Managing the Middle-Income Transition
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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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Chapter 7: Lessons from catch-up growth in East Asia

Wing Thye Woo


The People’s Republic of China (PRC) is a middle-income country, but its graduation to high-income status in the next 40 years is not a given—even though it was the fastest growing country in the world from 1980 to 2013. Argentina was the fastest growing among 65 countries from 1870 to 1913 but things did not turn out well over the rest of the century. Argentina’s income per capita was 72 percent of the United States’ (US’s) level in 1913 but declined to 35 percent by 2008, causing Argentina’s rank in the sample countries to fall from tenth to twenty-eighth over the same period. The obvious lesson is the well-known observation that the past is not a reliable predictor of the future. The important question for the PRC is what should it do to avoid the same fate as Argentina? The fact is that very few countries outside Europe have achieved high-income status in the past 50 years. To take again Latin America as an example, although the income levels of Argentina, Brazil, Chile, and Mexico (four of the region’s five largest economies) have grown and converged since the 1960s, the average income of the group as a percentage of the US level has stayed practically unchanged (30 percent) over this period—providing graphic confirmation of the middle-income trap phenomenon.

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