Challenges Facing the People’s Republic of China
Edited by Juhzon Zhuang, Paul Vandenberg and Yiping Huang
Chapter 3: Avoiding the middle-income trap: policy options and long-term outlook
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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