Why China Might Be Caught in the Middle Income Trap

A slew of statistics are coming out of China that document a slowdown.

China’s Slowdown

We can start with a decelerating GDP. Before Covid, the IMF predicted an annual growth rate that would be a bit less than 6%. Worse, China departed from double digits in 2011 with a more recent 3.5% average GDP increase.

China’s Annual GDP Growth Rate:

Reflecting less economic activity, at zero, China has a lower inflation rate than other large economies.

Inflation Rates:

To explain China’s current plight, The Economist cites an urban youth unemployment rate that exceeds 20% and lower than expected retail, investment, and property activity. Responding, China has been cutting interest rates to jumpstart a “sputtering” economic engine, they (reputedly) plan to finance an “infrastructure building binge,” and, to boost exports, they’ve let their currency weaken.

The Dips in Export, Retail, and Property Activity:

Our Bottom Line: The Middle Income Trap

The World Bank first told us about a middle income trap during 2006. Most simply defined, the middle income trap explained why an emerging economy might never emerge. Countries that are ensnared by a middle income trap are unable to move up to the World Bank’s high income group of nations.

By the numbers, the lower middle income countries have a per capita GNI (gross national income) that ranges from $1,036 to $4,045. At the next step on the ladder, middle income is from $4,046 to $12,535. Meanwhile, with the World Bank’s threshold for high income at $13,845, at $12,850, China is enticingly close.

As countries that made the leap from middle to high income, South Korea took 23 years, Taiwan, 27, and Singapore 29. But it can be tough. In the beginning it’s relatively easy to shift from the farm to the factory. A country can produce textiles or shoes or clothing, keep wages low, and exports cheap. Then though rising wages, insufficient innovation, and inequality can constrain the growth momentum.

It is indeed possible that China is stuck in a middle income trap. However, with the China experts disagreeing, we can just say that “it is difficult to make predictions, especially about the future.” (Yogi Berra, maybe)

My sources and more: Though dated, the Asia Society clearly and accurately describes the middle income trap. As a result, I referred to Axios, FT, and The Economist for up-to-date facts and to Project Syndicate for the analysis, here and here. And finally, we had more about China and the middle income trap in a past post.