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Liu Yuanchun: China Will Bypass the Middle Income Trap Around 2026 - 2021-06-15

 

 

To think about the future, we must keep in mind two overall situations: one is the strategic overall plan of the great rejuvenation of the Chinese nation, and the other is profound changes of a kind unseen in a century. We can discuss the key issues for the next 5 years in three ways: 1) Under the impact of the COVID-19 pandemic, the core of competition between China and the US in the short term will be to see who can take the lead in overcoming the pandemic and restoring normal economic and social development. 2) Domestically, can China avoid the middle income trap and join the ranks of high-income countries? 3) Externally, can China withstand the impact of the US’s strategic containment on China during the accelerated evolution of the profound changes in the world? What does it take to successfully escape the middle income trap? With a 1.4 billion population, China boasts a GDP per capita of $11,000, catching up with the world’s average level. But that figure is still about $2,000 below the threshold for high-income countries. According to the World Bank, the threshold to be considered a high-income country was $12,375 in per capita income for 2019. By simple calculation, we can get the threshold for this year, which is about $12,700. Assuming that our GDP grows at the normal rate of about 5.8% in the next 5 years, the GDP per capita will hit more than $14,000 by 2025. At a low growth rate, the GDP per capita may only reach $13,700. Suppose the threshold for high-income countries increases by $200 per year. By 2025, it is expected to stand at $13,400. That is to say, even if our GDP rises at a low rate, we can avoid the middle income trap. However, to avoid the middle income trap does not simply mean crossing the income threshold. In Latin America, for example, many countries surpassed the threshold, but finally fell into the trap again. So there is a consensus that to successfully escape the middle income trap, a country must have a GDP per capita about 20% higher than the threshold. There are some key qualitative indicators used to measure whether a country can bypass the middle income trap. They include (1) sustainable growth drivers; (2) higher degrees of social and economic harmony; and (3) sound and well-functioning institutions. We face many challenges in efforts to effectively escape the middle income trap during the 14th Five-Year Plan period. Our annual average GDP growth rate from 2020 to 2035 is desirably 4.83%. The 14th Five-Year Plan is a crucial point in the nation's efforts to lay a solid foundation for the basic realization of socialist modernization by 2035. Basically achieving modernization involves great improvement in several important indicators, the first of which is to be at the forefront of innovative countries. During the 13th Five-Year Plan period, China spent 2.1% of its GDP on research and development. Last year, the figure reached nearly 2.4%, due to a decrease in GDP. According to the report of Global Innovation Index 2019, during the 13th Five-Year Plan period, China did not make it to the top five R&D spenders globally, and now it ranks 14th. If we aim to realize modernization by 2035, we must increase our R&D intensity to 3.7% of GDP by that year. That means our R&D spending must increase from RMB2.4 trillion in 2020 to RMB7.4 trillion by 2035. In the next 5 years, we must make great strides in self-reliance and self-improvement in science and technology and basic research. The second indicator for modernization is that the GDP per capita reaches the level of moderately developed countries. In 2019, there were about 70 high-income countries in the world in contrast to only 39 developed economies. Then we often wonder whether developed countries are high-income countries or developed economies. In terms of GDP per capita or income level, a high-income country is defined as having a GDP per capita of $12,375, while the minimum GDP per capita for developed economies is $20,000, with an average of $48,000. If we want to reach the average level of $48,000 in the next 15 years—assuming the GDP per capita of developed countries remain unchanged, then our GDP has to increase by 13.1% on average annually. If we want to achieve the median level of high-income countries, that is, $28,000 in Spain, our GDP must grow at an annual rate of 6.43% in the next 15 years, even if that median level stays the same. So is such benchmarking reasonable? It ignores a key point, that is, most countries experienced currency appreciation in the process of getting out of the middle income trap. In 1960-1980, Germany saw its currency appreciate by 5% on a yearly average, while Japan’s more than 3% in that period. In China, the average annual appreciation reached 1.3% in the past 20 years. Therefore, to tell whether China can grow into a high-income country, we need to take the appreciation of RMB against US dollars into consideration. If the average annual appreciation of RMB is 2% in the next 15 years, we need an annual GDP growth of about 4.7% to overtake Portugal and 7% to overtake Spain. With the above in mind, we estimate that our GDP may desirably maintain an annual growth rate of 4.83% from 2020 to 2035, a rate that would enable the GDP per capita to steadily double and also reach the relatively low median level of high-income countries. We can draw a basic conclusion that if we maintain a real GDP growth rate of 4.8% annually from 2020 to 2035 and take 20% above the threshold of high-income countries as a point to escape the middle income trap, then China will complete the historical mission of tiding over the trap around 2026. Assuming that the GDP growth moves from high to low, we need to secure a growth rate of 5.5 to 6 percent in the next 5 years. In this year's government work report, China sets its GDP growth target at over 6%, which is considered a normal growth rate for China's economy. The world sees profound shifts in the economic landscape. The three world's major economic regions have undergone accelerated changes this year. The Indo-Pacific region now accounts for 31% of the world economy, and by 2025, the share is expected to rise to nearly 35%, equivalent to the highest share of the US in the world since World War II. The next 5 years will witness dramatic changes in global governance and economic centers. Specifically, the governance and military centers will still be the US, but the economic center would have shifted to the Indo-Pacific region. The competition between China and the US will enter a critical phase. In the 1980s, our GDP accounted for less than 10% of the US’s; then the share rose to 30% in 2008 and 60% in 2015. At the end of last year, China's GDP was projected to be 71% of the US's. According to the latest estimates, China's GDP is expected to be nearly 90% of that of the US by 2025. The imbalanced relationship between China and the US will change at a faster pace in the next 5 years, which is a crucial period seeing the shift from unbalanced to balanced competition between the two countries. In the next 5 years, apart from GDP, the strategic plan of self-reliance and self-improvement in science and technology plays an important role in determining whether a new global development landscape can be created. In the next 5 years, the US-China competition will continue to intensify, with the US imposing stricter tech restrictions on China. The next 5 years will be a key period for China to catch up with the US, and it is also a stage where China may face constant challenges. (Author: Liu Yuanchun, Professor and Vice President of Renmin University of China)

 


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