus Maddison and used the 1990 international dollar as the comparative benchmark. In addition to its high recognition and influence, this data set covers a wide scope and a long time and can better serve cross-country and cross-time comparisons. Through the calculation of major material indicators, this data set has also proven to be better than other data sets in matching with actual development levels.

II. Several Findings on "Squeezed Growth"

In the course of data analysis, we carried out research on the historical process and experience of industrialization. We first classified into five categories the countries and regions that have successively entered the process of industrialization. (1) Britain, the United States and other countries that developed first and have been on the forefront of technology. (2) The late-coming European countries that have successfully caught up with technologically-frontier countries. (3) The emerging industrialized countries and regions in East Asia that have tapped latecomer advantages, realized long-term rapid development and scored some progress in innovation driving. (4) The Latin American countries and similar Southeast Asian countries that had long pursued an import substitution strategy, created growth miracles but later fallen into the "middle-level income trap". (5) The former Soviet Union and East European countries that had long stuck to planned economy, realized rapid growth and also once fallen into the "middle-level income trap". The history of the above categories of countries and regions in industrial growth indicates that some are pioneers and some are latecomers in different periods and that some latecomers are successful and a considerable number of them are not so successful or even are failures.

In international comparisons, we noticed some important and typical facts. The reason we use "typical facts" instead of "regular facts" is that we have observed the repeatability of these facts but we are not clear about the inherent and consistent reasons that have caused the repetition of these facts. The term "typical facts" can better illustrate the current state of our research.

First, we have noticed the fact of the "squeezed growth" and the growth slowdown after a fast growth. Compared with pioneer countries, the late-coming countries accomplished roughly the same "workload" in industrialization and urbanization in less time. And the later an economy takes off, the shorter the time it used is. For example, in accomplishing the same economic growth task, Britain and the United States used about 100 years, Japan used 70 years, South Korea and other East Asian economies used 50 years, and China (or China"s developed areas) may use even a shorter time. We use the term "squeezed growth" to describe this phenomenon. The growth rate rises under "pressure" and reaches the period of fast growth. And once the potentials for "squeezed growth" are fully released, the growth rate will logically slow down. The past theories focus more attention on the occurrence of fast growth, such as "economic takeoff". But now we should focus our attention on growth slowdown after the fast growth comes to a terminal, namely the issue of "economic slowdown", and the complete description and interpretation of the process of the "squeezed" fast growth.

Next, we have noticed two different types of growth slowdown in the course of industrialization. One is the growth slowdown occurring when a country falls into the "middle-level income trap". The typical example is Latin American countries. We have discovered in our research that the former Soviet Union and East European countries, which mostly witnessed drastic growth slowdown in the 1970s, can be regarded as another type of countries falling into the "middle-level income trap". This is a point that has rarely been mentioned in past researches. What is thought-provoking is that this growth slowdown appeared at a time when planned economy was still robust in the former Soviet Union and East European countries. This indicates that once a system fails, growth slowdown remains unavoidable even if this system still looks very strong. Another growth slowdown appeared in what we call the "successfully chasing" economies. Germany, Japan, South Korea and other East Asian emerging economies are typical examples. The growth slowdown of these economies appeared at a time when their potentials for fast growth were largely fully released. In a sense, growth slowdown is a sign of an economy that has successfully gone through the period of fast growth and entered the period of moderate growth and high income.

Intuitively, these two types of growth slowdown have similarities. For example, they all appeared after a period of fast growth (or a golden period of growth). But the major point lies in their differences. In terms of per capita income levels, the growth slowdown of those falling into the "middle-level income trap" appeared in Latin American countries when their per capita income reached 4,000~6,000 international dollars and in the former Soviet Union and East European countries when their per capita income reached 5,000~7,000 international dollars. But for the "successful chasers", the growth slowdown appeared when their per capita income reached about 11,000 international dollars. While the former faced a "loss of speed" when they still had potentials for fast growth, the latter experienced it after their potentials for fast growth and their latecomer advantages were largely and fully released. Most importantly, the economies falling into the "middle-level income trap", both Latin American countries and the former Soviet Union and East European countries, all had some major defects in their systems, strategies and policies for industrialization, such as the closed import substitution strategy adopted by Latin American countries and the system of planned economy adopted by the former Soviet Union and East European countries. As these defects already existed in the initial stage of their industrialization, their economic growth was doomed to be unsustainable after reaching a certain stage. The "successful chasers" were successful, because they had avoided the above defects. In our research, we developed a "six-factor" model and attempted to give a preliminary description and interpretation of these problems.

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