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China Won’t Fall into the Middle Income Trap
Summary:Li Yining, renowned economist and President of Peking University’s Guanghua School of Management, explains why he’s not worried about China falling into the “middle-income trap.” He lays out suggestions for creating new demographic, resource and reform dividends so that China can continue to grow and create a new consumer class.

         Photo: Sina

By Jiang Yunzhang (
Issue 601, Dec 31, 2012
Page 8
Translated by Zhu Na
Original article:

Li Yining (厉以宁) is president of Peking University’s Guanghua School of Management. He’s advocated public privatization of state-owned enterprises since the 1980s and has been labeled the “[John Maynard] Keynes of China” for his influence in transforming China into a market economy over the past three decades.

Economic Observer: Recently you refuted the argument that China will fall into the “middle income trap.” You also said new demographic, resource and reform dividends are replacing the old dividends. This view is much more optimistic than prevailing predictions. Why are you so optimistic about China’s economy?

Li Yining: The “middle income trap” is a concept mentioned in the East Asian Economic Development Report by the World Bank in 2006. It refers to the idea that after a country’s per capita income reaches $4,000, it will encounter more and more difficulties. Its economy will easily enter a “bottleneck” situation where economic growth remains stagnant and national income hovers for a long time. The typical examples are Argentina, Mexico and Chile.

The concept of a "middle-income trap" can be used as a reference, but it’s not economic law. Looking at it from an economic angle, any income stage can become a trap. The upper limit of the middle-income level is $ 12,000. Many countries’ per capita incomes have long hovered below $1,000. Meanwhile, some Southern European countries surpassed $12,000 long ago, but economic stagnation has still occurred. Greece is one such example. It had been recognized by the World Bank as a successful example of breaking through the middle-income trap with per capita GDP reaching $26,000. But now isn’t it falling into a "high-income trap?"

Japan’s per capita income reached $40,000 a few years ago, but its economy has remained stagnant in recent years. So don’t view the middle-income level has the only trap. There will still be traps when per capita income exceeds $12,000. In any country at any income stage, as long as you don’t innovate and don’t reform, you’ll encounter new traps.

China is currently a developing country and is at the middle-income level. We need to be fully prepared to avoid falling into the middle income trap. I’ve often heard the view that China has been able to develop up to now, but the various dividends that enabled it to do so have basically been used up. For the demographic dividend, there’s no more cheap labor. For the resource dividend, there’s less and less land. For the reform dividend, original reform measures have basically already played out their role. So a pessimistic mood has been produced. Some enterprises even think there’s no future in China, and have started moving to other countries. I think this view is incorrect. Any country can see economic development reach a certain point then level off as it uses up its original advantages. At that point, it needs to create new advantages.  

China is in fact creating new development advantages. Take the population as an example. Economic development in many countries needs to pass through the stage of enjoying a demographic dividend. Now China’s cheap labor era has ended, so the era of skilled workers is the next step. The era of skilled workers can be established by increasing investment in human resources, enhancing vocational and technical education, and training a large number of workers with a certain level of education and professional skills. When the Southeast Asian countries enter the era of skilled workers, we must transition to an era of senior skilled workers. When Southeast Asia shifts to senior skilled workers, we have to become professionals. The key to developing new demographic dividends is to innovate.

Where does a new resource dividend come from? The key is to increase scientific and technological innovation. For example, developing a seawater desalination industry is important for relieving water shortages in costal water-deficient areas, as well as for promoting the utilization of brackish water in central and western regions and protecting the sustainable use of water resources. Ordos has worked on desert transformation over the years and Inner Mongolia has cultivated high quality grass seed more suitable for planting locally. These are all examples of using technology to create new resource advantages.

Then there’s the reform dividend. The original reform measures have already been played out and new reform measures with a top-down design are needed. The so-called top-down design mainly refers to unified planning and arrangement. Under a unified arrangement, we can stand high and see much further ahead.

For example, the State Council announced a decision on the reform of collective forest tenure on June 8, 2006 which included three breakthroughs. First was the contract length for leasing forest land, which can now be up to 70 years. This encouraged farmers. Secondly, forest land can be mortgaged and transferred. This allows the economy in forest regions to spring to life and develop. Thirdly, forest ownership can be contracted to individual households, with each household receiving a certificate of forest ownership.

It should be noted that with reforms such as this, decisions can only be made by the central government so all things can be taken into consideration. More top-down designs and comprehensive reforms are needed in the future.

EO: You often emphasize that
analysis of economic structure is more important than analyzing total GDP. Can you explain this?

Li: China’s economy has jumped to the second largest in the world, which is extraordinary, but there are also shortcomings. If only looking at the overall size of the economy, China has exceeded Japan, but when analyzing the economic structure, you’ll find Japan’s is better than China’s. Japan has a larger high-tech proportion of its GDP and its many industrial products have more high-tech content than China’s.

Over the past two decades, Tokyo, Osaka and other cities in Japan haven’t had much change in terms of urban construction, but household amenities for ordinary people have improved greatly. So we can’t be content with a total GDP analysis. We should pay more attention to structural analysis during the next step. Furthermore, we should do solid work in optimizing economic structure.

EO:  You are very concerned about the “san nong (三农)” issues (issues concerning agriculture, rural areas and farmers) like rural education and farming subsidies. But you think a series of preferential agricultural policies adopted by the state actually failed to reach the heart of the problem. In your view, how do we solve the issues concerning agriculture, rural areas and farmers?

Li: We just talked about China needing to avoid falling into the middle income trap. If making a detailed analysis of it, a country that enters the middle income trap actually faces three “traps” including systematic development, social crisis and a technical trap. For the systematic development and social crisis traps, the main contradiction is the issue of income gap between urban and rural areas.

Given China’s current situation, to expand domestic demand is basically to expand people’s consumption and lift rural residents’ income. For many years, the state has adopted a series of preferential agricultural policies like subsidies on farming equipment and home appliances for rural households. But these policies didn’t address the heart of the “san nong” problem. For China to expand domestic demand, the most important thing is to give rural residents property rights.

Over the past two years, I’ve led an investigation panel from the Subcommittee of Economy of the CPPCC National Committee to examine the housing problem of farmers in a few areas. They said land in urban areas is state-owned, but urban houses handed down from one generation to the next have property ownership certificates. And newly purchased houses in urban areas also have the certificates. But houses in rural areas have no such property certificates, so farmers are puzzled. Without this certificate, houses can’t be mortgaged or transferred and it’s even difficult to rent them. This generated the wealth gap and will continue to expand it.

EO: You also stressed focusing on developing the private economy; especially small and very small business. But now the development of private enterprises is still limited by policy restrictions. What’s your take on this issue?

Li: The employment issue in China will be very serious in the future. The best solution is to develop the private economy; especially small and very small enterprises. 75 percent of newly created jobs in China will come from the private economy.

Nationwide there are now 30 million individually-owned businesses and 10 million small-and-medium-sized enterprises. If policies are relaxed a bit more in ways like removing taxes or creating simpler financing mechanisms, then small business owners will feel safer and find it easier to do business. Then private businesses will add employees. If each individually-owned business adds two employees, then 60 million jobs will be added.

With policy support, university graduates, migrant workers, laid-off workers and others can all start or participate in the operation of small and very small businesses. This will be beneficial to overall economic development.

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