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China Briefings

Reports on China issued by Samsung Economic Research Institute

China's Efforts to Overcome the Middle Income Trap

China's Efforts to Overcome the Middle Income Trap

Samsung Economic Research Institute Beijing Office

Apr. 26, 2013

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The middle income trap is a situation where the per-capita income of a country is stuck at US$4,000-12,000. China became a middle income country in 2010 when its per-capita GDP exceeded US$4,000. Whether China can avoid the trap is an interest to the whole world.

Reasons for a country to get caught in a middle income trap are: 1) Rise in labor costs, decline in productivity and underdeveloped high added-value industries; 2) Decrease in labor force and stalled urbanization; 3) Limitation of investment-led growth. Currently, all three applies to China although the degrees of advancement vary. Demand for labor has already surpassed supply which has prompted wage hikes despite that fact that the economy is still led by investment.

The Chinese government plans to maintain economic growth through investment in urbanization projects for the mid-term and build the foundations for long-term growth by nurturing high value-added industries and consumption. For the time being, China will be able to maintain an investment-led growth, as its per-capita capital stock remains low. However, to avoid the trap, it needs to free the economy from the government’s hand and let the market distribute resources.

 

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