Managing the Middle-Income Transition

Managing the Middle-Income Transition

Challenges Facing the People’s Republic of China

Edited by Juhzon Zhuang, Paul Vandenberg and Yiping Huang

The growth model of the People’s Republic of China has been based on high investments, exports, low-cost advantage, and government interventions. This model has successfully transformed the country from a low-income to an upper middle-income economy. However, the model has generated contradictions that could undermine future growth. Making the transition to high income requires greater reliance on efficiency and productivity improvement, innovation, and market competition. This book examines the challenges faced by the People’s Republic of China in sustaining robust growth, and policy options for making a successful transition to a high-income economy to avoid getting caught in the middle-income trap.

Chapter 3: Avoiding the middle-income trap: policy options and long-term outlook

Juzhong Zhuang, Paul Vandenberg and Yiping Huang

Subjects: asian studies, asian development, asian economics, asian politics and policy, asian social policy, development studies, asian development, development economics, economics and finance, asian economics, development economics, politics and public policy, asian politics, social policy and sociology, social policy in emerging countries


The People’s Republic of China (PRC) graduated from low-to middle-income in 1998 and, until very recently, generated annual growth rates close to double digits. But the country remains well behind advanced economies in technology and productivity, and it needs to continue growing strongly and narrow these gaps to attain high-income status. A low-cost advantage significantly fueled the rapid growth of the past three decades. Yet, rising wages and an aging population mean that increasingly the PRC needs to drive growth with greater productivity and innovation, upgrading of technology, and by shifting from low-cost to high-value production. At the same time, it must address the problems created by incomplete reforms, an issue compounded by rapid growth rates. These have caused economic imbalances and contributed to rising inequality which, if not addressed, could become binding constraints on growth. This chapter looks at how the PRC should respond to these challenges. It argues that to grow beyond the low-cost advantage, avoid a middleincome trap, and ensure successful transformation, the country needs a new development strategy. This should (1) step up innovation and upgrading; (2) deepen structural reforms, in particular reforms of enterprises, labor and land markets, the financial sector, and the fiscal system; (3) develop the services sector and scale up urbanization; (4) maintain macroeconomic and financial stability; (5) make growth more inclusive; (6) promote a green economy; and (7) strengthen international and regional economic cooperation.

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