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China’s High-Income Future

At the recent meeting of G-20 finance ministers in Shanghai, many expressed concern about China's chances of reversing its economic downturn. If recent research debunking the so-called middle-income trap is correct, and China maintains the momentum of its structural transformation, such fears may turn out not to be warranted.

LONDON – “What if this is ‘as good as it gets’?” Jack Nicholson asks, as he walks through his psychiatrist’s waiting room in the eponymous film. At the recent meeting of G-20 finance ministers in Shanghai, participants were asking much the same question – and not just with regard to medium-term expectations of weak global growth. Many are now wondering whether China’s current growth rate will be as good as it gets for a long time to come.

Determining the validity of such fears requires understanding what is driving China’s economic slowdown. Some offer a straightforward explanation: China, along with other major emerging economies, has become ensnared in the dreaded “middle-income trap,” unable to break through to advanced-economy status. But this assumes that some exogenous force or tendency causes countries to become “stuck” at a particular income level – a view that one academic study after another has debunked.

To be sure, countries do often struggle to achieve high-income status. According to the World Bank, only 13 of 101 countries classified as middle income in 1960 had reached high-income status in 2008. Moreover, some middle-income countries, after promising growth, spent decades “trapped” at a certain per capita income level. Argentina, for example, kept pace with the United States in per capita income growth from 1870 to 1940; since then, the gap has been widening steadily. In this manner, even countries that make it to high-income status sometimes regress to middle-income levels.

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