How China Might Avoid the Middle Income Trap

China recently started its consumer trade-in program.

By encouraging households to swap their old cars and home appliances, they hope to boost domestic demand. With cars, financial institutions could lower the down payment. Meanwhile, the appliance incentives will come from local governments.

The goal is to expand the household consumption slice of their GDP:

China’s Slowdown

At 4.6%, China’s 3rd quarter GDP numbers again displayed a slowdown:

Summarizing why China’s economy is growing more slowly, a Cornell University professor cited an “unraveling property sector and unfavourable demographics” as well as sinking growth, deflation, and “loss of confidence in the government’s policies.”

Compared to the U.S., China has lagged in consumer expenditures and depended too much on the investment from its property sector:

China entered the world’s middle income group in 1997. Now, according to its 14th 5-year plan, they project the high income leap in 2035. How? The World Bank Group has some advice:

Our Bottom Line: The Middle Income Trap

Definition

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 low income countries have a per capita GNI (gross national income) of $1,145 or less (2023). Then, moving up the ladder, lower middle income ranges from $1,146 to $4,515 while upper middle income is $4,516 to $14,005. Meanwhile, with the World Bank’s threshold for high income at $14,005., China has been enticingly close. Recently though, a slip in their per capita GNI widened the gap.

Examples

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: For a long slow 276 page read, the 2024 World Development Report is a possibility. By contrast, the Financial Times had a fast look at China’s growth. Then, even more specifically, WSJ described China’s appliance trade-in program while Reuters had more of the macro data. Please do note that although our stats from Reuters are dated, they remain valid as long as they are based on accurate numbers from China (which are not always dependable.). Also, our “Bottom Line” is an updated version from a previous post. And finally, this year’s economics “Nobel” winners expressed the most resounding wisdom about why nations fail and succeed. (After publication, I slightly edited the sources paragraph and “Our Bottom Line.”)