China’s High-Income Future

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.

But there is no historical necessity that dictates that countries get stuck at particular levels of income. On the contrary, studies suggest that fast-growing low-income economies are also likely to become fast-growing middle-income economies, and ultimately to graduate to high-income status. If an economy gets stuck, it is because it has failed to adjust, as the basis for growth changes. And, in fact, the lack of capacity for self-transformation normally would have been visible at low-income levels, too.