How the Middle Income Trap Could Ensnare China

China watchers have been talking about “Common Prosperity.” Explained by President Xi Jinping at the Chinese Communist Party Central Committee for Financial and Economic Affairs meeting on August 17, the policy appears to be a pivot away from the market. The idea though dates back to a 1953 People’s Daily headline. Then and now, the aim was “socialist” policies that offset the inequities of capitalism.

In this excerpt from a Chinese infographic, they tell us that total equality is not the goal. But they also don’t want a relative few with wealth. You can see that the general goals sound benevolent:

https://www.globaltimes.cn/page/202108/1231872.shtml

Some say the goal could be to avoid the middle income trap through more government control.

The Middle Income Trap

China is a upper middle income country:

https://data.worldbank.org/indicator/NY.GNP.PCAP.CD?locations=CN

However, most fast growing middle income economies have to experience a slowdown. After all, the beginning is the easy part. Move from the farm to the factory. Produce textiles or shoes or clothing. Keep wages low and exports cheap. Then though, it is increasingly tough to control an economy as it grows richer and more complex. When a country cannot move from middle to high income, it might be caught in the middle income trap.

The World Bank uses per capita GNI (Gross National Income) as its middle income metric.  An economy with a per capita GNI between $1,046  and $4095 is lower middle income while upper middle income ranges from $4,096 to $12,696:

https://datatopics.worldbank.org/world-development-indicators/the-world-by-income-and-region.html

South Korea and Taiwan were able to make the leap to high income through the market. Although China is looking toward more “socialism,” Bloomberg tells us that they might exceed the World Bank’s $12,696 threshold by 2025:

https://www.bloomberg.com/opinion/articles/2021-09-06/china-s-common-prosperity-goal-ends-in-a-middle-income-trap#:~:text=The%20middle%2Dincome%20trap%20describes,transition%20to%20high%2Dincome%20status.

Chinese leaders have been saying that the rich poor gap is too large. They cite official figures showing that the top fifth had disposable income that was 10 times as much as the bottom quintile, They compare urban affluence to rural poverty. Their response? So far, ranging from young video gamers to aging tech billionaires, they have implemented restraints. They also reigned in tutoring firms and Evergrande, the property giant.

Our Bottom Line: Economic Systems

Most economies are a mixture of three main economic systems. Many combine bottom up and top down–the market with central planning. They they add perhaps a touch of tradition. In the U.S., we have a large dose of individual supply and demand (the market) being tempered by entitlement programs from the government that include Medicare and Social Security (central planning). To that we can add the goals and roles that families and cultures encourage (tradition).

Many of us expected China’s market to spread as it became more affluent and joined the high income club. Now though Mr. Xi says he can do it through the “socialism” that embodies more government. As he proclaimed, through “Common Prosperity,” the fuel could be more equality.

Instead, more control from the top down could slow growth.

My sources and more: Using a 2015 econlife as a springboard, I checked on recent research. Starting with The Economist  and Bloomberg, I wound up at Project Syndicate.and Brookings. Meanwhile, hoping to eliminate misunderstanding, China itself described “Common Prosperity.” (The document belies current policies.) Finally, firsthand, you might like to see the World Bank’s numbers.