In his Opening Remarks on 3 September 2011 at the Conference on China’s Challenges for 2030 in Beijing, Robert B. Zoellick, World Bank Group President, wanted to understand how China could avoid the so-called “Middle Income Trap” – that stage when countries reaching about $3,000 to $8,000 per capita income seem to stall in productivity and income growth. The opening session is to critique and refine the initial findings of a joint project between the Development Research Center of the State Council and the World Bank on China’s medium-term development challenges up to 2030. Click here
Zoellick points out that China’s policymakers know what needs to be done, as evident from a changed policy direction in the 11th and 12th Five Year Plans. These focus on quality of growth, expansion of domestic demand through higher consumption, structural reforms to spur innovation and economic efficiency, and social inclusion to overcome the rural-urban divide and income inequality.
Nevertheless, in the midst of an uncertain world entering into a “new danger zone” with stalling Western economies, a looming European sovereign debt crisis, volatile commodity prices and surging food prices, Zoellick raised the following timely questions:
“How can China manage the shift from an intense focus on economic growth to a broader approach that highlights quality of growth, inclusive growth, sustainable growth – and the well-being of all Chinese citizens?
How can Chinese policymakers sustain economic growth while protecting the environment and using natural resources efficiently, and how can China transition toward green development? How can pricing policies assist?
What will it take to help China adjust to rapid urbanization – from 50 percent of the population living in cities today, to almost 70 percent in 20 years?
How can policymakers modernize the country’s fiscal and financial systems -- aligning revenues with expenditure responsibilities at different levels of government and placing all expenditures “on budget”?
How should policy makers address the roles of state and market, and private and state-owned enterprises? More fundamentally, perhaps – what should be the role of the state in China – with respect to land, labor, markets, and the rule of law?
What about rethinking the organization of public management, and the shift from administrative management to rule-based policies?
How can China best encourage open innovation – in products, systems, and technology – in ways that connect that innovation with the global network of ideas?
How should China interact with the international economy? China is already a key stakeholder in the world economy. Looking forward, how can China be a responsible international economic stakeholder, serving as a key partner in finding global solutions and sharing mutual responsibilities?
And – perhaps the most important question: How can China best draw on the talents, energy, and creativity of its people? In the next five years, more people will be leaving the Chinese workforce than joining it. How can policymakers ensure that the Chinese people can adapt, innovate, and play an active role in the healthy and positive process of change?”
These questions are shorthand for the gripping issues China has to contend with in overcoming the Middle Income Trap –
- Widening economic and social inequalities
- Balancing growth with ecological and resource constraints, including the economic pricing of energy and water resources
- Social, economic, and political adjustments in keeping with China’s massive and rapidly-growing urban citizenry
- Fiscal and financial reform including regulating the credit risks of numerous off-budget “local government financing vehicles (LGFVs)”
- State cronyism and the rule of law
- A society that nurtures creativity and innovation by promoting rather than restricting freedom of ideas and expression
- The need for greater protection of intellectual property rights
- Growth of talent in face of a looming aging population profile
- Readiness in shouldering greater international responsibilities commensurate with the size of China’s economy
By coincidence, so far how successful are China's top companies in overcoming the Middle Income Trap is revealed in the 2011 ranking of China's top 500 enterprises released at a “Top China Corporations Summit” on the same date in Chengdu, Sichuan. Click here
The lists, including separate ones for manufacturers and service companies, show that China's top 500 companies generated 3.631 trillion yuan ($5.39 trillion) in operating revenue last year, an increase of 31.6 percent, which is equivalent to 20.69 percent of the total operating revenue created by the world's top 500 companies in the same year. Their net profits grew by 38.67 percent from last year to 2.08 trillion yuan. Their tax contribution grew 28.77 percent to 2.73 trillion yuan, accounting for 37.4 percent of China's total tax revenue of 7.3 trillion in 2009.
However, behind these apparently impressive results are some stark realities. These lists continue to be dominated by state-owned enterprises (SOEs). Among the China's top 500, 316 are SOEs, accounting for 63.2 percent. Most are traditional industrial enterprises in the fields of steel, real estate, mining and oil and power generation. What is more, compared with Western global giants, their average profit margin was minuscule, at 5.74 percent in 2010, already higher than the average of 5.44 percent in 2009, while their return on net assets increased but to a meagre level of 1.93 percent.
