Possibility of a Middle-Income Trap in China

Chapter 9 discusses the possibility of China falling into the middle-income trap in terms of three checkpoints: innovation capability, big businesses, and inequality. The main finding is that China is performing well in terms of the first two criteria, but there is some uncertainty in the last criterion of whether it generates Kuznets curve-type dynamics of growth leading to better equality. First, China has increasingly become innovative; thus, it differs from other middle-income countries. It has been pushing strongly for considerable R&D expenditure and has been ahead of the typical middle-income countries. Second, China has many world-class big businesses, which is more than its size predicts, not only in finance, energy, and trading as in the past but also increasingly in manufacturing. Thus, it differs from other middle-income countries with few globally competitive large businesses. Third, China faces some uncertainty in terms of inequality. The Gini coefficient continuously increased from approximately 0.3 in 1981 to reach its peak of 0.49 or so in 2008–2009 but has decreased to 0.42 since then. This recent decrease may be a sign that China is following the Kuznets curve. However, China is now facing new sources of inequality, such as wealth (including financial and real estate assets) and non-economic factors (including corruption).