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 15: Making growth more inclusive

Guanghua Wan and Juzhong Zhuang

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


Sustained and rapid economic growth in the People’s Republic of China (PRC) since the late 1970s has significantly increased per capita household income and helped lift hundreds of millions of people out of poverty. However, Chinese society has in the process become much less equal. With a Gini coefficient of per capita household disposable income below 30, the pre-reform PRC under central planning was poor and relatively egalitarian (Ravallion and Chen 2007; Wan 2007). But the Gini coefficient has increased since the mid-1980s, reaching 47.3 in 2013, just off its peak of 49.1 in 2008 (National Bureau of Statistics 2013). This is a high level compared with other countries in Asia (Li et al. 2014). The reforms began with the introduction of the household production responsibility system in rural areas. This decollectivized agricultural land and allocated it to individual households while allowing them to retain any produce over and above state procurement quotas. This reform, coupled with increases in grain procurement prices in subsequent years, led to significant improvements in agricultural productivity and rural incomes. At the same time, owing to fairly equal land distribution, rising rural incomes were shared relatively equally and, because the urban–rural gap explained a large part of the PRC’s total inequality at that time (Wan 2007; Lin et al. 2010), this in turn led to declines in overall income inequality. Rising rural incomes also increased demand for industrial goods and stimulated the development of nonagricultural sectors.

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