"It is a tough job, in the short-term, to …catch up with their foreign counterparts in terms of …. the capability of resource integration, management expertise, brand building and intellectual property," said Miao Rong, a China Enterprise Confederation (CEC) researcher who led the compilation of the lists.
These realities also echo a sobering note for the US-China Business Council on why Western (especially American) businesses may still rule, at least for now, by Peter Nolan, director of the China Big Business Program at Cambridge University. It shows how much China’s export prowess is dependent on imported and embedded Western technologies and how far ahead and entrenched is the West in the commanding heights of global strategic businesses including commercial aircraft industries, finance, and the world’s top brands. Click here
Robert Zoellick applauded China for having achieved unparalleled development success during the past three decades, lifting half a billion people out of poverty and maintaining an yearly average economic growth rate of 10 percent. In July of this year, the World Bank Group reclassified China as an upper middle income economy and in the next 15 to 20 years, China is well-positioned to join the ranks of the world’s high-income countries, according to Zoellick. But he cautioned that such a transition is by no means the norm. Only a handful of countries or economies have made it. The best success examples in Asia are South Korea and to a lesser extent, Taiwan, according to Michael Schuman in an article posted on Times.com (10 August, 2010). Click here Many countries in South East Asia and Latin America, however, are still struggling with the Middle Income Trap (between a GDP per capita of $3000 to $8000).
In a Special Report “Beware the Middle Income Trap”, The Economist (23 June, 2011) outlined some of China’s current daunting challenges including huge local government debt, over-investment, an asset bubble, inflation and rising social unrest. Click here
In a critical assessment of China's current macroeconomic situation and economic challenges posted on the Communist Party of China’s website on 1 September 2011 Click here , Premier Wen Jiabao, while acknowledging that “complex, unstable and uncertain” domestic and international challenges still remain, highlighted the following to show that the overall situation remains largely positive -
- Domestic demand growing at 16.8% p.a. to play an increasing role with reducing trade surplus.
- Summer agricultural production increased by 6.2 billion catties (3.1 billion kg).
- Price inflation within manageable levels.
- Government revenue increased by 31.2% (by 1.35 trillion yuan).
- Profitability of large industrial enterprises increased by 28.7 %.
- Strategic structural adjustment speeding up: growth rates of engineering and pharmaceutics higher than those of large industrial enterprises; software, informatics, culture, creative and other service industries on the rise.
- Central and Western regions in process of accommodating relocated industries.
- Urban employment increased by 6.55 million jobs.
- Per capita cash income of peasants increased by 13.7%; per capita urban disposal income increased by 7.6%.
- Government investments in social security, employment creation, healthcare and public housing expanded by wide margins.
- Slower growth at reasonable levels, largely a result of macroeconomic adjustments.
According to the Premier, China will continue to focus on balanced but reasonably fast growth, economic re-structuring and inflation management for the rest of this year.
At the 17th National Congress of the Communist Party of China (CPC) in October, 2007, President Hu Jintao set the target of achieving an all-round moderate-income society by quadrupling the per capita GDP of the year 2000 by 2020. China’s per capita GDP in 2000 of $949 has now grown to $4260 (September 2011), already well exceeding the original target by 2020.
However, to emerge from the Middle Income Trap by 2020, China will need to maintain an annual growth rate of 7% whereby per capita income will grow to $8380 by 2021. The 7% growth target is stipulated in the latest Five Year Plan (2011-2015), but with a slowing domestic economy and an uncertain global economic outlook, this trajectory is not guaranteed.
In the final analysis, each Chinese currently consumes about one-fifteenth of primary energy as an American. Multiplying the American per capita energy consumption by China’s population is clearly not feasible within the Earth’s resource limits. The pursuit of a higher-income Chinese Dream will therefore need to take place in a Low-carbon Future. The country is already starting to move in that direction but success is by no means assured.
China may well overcome the odds and attain the ranks of high-income countries within 20 years as hoped by Zoellick, but the road to utopia is fraught with barriers. It is clear that China needs to redouble her efforts and remain on her toes if she is to overcome the Middle Income Trap.