Jiang returns to help China avoid the ‘middle income trap’

Economic growth

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China 2030.pngIt is not easy to discover what is really happening in China’s government. There were no opinion polls before the new leaders were appointed, and certainly no public policy debates. But the blog’s careful reading of Chinese and foreign media does suggest that some important changes may be underway. The evidence for this rather bold statement is as follows:

• Former president Jiang Zemin has been personally involved in the leadership transition
• The 86 year-old was Deng Xiaoping’s successor, and responsible for continuing his reforms from 1989-2003
• His heirs, President Hu and premier Wen, have talked often about the need for more economic reform and fighting corruption
• But they have achieved little, as the recent Bo Xilai affair demonstrated
• Jiang thus felt forced to re-emerge on the political scene, to deliver one more effort at reform

Reform is definitely long overdue, as the chart from March’s key Party Conference report demonstrates. The reason is that China now faces the ‘middle income trap’. It needs to change its policies quite drastically, if the growth of the past 20 years is to continue:

• Since 1950, 10 major countries have tried to escape the trap
• Only Japan (light green) and S Korea (dark green) have succeeded
• The other 8 have seen their GDP/capita plateau around US$10k

As the World Bank (co-author of the report) warns:

“Over the past half-century, many countries have entered middle-income status, but very few have made the additional leap to become high-income economies. Rather, several faced sudden, sharp decelerations in growth and have been unsuccessful in addressing the root structural cause of the slowdown.”

The issue is simple. The advantages which create high initial growth – low-cost labour and easy technology adoption – disappear at middle income levels. If a country fails to adapt to this paradigm shift, their economy stagnates as rising wages make their labour-intensive exports less competitive.

It was presumably this realisation that led Jiang to make his return. The blog will look at the results of his activity in more detail tomorrow.

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