“China’s policy makers are already focused on how to change the country’s growth strategy to respond to the new challenges that will come, and avoid the “middle-income trap.” That is clearly reflected in both the 11th and 12th Five Year Plans, with their focus on quality of growth, structural reforms to harness innovation and economic efficiency, and social inclusion to overcome the rural-urban divide and the income equality gap.”
This quote comes from one of the opening paragraphs of the WorldBank’s 2013 report on China and its economic development, entitled “Building a Modern, Harmonious, and Creative Society.” The Middle income trap occurs for developing economies when their growth causes wages to raise such that they are no longer competitive with lower cost nations, yet they lack the technological and innovative capacity to compete with the advanced nations. Realizing the Asian Century says, “such countries cannot make a timely transition from resource-driven growth, with low-cost labor and capital, to productivity-driven growth.”
High growth rates are easier to sustain when countries are underdeveloped because they can improve economic efficiency in the economy relatively easily by shifting jobs from agriculture to manufacturing and by implementing technological advances previously pioneered by other countries, which can rapidly increase GDP. Once developing nations become technologically ‘caught up,’ it is much more difficult to sustain those levels of growth. China is still not close enough to the technological frontier, and it’s wages aren’t high enough to accurately evaluate whether or not it will fall victim to the middle income trap.