Per capita income in China grew from 155 Usd in 1978 to 4.300 in 2011. Ironically, this unprecedented result is considered by some as a hazard more than a pride. China is now fully within the risk range of the so called “middle income trap”. It is a statistically proven danger that may occur when a country is caught between the success of the past development and the challenges of future development.
The World Bank coined the expression in 2007, to symbolize the fate of some developing countries who were able to achieve remarkable results in defeating underdevelopment, but then could not progress consistently towards prosperity. After few years, production costs became too high to compete with newly emerging countries; conversely, their lack of industrial and educational sophistication forbade them to join the group of industrialized countries. In Asia, Japan and South Korea escaped the trap, Philippines and Indonesia fell into it, even at a lower income level than China today, Malaysia and Thailand were partially stuck.
Economic history shows it is easier to move quickly at the beginning than to keep the pace afterward. Among the many causes, one prevails: tools of the past are no longer useful. Many countries like China followed the recommended road, paved with low cost manufacturing, large investments, reduced consumption, and massive exports. But without innovation, the economic structure could get sclerotic. To avoid stagnation is necessary to raise productivity, which is actually happening in China at a fast pace of 8% p.a.. This issue is in fact in Beijing priority list, but time may still be running short. Chinese industry is still relying mostly on low value added products, although their share of total exports is declining, competing thanks to cheap labor costs.
Recent pay rises in China made possible for domestic and multinationals companies to consider relocating manufacturing to cheaper countries. Yet, China can offer a bigger market and a modern infrastructural network, but they might be sufficient in the short run, but not in the medium-long run. A temporary solution might be to move West, i.e. to transfer low-end manufacturing inland, but in this case income disparity between coastal and internal provinces could become socially risky. To keep stability and employment levels, China has to rapidly create new opportunities in high-end activities. Thus, time is crucial, since competition is fierce. Expanding the service sector is an obvious solution. Only 34% of China’s wok force is employed in services, approximately half an average industrialized country. But to compensate low-end factories relocations, within a framework of growing urbanization, will be challenging.
Creating many-million jobs will be necessary. Paradoxically, China Government should renegade its own successful policy. Beijing knows well that cannot rely on its glory, otherwise China’s future may be at stake. Still, it is called to fight against a conservative environment, a combination of traditional culture and vested interests. However the social arena is so pregnant with high expectations that the danger of making no decision is equivalent to making a wrong one.