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Xiaoyan Lei, Chuanchuan Zhang and Yaohui Zhao

.0 6.0 6.8 7.6 8.3 2.0 2.5 3.0 3.4 3.8 4.1 Note:  Table shows years of contribution at five-­year intervals. Source:  Authors’ estimates. the income dynamic of the rural household, it is also assumed that the premium increases at the same rate as net income. At the highest premium of CNY500 per year, 40 years of contributions only yield a replacement rate of 20.7 percent (Table 18.7). The guiding principles also require that funds in individual accounts are deposited with commercial banks, accruing at the yearly interest rate. A key parameter of the individual

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Yolanda Fernandez Lommen and L. Randall Wray

, although western experience shows that excessive inflation comes at a political cost. Hence, a slow transition to less reliance on corporate debt to finance economic growth would reduce financial fragility. In the financial instability hypothesis of Minsky (1986), income flows that only service debt are considered speculative finance. Minsky warned that a speculative position effectively becomes a Ponzi scheme if income falls or if interest rates rise when interest is capitalized and is serviced by additional borrowing. This is the danger an indebted corporate sector

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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.
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Ligang Song

investment share of GDP and an enormous current account surplus. The PRC’s savings and investment experience certainly needs explaining when set against the decline in the US savings’ rate in an era of loose fiscal and monetary policy, and in tandem with a social policy that encouraged broadening home ownership beyond its ‘natural’ perimeter (Brookings Institution 2004; Roubini and Setser 2005). Cross-­country studies of savings rates emphasize their positive relationships to income per capita levels, credit expansion, and GDP growth; their weak relationships with rates of

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Wing Thye Woo

-­dominating enterprises’ (Wade 1990: 18), and the controls on capital outflow to prevent the chaebols from using ‘public subsidies to build personal fortune abroad’ (Amsden 1989: 18). The trouble with Amsden’s narrative is that she was almost always seeing only the positive aspects of whatever intervention the government had undertaken. For example, when it helped the chaebols by channeling bank credit to them at subsidized interest rates, Amsden’s claimed positive outcome was that the government’s control of the purse ‘helped orient the chaebols toward accumulating capital rather than

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Juzhong Zhuang, Paul Vandenberg and Yiping Huang

, improved productivity, and innovation as sources of growth, it is imperative that it deepens financial sector reform. The priorities for this include: Avoiding the middle-­income trap ­71 making the financial sector and financial intermediation more market-­based; this means allowing demand and supply to play a greater role in determining interest rates, opening up the financial sector to private sector participation, and making state-­owned banks truly commercial; enhancing financial safety by further strengthening the regulation and supervision of financial

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Loren Brandt

, was upwards of 225 million. The sector has also regularly been the source of 85–90 percent of the PRC’s export earnings, which have helped finance growing imports of natural resources, capital goods, and technology. Industry will remain vital to the PRC’s growth and rising incomes. Concerned about the prospects for the sector, the government’s recent policy initiatives are focused on new industrial upgrading amid the belief that this and the development of innovative capacity have so far been limited. Several factors are frequently cited in policy discussions in

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Juzhong Zhuang, Paul Vandenberg and Yiping Huang

economies and middle-­income countries in Latin America (Figure 1.3). To some extent, the PRC’s low-­cost advantage also developed out of asymmetric market liberalization. Here, approximately 90 percent of product market prices were fully liberalized, but the government still controlled prices in various factor markets to varying degrees (Huang 2010). For instance, low deposit interest rates combined with high household savings offered banks a steady flow of cheap funds. These savings were intermediated at low interest rates to enterprises, especially state

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Yi Jiang and Jingmin Huang

trading, have attracted considerable interest among policymakers. Given the scale and complexity of the country’s water pollution challenges, Managing water resources for sustainable growth ­559 command-­and-­control measures often cannot achieve the desired effects at a reasonable cost. While financial disincentives, such as pollution discharge levies, are potentially powerful deterrents for polluters, inefficient levy rates and low enforcement capacity can lessen their impact (ADB 2011b). A broader range of market-­based instruments should be promoted to protect

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Guanghua Wan and Juzhong Zhuang

registration system, social protection, access to public services, taxation, and governance. Rising inequality in the PRC and its potential implications have attracted considerable research interest and a sizable literature has emerged. Largely due to the unavailability of household survey data covering the entire country, earlier attempts to assess the level of inequality focused on the measurement of regional or inter-­household inequality in specific locations, such as rural or urban areas, and in specific provinces for specific periods (see Tsui 1993; Rozelle 1994