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 17: Education and human capital development

Meiyan Wang

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


Strengthening education and developing human capital are essential for the People’s Republic of China (PRC) to avoid the middle-income trap. The reasons for this are fourfold. First, education and human capital development are among the most effective ways to achieve rapid economic development and improved labor productivity. In Cai and Wang’s (1999) decomposition of the PRC’s growth from 1978 to 1998 into capital, labor, human capital, and labor transfer, human capital contributed 24 percent to annual gross domestic product (GDP) growth. In addition, Cai and Qu (2010) find that marginal labor productivity in manufacturing rises by 17 percent for each year of additional schooling. Second, nearly all high-income economies attached great importance to education and human capital development when they made the transition from the middle-income stage. Two important models are Japan and the Republic of Korea, both well known for increasing education investment and instituting reforms to improve access and raise the quality of education during their economic transformations. For example, the Republic of Korea increased education expenditure substantially from the 1970s and encouraged a major increase in private investment in education. Third, returns to education have increased rapidly in the PRC (Lai 1999; Li et al. 1999). Gustafsson and Li (2000) find a substantial rise in the returns for a four-year college education compared with a high school education for male workers, from 9 percent in 1988 to 16 percent in 1995.

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