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No Middle-Income Trap for China

The days of 10% annual growth for the Chinese economy have ended, as was inevitable. But there is good reason to believe that the real story is not the slowdown, but the shift in Chinese output from quantity to quality.

BEIJING – There has always been a fixation on Chinese economic growth. And with good reason. For a large economy, sustaining annual growth rates of 10% over several decades is unprecedented. And yet that’s exactly what China did from 1980 to 2011. But now the miracle is over. Since 2012, annual growth has slowed to 7.2%, and Premier Li Keqiang’s recent annual “work report” set a growth target of just 6-6.5% for 2019.

For the vast legions of China doubters, this is a “gotcha” moment. After all, the lower bound of the premier’s target implies a 40% deceleration from the “miracle” trend. This seems to vindicate warnings of the dreaded “middle-income trap” – the tendency of fast-growing developing economies to revert to a much weaker growth trajectory just when they get their first whiff of prosperity. The early work on this phenomenon was precise in terms of what to expect: as per capita income moved into the $16,000-$17,000 range (in 2005 dollars at purchasing power parity), a sustained growth deceleration of around 2.5 percentage points can be expected. With China having hit that income threshold in 2017, according to International Monetary Fund estimates, its post-2011 slowdown looks all the more ominous.

But one of the first things taught to economics graduate students, even back in my day, is to be wary of the perils of data mining. And the middle-income trap is a classic example of the pitfalls of endless number crunching. Give me a database and a powerful computer, and I can “validate” almost any economic relationship masquerading as an analytical conjecture. There are five key reasons to dismiss the now-widespread diagnosis that China is ensnared in the middle-income trap.