China May Be Running Out of Time To Escape the Middle-Income Trap

A former senior director for Asia in President Barack Obama's National Security Council says that China only has “about five years” to become a high-income economy, or it will likely find itself stuck in the middle-income trap.

Speaking at Asia Society in New York on Tuesday, Evan Medeiros noted that China has been what the World Bank considers a middle-income economy — one where per capita income is between $1,000 and $12,235 — for about 25 years. South Korea, Taiwan, and Singapore, he added, spent 23, 27, and 29 years respectively as middle-income economies before moving up to upper-income level.

“I think time matters an enormous amount for China, and I think [it] is in short supply,” Medeiros said, noting that China’s per capita income is currently at about $8,700. “China in the next five years needs escape velocity — it really needs things to pick up if it's going to make that jump.”

The “middle-income trap” is a theory of economic development in which wages in a country rise to the point that growth potential in export-driven low-skill manufacturing is exhausted before it attains the innovative capability needed to boost productivity and compete with developed countries in higher value-chain industries. Thus, there are few avenues for further growth — and wages stagnate.

China has already begun to show signs that it is growing past the manufacturing-led growth model that has fueled rapid economic growth in recent decades. The country’s working age population has been declining since 2012, and as early as 2013 some economists declared that China had begun to enter the “Lewis Turning Point” — where worker wages begin to rise faster than the rate of inflation because the surplus labor pool has been exhausted.

Medeiros said China needs to carry out serious market reforms in order to help drive the growth needed to “graduate” from middle to upper-income level in time. He recalled attending a meeting between President Obama and Communist Party General Secretary Xi Jinping in 2013, where Xi stressed his hope of avoiding the middle-income trap. Later that year, China’s government laid out an ambitious economic reform program that would help accomplish this. But so far the reforms have been a “big disappointment” for the international community, he said, as few of them have actually been accomplished.

“Are Xi Jinping and [Premier] Li Keqiang ready to pay the necessary political costs [to avoid the middle-income trap]?” Medeiros asked. “I would say the jury is still out on that.”

“I don't think Xi Jinping necessarily is a reformer,” he added. “I think he is a modernizer, and the reason that distinction is critical is because Xi Jinping's views about the economy are informed by a series of Leninist and nationalist political beliefs, not a full-throated embrace of the market. So I think what we're going to see in the next five years is a tension play out between those nationalist Leninist beliefs and market forces.”

In the above video, Medeiros describes the conflict between marketization and state control in China. Watch the complete program in the video below.