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 11: Industrial upgrading: experiences and policy lessons

Loren Brandt


Industry has played an important role in the economic transformation of the People’s Republic of China (PRC). Over the past several decades, the sector has grown apace with the entire economy and remained the source of 40 percent of gross domestic product (GDP). Even with the massive state-sector layoffs beginning in the mid-1990s, industry still absorbed an additional 75 million workers, so that in 2012 total employment in secondary industry, which includes construction, 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 support of upgrading initiatives. These include the country’s high dependence on foreign technology and foreign firms,1 foreign firms’ limited transfer of cutting-edge technology into the domestic economy, a lack of ‘national champions’ with international brand-name recognition, and a low, though rising, share of GDP directed toward research and development (R & D).

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