Middle-Income Trap: An Analysis Based on Economic Transformations and Social Governance

680 Pages·2020·5.583 MB·English

by  Zhijie Zheng

Middle-Income Trap
An Analysis Based on
Economic Transformations
and Social Governance
zhijie zheng
Middle-Income Trap
Zhijie Zheng
Middle-Income Trap
An Analysis Based on Economic Transformations
and Social Governance
Zhijie Zheng
China Development Bank
Beijing, China
ISBN 978-981-15-7400-9 ISBN 978-981-15-7401-6 (eBook)
https://doi.org/10.1007/978-981-15-7401-6
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Foreword
The transformation of China over the past forty years from one of the
poorest countries in Asia to the world’s second largest economy is the
most significant geopolitical event of our times. In the era of Reform
and Opening-up, China has lifted 700 million people out of poverty—an
unprecedented feat in human history. China’s rise has redrawn the maps
of commerce that defined the global trading system after World War II.
Today its banks are among the largest financial institutions in the world;
itsleadinginternetcompaniesstandwiththeworld’smostinnovativeand
competitive. Chinese travelers can be found in numbers in the remotest
corners of the globe, as well as in New York and Tokyo.
Success, however, can be its own worst enemy if a developing country
remains bound to what has worked in the past and fails to adapt to
new challenges brought about by development itself. Many emerging
economics have failed to escape the “middle-income trap,” while those
that have averted it to achieve sustainable growth and join the ranks of
high-income countries stand out precisely because they are the excep-
tions. According to the World Bank, only thirteen countries successfully
made the transition between 1960 and 2008.
China’s per capita income (in purchasing power parity terms) has
grown from less than 1000 US dollars in 1990 to over $15,500 in 2016.
In this remarkable achievement, however, it has essentially reached the
level of $16,000 that many economists believe is the precipice of the
middle-income trap. Indicators such as the deceleration of GDP growth
v
vi FOREWORD
from 10 to 6.5% in recent years have sparked discussion and focused
policymakers on the question of how China can avert the stagnation
experienced by so many other developing nations.
Given the urgency of the challenge, Mr. Zheng Zhijie’s original and
wide-ranging examination of the topic, The Middle-income Trap: An
Analysis Based on Economic Transformations and Social Governance,
couldnotbemoretimelyorrelevant.AsthePresidentoftheChinaDevel-
opment Bank (CDB), the largest finance development institution in the
worldwithamandatetosupportChina’slong-termdevelopmentstrategy,
Mr.Zhengisinasingularpositiontounderstandthemiddle-incomechal-
lenge in theory, policy, and practice. What comes through in these pages
is not only President Zheng’s deep technical expertise, but also his sense
ofprofessionalandpersonalresponsibilityfortheissuesheexplores.That
combinationmakes itabookthat shouldhaveprofoundinfluenceonthe
debateaboutthisvitalquestioninthenextphaseofChina’sdevelopment.
The book’s central insight is that for a country to transition success-
fully from middle income to high income, it must transform not only
its economic system, but its social system as well. After a broad-ranging
surveyoftheexperiencesofcountriesonfourcontinents,PresidentZheng
concludes that, “Historically, all countries that managed to escape the
middle-income trap have undergone a series of comprehensive transfor-
mations in the economy, politics, society and culture before escaping
the trap.” He also finds that government plays a decisive role in deter-
mining whether or not a country makes the necessary changes to avoid
the trap. This is particularly true in China, given the dominant role that
government has played since ancient times through to the present day—
in contrast to a country like the United States, in which the founders
intentionally set out to restrict government’s reach.
Regarding the economy, President Zheng argues that China’s primary
challenge is still to delineate the relationship between government and
the market—the fundamental question for Chinese leaders since the late
1970s. There are still too many cases of large state-owned enterprises
(SOEs) dependent on government planning and support. Local govern-
mentleaders,meanwhile,relyfartoomuchoncapitalinvestmenttomain-
tainthegrowth,taxrevenues,andemploymentbywhichtheyareassessed
and promoted. The same dynamic motivates them to protect inefficient
SOEsthroughfavorablepolicy,credit,andloans.Suchactionsdistortthe
market incentives needed for sustainable growth. President Zheng argues
FOREWORD vii
that China needs to “further open up the market and remove barriers
to allow the market to play a decisive role in resource allocation (and)
create an equal competition environment,” which in turn would “enable
the government to play its role better.” These insights are extremely
important.
Given his decades of experience on the front lines of China’s devel-
opment work, President Zheng understands that meaningful change
will inevitably face fierce resistance from those who are invested in the
current system and can exert political influence. In case studies from
LatinAmericaandSoutheastAsia,hedrawscautionarylessonsforChina:
economies controlled and dominated by interest groups sacrifice efficient
markets and the broader good for the narrow benefits of the ruling class;
in doing so, countries ruin their chance to achieve full modernization.
In the countries that failed, President Zheng observes that intense
social conflict and the resulting damage to societal stability can be one of
the major elements that block further progress. This is one reason China
must transition from the growth-first orientation of previous decades,
which has exacerbated income inequality, to one that narrows the wealth
gap, expands the middle class, and devotes far greater resources to
strengthening the social welfare system and safety net.
President Zheng goes on to argue that it is still not enough to
executetheeconomictransformationsuccessfully.Economicreformmust
beaccompaniedbyanequallydeepsocialtransformationthatstrengthens
