China's Path to Overcoming the Double Middle‐income Traps

• DOI: http://doi.org/10.1111/cwe.12219
• Date: 01 November 2017
• Author: Peilin Li
• Published date: 01 November 2017

©2017 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 28–44, Vol. 25, No. 6, 2017

28

China’s Path to Overcoming the Double

Middle-income Traps

Peilin Li*

Abstract

China is at a crucial stage of overcoming the middle-income trap, with the factors

that drive economic growth having undergone significant changes, and domestic

consumption playing a more important role in economic growth. It is necessary, at this

point, to promote mass consumption by expanding the middle-income group. The present

paper puts forward the concept of the “double middle-income traps.” This refers to the

situation in which an economy’s per capita output stagnates and the size of the middle-

income group is unable to expand for an extended period of time. These two factors are

closely related. Based on data from the Chinese Social Survey conducted by the Institute

of Sociology at the Chinese Academy of Social Sciences, the present paper analyzes the

scale and development of middle-income groups, and the relationship among middle-

income groups, the middle-class and middle-class identity. The marginal consumption

propensities of middle-income groups are also considered. The findings of the paper

indicate that the expansion of the middle-income group plays an important role in

promoting mass consumption, maintaining continuous and stable economic growth, and

overcoming the double middle-income traps.

Key words: double middle-income traps, mass consumption, middle-income group

JEL codes: O12, O43, O53

I. Introduction

China’s development over the past several decades is distinguished from that of other

major nations around the world by its setting of long-term goals and the formation of

plans that have been followed by generations of hard-working people. At the end of the

1970s, when China rst implemented the reform and opening-up policy, it set the goal

of building a “moderately prosperous society.” China intends to achieve this goal in a

comprehensive way by 2020. The intention is to increase the proportion of the middle-

income population, narrow the gaps of rural–urban disparity, area differences and

income distribution among industries, and eventually form an olive-shaped distribution

*Peilin Li, Senior Researcher, Institute of Sociology, Chinese Academy of Social Sciences, China. Email:

Lipl@cass.org.cn.

©2017 Institute of World Economics and Politics, Chinese Academy of Social Sciences

Overcoming the Double Middle-income Traps 29

structure.

China is entering a new developmental stage. The economy is going through a huge

transformation as it enters “the new normal.” Whether China will be able to overcome

the “middle-income trap” has become a critical question. Here, we add another layer of

meaning to the notion of the “middle-income trap” by introducing the hypothesis of a

“double middle-income trap.” On the one hand, it refers to a stage of generally slower

growth that an economy reaches after becoming a middle-income society. On the other

hand, it refers to the inability of a society to curtail the widening of social inequality, or

to expand the size and proportion of the middle-income population, thus failing to build

an olive-shaped society with a dominant middle-income social group. The two problems

are intricately related, with most countries battling with the “middle-income trap”

having to deal with problems of disparities between rich and poor, and such disparities

being among the major causes of the “middle-income trap.”

During economic transformation, only a minority of the middle-income countries can

catch up with and eventually join the group of high-income economies; hence the middle-

income trap. The majority will endure long-term economic stagnation. They can neither

compete with low-income countries in terms of labor costs nor compete with high-

income countries in high-end innovation. Accumulated social and economic problems

become bottlenecks for further development. These countries are unable to achieve the

desired social transformation and modernization as their economy remains stalled.

Most of the countries that have fallen victim to the “middle-income trap” are from

the Middle East and Latin America (e.g. Brazil, Mexico and Chile). These countries

became middle-income countries in the 1970s, similar to the “Four Little Dragons” in

Asia. Since then, however, the development of these countries seems to have reached

the glass ceiling, and they have not made it to the high-income club. To those economies

in the middle-income trap, passing the threshold of US$10 000 GDP per capita appears

insurmountable.

In contrast is the successful “East Asian model,” referring primarily to Japan and

the “Four Little Dragons”: Singapore, South Korea, Chinese Hong Kong and Chinese

Taiwan. It took these countries approximately 10 years to transform from middle-

income to high-income countries. For example, Japan’s GDP rose from US$3000 in

1972 to US$10 000 in 1984. South Korea’s GDP per capita rose from US$3000 in 1987

to US$11 469 by 1995.

There is extensive literature on the causes of the “middle-income trap,” with

analysis being undertaken from many perspectives. Such causes include debt, inequality,

corruption, over-urbanization, public service shortages, youth unemployment and social

divisions. In the majority of research, social inequality and the insucient size of the