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China’s High-Income Hopes

SHANGHAI – It is widely agreed that economic development means more than GDP growth. As China is now learning, one does not guarantee the other. Unless China’s leaders upgrade the country’s growth strategy to stimulate technological progress and structural transformation, high-income status will continue to elude the world’s second-largest economy and most populous country.

To be sure, China’s growth strategy – powered by investment in infrastructure, a massive increase in low-cost manufacturing exports, and technology transfers – has led to some structural change. As labor and capital moved from low-productivity sectors and regions to high-productivity activities, resource allocation became more efficient, real wages rose, and the economic structure was upgraded.

But the growth strategies that lift a poor country to middle-income levels cannot be counted upon to propel it to high-income status. Indeed, there is no shortage of countries whose leaders have failed to recognize their strategies’ constraints and provide enough incentives to encourage the emergence of a new one, causing their economies to stagnate and leaving them stuck in the so-called “middle-income trap.”

Perhaps the most notable exceptions to this rule have been in East Asia, where four economies – South Korea, Taiwan, Hong Kong, and Singapore – responded to external crises and challenges by shifting their growth strategies. For China, whose growth model has so far resembled that used by these economies before they attained middle-income status, a similar shift is urgently needed.