Learning from China’s Rise to Escape the Middle-Income Trap

Since 2000， the world economy has experienced a burst of convergence， as developing countries have grown substantially faster than high-income countries. As a result， the world economy has entered a new era in which emerging market economies are the main drivers of global growth. This trend was reinforced after the 2007 global crisis by a recovery that has been characterized by a two-speed pattern， with growth rates in developing countries that have been more than twice those in high-income countries.

The dynamic growth of these emerging economies will engender tectonic shifts in the global economy that will provide new opportunities for both high-income countries and developing countries. One of the most noteworthy features in the new world economy for Latin American and Caribbean countries is China’s rise. This development has three major implications.

First， following years of high growth， China’s wages in the manufacturing sector have been rising rapidly and its surplus labor has been diminishing. As a result， China’s economy now faces pressure to upgrade its industrial structure and to enter capital and knowledgeintensive industries to maintain dynamic growth.

Second， China’s emerging middle class will give rise to a new and growing market for products from other countries. This boost in consumption will provide new export opportunities for both advanced and developing countries and could lead to an upward shift in the growth trajectory of the world economy.

Third， China’s upgraded industrial structure may present growing challenges to the competitiveness of the manufacturing sector in other upper middle-income countries， particularly those countries in Latin America.

The opportunities and challenges of china’s Rise

Industrial upgrading to higher value-added commodities is particularly important in view of the opportunities and challenges to Latin America’s economies due to the rise of China. The first decade of the twenty-first century will be considered a strategic inflection point in the global economic landscape. China’s meteoric rise is the hallmark of this transformation.

What lies in store for future growth prospects in China? One way to gauge the potential is to compare the position of China to that of other emerging economies that caught up rapidly with advanced countries since the end of World War II， in particular South Korea， Taiwan area， mainland China and Japan. These economies used their advantage of backwardness to upgrade their technology and industries at a cost advantage， thus achieving a fast rate of structural change and economic growth.

In 1979， China had a per capita income that was 6 percent of the per capita income of the United States， when measured in terms of purchasing power parity. In 2008， the per capita income of China was 21 percent of the United States. Since 1979， China has been following a similar development strategy focused on exports and diversification as Japan， Korea and Taiwan area， mainland China earlier. In light of these economies’ success in narrowing the gap of their economies with more advanced countries through industrial upgrading and the continued large technological gap between China and the United States， it would appear that China has the potential to achieve 8 percent growth for another 20 years. By that time， the per capita income of China measured in purchasing power parity may reach about 50 percent of the per capita income of the United States， and China’s economy could be twice as large as that of the United States.

The high growth scenario assumes that key domestic reforms are being implemented in both advanced and developing economies by the year 2030. In China， these reforms include the removal of various barriers to exit and entry of the private sector and the implementation of corporate reform， especially regarding dividends， for state-owned enterprises which would lead to greater competitiveness and would reduce imbalances on account of high corporate savings. Increased severance taxes on the extraction of energy resources such as coal， petroleum， and natural gas would limit concentration of wealth in these sectors. The banking system， which is largely composed of stateowned enterprises and dominated by four firms， would be gradually commercialized and free to set interest rates according to market forces. This would allow the private sector to be able to borrow at the same rate as state-owned enterprises and credit would also become more easily available to small and medium-size enterprises.

The increased growth of developing economies will have considerable impact in both advanced economies and on the developing economies themselves. New markets are being created in China and other developing economies， and these markets are going to be increasingly driven by domestic consumption， South-South trade， and innovation rather than by exportled growth dependent on established markets in the United States， Europe， and Japan. Other regions can take advantage of this paradigmatic shift and capitalize on the new opportunities， while preparing for the economic challenges that will be the result of the structural upgrading that China will pursue. A better understanding of the changing market in China would facilitate this upgrading. A key change will be emergence of a growing middle class.

Various estimates indicate that the Chinese middle class is already larger than that of the United States. Conservative estimates state that 350 million new middle class consumers in China will be created in the next 15 years. According to econometric projections calculated by McKinsey in Figure 20 the middle class in China is calculated to grow by a factor of 3.6 from 2005 to 2025， while those in poverty will decline by a factor of 7.9. This means there will be 875 million Chinese people out of poverty by 2030.

Based on projections by Kharas， the share of the U.S. middle class in the global middle class may drop from 24 percent in 1965 to 12 percent in 2010 to 4 percent in 2030. At the same time， the share of China’s middle class is predicted to be 20 percent by the year 2030， rising from 9 percent in 2010. This figure alone epitomizes the new type of world economy that will exist in the future， and will lay the backdrop for the new opportunities and challenges for Latin America and the Caribbean. The strengthening of China’s middle-class will imply a shift towards consumption-driven growth， with the structure of consumption expected to move away from food consumption (which has recently fallen to its lowest levels since the late 1980s) towards transportation， communication， recreation， and healthcare.

As a result of these shifts in consumption， China will soon become the largest market for many products and services. The nation will account for at least 16 percent of the world’s market for products and services， and most of the growth will come from the creation of large middle class mass markets.

China will foster the development of many multi-national corporations that are likely to be big players in the global market. Collaboration with these local corporations could also help facilitate the growth of multinational corporations interested in investing in China.