the rule of law and brings about good governance. It requires the estab-
lishment of a legal system that enjoys the confidence of average citizens.
Only by doing this can China “guarantee the lives and livelihoods of its
people, handle social conflicts, and ensure long-term social stability and
prosperity.”
As with economic transformation, social transformation requires that
government loosen its grip. The government should share responsibility
with other stakeholders in managing civil affairs and ultimately let citi-
zensgoverntheirownaffairswhereverpossible.PresidentZhengcontrasts
this with the historical model, too much of which still persists, in which
“social governance in China was limited by a fundamental problem with
thegovernmentfunctioningasthesolegoverningbody,whilethepowers
of the market, society and the public were too weak, if not zero, leading
to over-administration in social governance and low efficiency of social
resource allocation.”
viii FOREWORD
Finally, President Zheng makes a persuasive case that education can
be a great source of strength in helping China escape the middle-
income trap. By any measure, China has had remarkable success in the
daunting task of educating the largest population in the world. The
effects can be seen from the efficient employees on the factory floors of
Guangdong and Chongqing to colleges in the United States where over
300,000Chinesecurrentlystudy.Inahighlycompetitiveworld,however,
China cannot afford to be satisfied or complacent. Only education “can
provide economic transformation and industrial upgrading…which, in
turn, restructures productive forces, changes relations of production and,
in the end, reshapes the economic base of a society.”
Having known President Zheng for nearly 20 years, it comes as no
surprise to me that he has written a book that is at once scholarly and
deeply humane. It is a volume that will hold the interest of both experts
and those concerned with an issue that will affect so many lives. It is also
relevantforthoseofusbasedprimarilyoutsideChina,becauseaworldin
which China averts the middle-income trap and joins the ranks of devel-
opednationsismuchbetterthanoneinwhichitfails.Weareallinvested
in China’s success. If it can safely navigate this challenge, as it has in so
many other cases, China will be an example for other nations who share
the universal aspiration of providing a better life for their citizens.
John L. Thornton
John L. Thornton is Chairman of the Board of Trustees of the Brookings
Institution, Executive Chairman of Barrick Gold Corporation and Professor and
Director of the Global Leadership Program at China’s Tsinghua University. He
wasPresidentofGoldmanSachs.In2008,hewasawardedtheFriendshipAward
of the People’s Republic of China.
Preface
Escaping the Middle-Income Trap Requires
Increasing Governance Capacities1
Socialism with Chinese characteristics has entered a new era; the main
contradiction in our society has been transformed into a contradiction
between the growing needs of the people and the inadequately balanced
economicdevelopment.AsChinaemergesasamiddle-incomecountry,its
economicgrowthslowsgradually.Anditentersintoa“newnormal”char-
acterizedbymediumorhighspeedgrowth.XiJinping,GeneralSecretary
of the CPC Central Committee, attaches great importance to issues such
as how can China move on to the high-income stage, and how to stay in
that stage, because escaping the middle-income trap, in its essence, is not
an issue of quantity, but an issue of the quality of governance. Without
modernized governance systems and capacities, countries may still come
across development traps at the low-income stage. Although some coun-
tries have entered the high-income stage, they experience larger wealth
gap, and intensified social conflicts, which makes it difficult to main-
tain sustainable development. Therefore, as we are at a critical juncture
of escaping the middle-income trap, it’s critical to review the lessons of
1This was an article originally published in the first edition of the August 11,
2016 issue of Study Times, a newspaper published by the Party School of the CPC
Central Committee, and was edited as the foreword of this book.
ix
x PREFACE
success and failure learned by countries around the world in escaping the
middle-income trap, enhance governance capacities, construct the legal
system and roadmap for national economic governance in a comprehen-
sive manner, and advance national governance on the track of rule of
law.
I. Enhancing Economic
Governance Capacities to Adapt
to the Development Needs of the Economy
Reviewing the development path of our economy, it can be observed
that the relationship between government and market continues to be
an issue in the forty years of development since the reform. Although
the economic boom requires the market to play a fundamental role
in resource allocation, it is necessary to take further steps in escaping
the middle-income trap, such as facilitating market-oriented reforms and
invigorating the economy.
Further Reforming the Economic System to Transform Government
Functions. In the Decision of the CCCPC on Some Major Issues
Concerning Comprehensively Deepening the Reform made in the 18th
The Third Plenary Session of the 18th CPC Central Committee, the
reform of the economic system was recognized as the focus of all the
effortstodeepentheall-roundreform.Andthecoreissuetobeaddressed
is handling the relationship between government and market properly to
allowmarkettoplayadecisiveroleinresourcesallocation,andenablethe
government to play its role better. The role and function of the govern-
ment is to maintain the stability of the economy on the macro level,
enhanceandimprovepublicservices,safeguardfaircompetition,enhance
marketsupervision,complementmarketfailure,maintaintheorderofthe
market, promote sustainable development, and common prosperity.
Establishing a More Open Market to Eliminate Barriers to Market
Entry. Due to historical reasons, the government and enterprises have
been closely associated for a long time in China. In the early stage of
building and refining the market economy mechanism, the functions
of the government and those of the enterprise were not thoroughly
separated. The operation system and management mindset were not