China As Middle Income Country: Is The Downturn The New Normal?

Way back in 2011, when China’s economy was still going gonzo, Economist Magazine came out with a special report on whether China would be able to escape the Middle Income Trap. The lead article in that report was titled: Beware the middle-income trap: China’s roaring growth cannot last indefinitely, and I remember it well. I remember it well because I back then sought to engage many people in discussing whether China would ever escape the middle income trap and very few would Then, as now, just about everyone who does business in China or with China is reluctant to admit it possible that the real issue with China’s economy is not its short term gyrations, but rather, whether China will soon plateau at an economic level more akin to Thailand or Malaysia or Brazil or Russia, rather than reach the heights of a Japan or a United States.

Back in 2012, I was on a “Doing Business in China” panel at a Wharton Business School China Forum and while there I had the opportunity to listen to a great lecture by world-renowned economist, Augusto Lopez-Claros. I asked Professor Lopez-Claros whether he thought China would be one of the rare countries that breaks through the middle income trap and his answer was a resounding “it’s possible.” He then went on to note how only five countries have really done that and become developed: South Korea, Japan, Singapore, Hong Kong and Chile. I’m not even sure Singapore and Hong Kong are even large enough to count.

I am not prepared to say that China will not be able to burst through the middle income trap, but I will say that I think those who just assume that it will are ignoring all sorts of things. I will also say that since that 2012 event I have asked a number of other economists and a number of people with deep knowledge of China and of its business climate/economy this same question. And the most common answer I get is that it’s possible, but that it hasn’t really shown much evidence that it will yet. These people talk of how, yes, the complexity of the widgets China is building is growing, but that there are so many other factors indicating it is not heading for first world status, including governance, corruption, massive numbers of rural poor, exodus of talent, and stifling of innovation.

Will China ever become a developed country? If you think it will, what do you think China has that that will enable it to do so? Conversely, if you think it will not, please explain why you think that. I see China doing just fine, a la Malaysia, but becoming an economy like Japan’s, no I don’t see that. Do you? And if you do, what are you seeing that I am not?

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