How To Surpass The Middle-Income Trap

China will surpass the middle-income trap by continuing to implement structural reforms and focusing on economic development. The lesson to other emerging economies is to distinguish good growth policies from self-serving agendas in the advanced West.

According to the World Bank, high-income economies ($12,236 or more) include the US, Western Europe, and Japan, while upper middle-income economies ($3,956 -$12,235) feature Turkey, Russia, Brazil, and China, among others.

In the past, many countries have attained moderate living standards, yet failed to graduate to the next level. China entered the ranks of the “upper-middle-income” countries in the early 2010s. But can the country avoid the middle-income trap?

Overcoming the middle-income trap

China has great potential to overcome the middle-income trap. First of all, its world-historical growth record speaks for itself.

Second, the rebalancing of the economy from exports and investment to consumption and innovation is proceeding according to the expected trajectory.

Third, new growth targets indicate that policymakers are well attuned to the need to move from simple growth to higher-quality development.  Also, the deleveraging has slowed credit growth and will significantly lower local government debt in the late 2010s, which will ensure higher-quality growth.

Finally, the huge size of China’s population disguises regional progress. In relatively wealthier megacities, including Shanghai, Shenzhen, and Beijing, the middle-income trap may already have been surpassed.

What makes Chinese progress so impressive is that, unlike other major economies, China is executing structural reforms, which has proven so difficult in other countries.

America is so polarized that some policymakers prefer a government shutdown to a credible, bipartisan medium-term debt-cutting plan. In the Eurozone, the sovereign debt crisis has caused huge dislocations and a cyclical recovery alone is not enough to resolve the structural crisis. In Japan, half a decade of massive monetary injections has not achieved adequate inflation.