By Dr. Dan Steinbock
According to a recent report by the Chinese Academy of Social Sciences (CASS), China has entered the ranks of the so-called ‘upper-middle-income’ countries. Many Chinese concerned about the middle-income trap have shown a fair amount of interest in this report. The trap refers to a status quo wherein a country gets stuck at a certain income level.
While most observers feel that the pace of transformation in China has been rapid, many remain concerned about the increasing income inequality. Others point to successful industrialisation in East Asia – from Japan to South Korea – arguing that improving social welfare will be critical to avoiding the middle-income trap.
These viewpoints are not mutually exclusive. Together, they drive the re-balancing of the Chinese economy through further urbanisation and industrial progress. They believe that if this process continues for the next ten to fifteen years, China may escape the trap. But why do countries get trapped in the first place?
China joined the so-called ‘upper-middle-income’ countries a few years ago. The CASS report relies on the World Bank’s classification, which groups economies based on gross national income (GNI) per capita. Based on the bank’s method, there are four categories:
- Low-income economies ($1,025 or less)
- Lower-middle-income economies ($1,026-$4,035)
- Upper-middle-income economies ($4,036-$12,475)
- High-income economies ($12,476 or more)
In the early days of economic reforms, China was still in the ‘low-income’ group. This category currently features countries such as Senegal, Haiti and Afghanistan. In 2008, after decades of investment and export-led growth, China joined the ranks of the ‘lower-middle-income’ countries, which now include Tunisia, El Salvador and Sri Lanka.
According to the CASS, the current Chinese per capita GDP is $8,016 (52,000 yuan). As such, China joined the ranks of the ‘upper middle-income’ countries around 2012. As a result, Chinese living standards are approaching those of Turkey, Brazil and Southern Europe. However, these findings should be taken with a grain of salt.
Today’s advanced economies industrialised in the late 19th and early 20th centuries. So, they have enjoyed the benefits of wealth and income for an extended period.
In China, and other emerging economies, prosperity is still very young, and far more fragile.
Potential is not reality
Just because an economy has great potential does not always mean that it can deliver. And yet, that’s what my acquaintance Jim O’Neill, who coined the term ‘BRICs’, seemed to imply. While O’Neill did wonderful work in promoting emerging economies, analysts focus on abstract data rather than real life.
If the theory had been valid, we would continue to see solid economic progress in China, India, Brazil and Russia. Further, the ‘mini-BRICs’, including Nigeria, Indonesia, Iran and Pakistan, would also maintain their progress.
Yet, this has not played out. The emerging and developing countries have always relied on diverse sources of industrial advantages. Before the global crisis, those ‘BRIC’ economies that relied on their natural resources enjoyed high growth. This continued as long as the prices of oil, gas and commodities continued to rise.
Conversely, with the end of the ‘commodities super-cycle,’ the very same nations have taken heavy hits.
What’s worrisome is that external pressure – especially by Western nations – can effectively undermine the benefits of modernisation. This is a problem even if economies change their industrial structures and get their policies right.
The new Cold War and geopolitical tensions are compounding the economic woes of these countries. This includes the US-EU sanctions against Russia, Washington’s tacit support for the ‘soft coup’ in Brazil, and land wars across the Middle East.
It is for these reasons that I have argued, for more than a decade, that the hopes associated with some ‘BRIC’ economies or ‘mini-BRICs’ will prove inflated. It was wrong to project bright futures, in the early 2000s, for economies that relied mostly on resource and commodity-driven growth.
These mistakes are not new. In 1960, Ghana and South Korea were at similar starting points and ordinary wisdom was Ghana would grow faster than South Korea. Today, the GDP per capita of South Korea is $36,600, while it is less than $4,300 in Ghana. This is a reminder that economic development depends on the impact of industrialisation rather than potential and promise.
Once, when I met the legendary investor Jim Rogers, he referred to ‘BRIC’ analysts as “number crunchers.” This was spot on, as, though Rogers is a commodity expert, he started his career as a gifted historian and knows only too well that numbers without context are hollow.
In this regard, China is better positioned to overcome the middle-income trap with a more diversified industrial structure, as long as regional re-balancing continues and the external environment remains peaceful.
Dr Dan Steinbock is Guest Fellow of Shanghai Institutes for International Studies (SIIS). This commentary is based on his SIIS project on “China and the multipolar world economy.”
A slightly shorter version of this commentary was published by China Daily on November 4, 2016.
Featured Image Credits: American Enterprise Institute