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China’s Four Traps

During its 40 years of reform, China has mastered learning by doing, engaged in bold policy experimentation, and become steadily more integrated into global economy. It will need to bring all of this experience to bear, as it attempts to avoid the pitfalls that could derail its effort to achieve high-income status.

HONG KONG – On the 40th anniversary of the launch of China’s “reform and opening up,” the country is well on its way to recapturing its former status as the world’s largest economy, having made substantial progress toward modernizing its agricultural sector, industry, defense systems, and scientific capabilities. But four major traps lie ahead.

The first is the middle-income trap. With a per capita annual income of around $9,000, China remains significantly below the threshold for high-income status, set at around $12,000-$13,000 by the World Bank. Only a few countries in history have managed this leap during the last half-century.

A major reason is that reaching high-income status demands a strong network of modern institutions that define individuals’ rights and obligations, enable market exchange and non-market interactions, and enforce the rule of law by resolving disputes fairly. While China has been working to develop its institutions for four decades, it still has a long way to go.

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