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John Ross: Avoiding ‘middle income trap’ needs facts, not myths

2016-04-14

By John Ross    Source: Global Times    Published: 2016-4-13

 

How to guarantee that China breaks through the "middle income trap" and makes the transition from a "middle" to a "high" income economy has become a hot topic. But unfortunately some discussion in the media of this fails to follow the fundamental Chinese saying of "seek truth from facts." Instead it follows a method of "ignore the facts, and focus on inaccurate dogma."


In particular, as usual, neo-liberals engage only in stereotyped speech and avoid dealing with the facts. They suggest that to avoid the "middle income trap" China should follow the policies advocated by the World Bank and IMF - known internationally as the "Washington Consensus."


It is extremely difficult for a developing country to break through to high income status, and only an extremely small group of countries have undergone very rapid economic development and broken out of low or medium economy status and become high income economies.


A first issue is evidently what is the criteria for an economy to become "high income"? Internationally there are 68 countries or regions of countries that meet the World Bank official definition of a "high income" economy: a per capita GDP of $12,736. This, however, presents a misleading picture for China for two major reasons.


First, the majority of these 68 high income economies are in very small countries - 35 out of 68 have populations of under 5 million. Only 22 high income economies or regions have populations of more than 10 million.


A number of countries have "high income" status exclusively due to their simultaneously having very small populations and being havens for tax evaders, such as the Cayman Islands, Monaco, Liechtenstein or Bermuda, or due to the possession of large quantities of oil, such as Saudi Arabia.  


Evidently, neither of these types of economy can provide a development model for China. Such realities, however, demonstrate that the method sometimes followed in media discussions of looking at China`s "ranking" in a list of countries which takes no account of population, economic size, or whether a country`s economy is essentially exclusively an oil exporter is extremely misleading.


Turning to the facts of economic development, the most important "high income" economies have been so for many decades, such as the UK, US, Germany and France. They achieved this status by relatively slow growth over many decades - usually more than a century. For example, average annual per capita GDP growth over the entire 20th century was only 1.9 percent in the US, 1.8 percent in Germany and 1.5 percent in the UK. Evidently such a slow growth path cannot provide a model for China - which aims to achieve "moderate prosperity" by 2020 and "high income" status by international standards in the next five to 10 years.


Turning to the conditions facing China`s development in the period since it began its "reform and opening-up" in 1978, it can be noted that the majority of large developing economies actually fell further behind the US in this period. Taking as a criterion a country having a population of at least 5 million, and 40 percent of US per capita GDP in 1978, then of the 53 economies in this category 28 fell further behind the US in per capita GDP in 1978-2015 and 25 improved their position in comparison to the US. The majority of large developing economies therefore "undeveloped" relative to the US in this period. This emphasizes the difficulty of sustained rapid economic growth.


Over a longer period, it should also be noted that a number of previously advanced economies fell back into the ranks of developing economies or suffered disastrous setbacks.


Asia`s dominance in rapid-growth economies is overwhelming. All 10 of the world`s fastest-growing economies are Asian - indeed the top 13 are. It is therefore Asian economic development, not the Washington Consensus of the World Bank and IMF, which has been an overwhelming success. It follows that what China has to study to ensure it breaks through to high income status is not the dogmas of the World Bank but the forces which led to China`s own economy outgrowing all others and, after that, what forces produced rapid economic growth in Asia.


It may be seen that any model based on copying advanced economies is erroneous if the aim is to catch up with the advanced economies. The model of the main advanced economies is based on slow growth maintained over very many decades - over a century. China using such a slow growth model could not achieve high income status by international standards in five to 10 years or close the gap with the advanced economies. China must therefore use economic methods which have been shown to generate rapid growth - those used by successful developing economies.


China`s has been by far the most successful strategy in generating rapid economic growth. China`s rate of per capita GDP increase has outperformed all other economies both over the entire period of 1950-2015 and in 1978-2015.


The second most successful economic development strategy after China`s has been what is generally referred to as the "Asian development model."


The neo-liberal Washington Consensus of the World Bank and IMF has been a failure compared both to China`s development model and those of the rapidly growing Asian economies.


Any policies for China`s economic development must be based not on dogmas of the Washington Consensus, but on the facts of those countries which have achieved successful rapid economic development. As always the only correct method in dealing with such a serious question as how to overcome the "middle income trap" is to "seek truth from facts."


The author is a senior fellow with the Chongyang Institute for Financial Studies at Renmin University of China.

Key Words: income   economy   GDP  

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