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Yew-Kwang Ng :Will China Fall into the Middle-income Trap?

Yew-Kwang Ng:


Thank you for inviting me to attend this grand awarding ceremony and forum. My topic is about middle income trap.


What is middle income? In view of price, it means $5,000 to 16,000 per capita or 35,000 to 110,000 RMB per capita. The number is $8,000 in China, which could be higher and approach the top if measured by purchasing power. Therefore, even if the annual growth rate is 5% in the future, the income will overpass $16,000 before 2030. Thus, I don’t think China will fall into the middle income trap.


There are many issues in China’s economy and other areas, but these issues are usually being exaggerated. For example, we often hear that “China’s economy is on a downward trend”. I think this is wrong because China’s economy is not on a downward trend. Downward trend means negative growth rate. Despite a decreased growth rate, China still perpetuates a rapid growth at a rate of 6.5%. 20 to 30 years ago, China was developing at a super speed. Now it is still developing rapidly. How can we say it is on a downward trend? That is completely wrong. Many people fail to see that China is no longer what it used to be. The real output of very one percent growth now almost equal to the 2.4% 10 years ago. Therefore, even if the growth rate declines to 5%, its actual increased output almost equal to the 12% 10 years ago, the 20% 15 years ago, the 30% 20 years ago and the 50% 25 years ago.


The growth rate of 2015 was 6.9%, also represent bigger real output than the 7.4% in 2014. If we could recognize this, we will not be influenced like Taiwan scholars by the ideology and think that “Taiwan manufacturers have to seek for other opportunity instead of relying on the market of mainland China as mainland China’s economy is declining”. This is wrong. Even if China only has 4% growth in the future, it can still offer bigger newly added market for its trade partners.


The 20%, 30%, 50% that I mentioned just now was measured by the real GDP data of National Bureau of Statistics. The official data might not be completely reliable. For example, the Gini coefficient is too low to be true. In view of the growth of economic aggregate, the parts that were not reported due to tax evasion would offset the part that being overestimated excessively. Therefore, I think the growth of economic aggregate was not overestimated and even underestimated.


In addition, the debt issues that we talked about in recent 2 to 3 years do exist but are not so severe because China has a comparatively high saving rate. Debt is not very high in view of saving rate.


In addition, China’s economy is developing rapidly at around 6.8%. Thus, debt issue is not deteriorating. The relative amount of debt will shrink. It will become even smaller with the growth in GDP.


It is agreed that anyone able to  explain the “China Miracle” of China’s rapid growth in last few decades should win the Noble Economics Prize. I think I could give you the answer but I don’t think I deserve this award. Because I don’t think there is a miracle in China that simply explains the rapid growth in last few decades. Why there was a so-called “China Miracle”?


1. Just now, several scholars and Professor Tian mentioned that this should be credited to Deng Xiaoping. The Reform and Opening up conducted by Deng Xiaoping gradually eliminated the restrictions of public owned planned economy and allowed market to play the role of adjustment and obtained benefit of comparative advantage by international trade. What is more important is that it aroused the enthusiasm of almost everyone such as entrepreneurs, managers, workers and farmer for production. Therefore, the economy developed rapidly. This is the prime reason for the so-called China Miracle. It is too obvious to be mentioned.


2. Later Developed Advantages: Reform and Opening up allows us to obtain advanced production and operation management technology to achieve rapid development through international trade, investment and other channels. Lin Yifu stressed about later developed advantages. He mentioned about middle income trap recently. One of the key points he made was the “Per Capita GDP in China is at the middle income level that used to trap Latin American countries”. Lin Yifu pointed that people failed to see when Latin America was at that income level few decades ago, the income of America was much lower than now. Therefore, in terms of the income percentage of the America at that time, Latin American countries accounted for around 40% while China accounted for only around 20%. We are far below 40% and have a huge space to catch up comparing with those Latin American countries that fell into middle income trap. Therefore, there is a large space for later developed advantages.


3. Chinese in Hong Kong, Macao, Taiwan and overseas


For entrepreneurs, investors and scholars in economic management and technology, etc. on one hand, mainland China after the Reform and Opening up provides them with a larger stage; on the other hand, due to Chinese complex, they invested, established enterprises and taught in mainland China which directly or indirectly increase the economic growth rate of China.


4. Chinese are diligent. They are able to perform the business talent after the Reform and Opening up.


5. The convention of taking precautions and blessing descendants contributes to a high saving rate that increases capital accumulating rate and promotes economic development. In recent years, some people say that the export growth rate decreased and we need to encourage consumption as we need to rely on it. I disagree with encouraging consumption. People save money because they want to spend in the future. We can increase production rate and maintain high overall demand if we can transform savings into investment. I think encouraging consumption will make us lose the traditional merits, which in long term would not be good.


6. Even though there are many problems, I still think the Chinese government’s adjustment over economy was generally successful. Take 4 trillion RMB as an example which is claimed having caused many problems, I believe it played an important role in sustaining a stable economic growth.

According to orthodox economics which includes Hayek and Friedman’s opinion, the increase in monetary supply will only increase the price and has no influence on the output. Market can adjust automatically. We don’t have to worry about inadequate demand, and government doesn’t need to make 4 trillion RMB and other offerings.


According to Keynes and other scholars including me, the combination of traditional macro, micro and general equilibrium analysis is Mesoeconomics analysis. Through this analysis, we might have Friedman’s conclusion that the changes in monetary supply only influence the price rather than the output if we don’t assume there are complete competitions.


7. China boats an advantage of large population. Most people think this is a big issue for China, but I think this is a merit.


The above 7 advantages are factors beneficial to the rapid development and they basically remain unchanged. Some of the factors like smaller space for catching up were due to changing from super speed development to rapid development. However, we will still maintain rapid or moderate growth for at least several decades. Therefore, I think we can avoid traps as long as we maintain a stable growth.


In addition, we put huge investment into infrastructure constructions in recent decades. Even though some of the high-speed rails are too advanced, especially the maglev train in Shanghai which is definitely advanced but only generates few economic profits, most of the high-speed rails will make a great amount of dividend out of infrastructure constructions in the mid-and-long term and will offset the lost population dividend. Therefore, I am pretty sure that we will avoid the middle income trap. In addition, I believe China will outperform other countries. We will not only avoid the trap but also outperform the America in terms of per capita income.


Major dependence:


1. Technology advancement and innovation: The investment on people’s quality, education and technology account for 2.1% of the GDP. The number of patents in China ranks the first in the world, higher than that of the America. China has a huge population. It has a more detailed division of work and the labor cost is rather low in areas like providing public goods. In view of Mozart effect, it means the more people, the more talents. The knowledge of talents can be utilized in the whole society.


2. Catching up with and surpassing rely on institutions and reform.

3. China’s high saving rate and large infrastructure investment contributes to catching up with and surpassing other countries in the future.

Based on these advantages, my prediction is the per capita GDP after adjusting the purchasing power will surpass the America before 2088. In addition, even without PPP adjustment, the per capita GDP will also surpass the America before 2100. This is my prediction that based on the growth speed. I also take the growth of the America into consideration.

Ways to avoid traps and catch up with others:

1.Continue to reform and enhance the utilization of the market.

2.Abandon unnecessary political limitations like limitations on registration system of the urban and rural areas, 1.8 billion hectare farmlands as well as one-child policy.

3.The issue of corruption and unequal distribution.

4.To enhance soft power like culture and morals in the country rather than building Confucius Institutes overseas.

Even if we could avoid traps to catch up with and surpass other countries, there will still be some problems.


1. Environmental protection. The average income now is much higher than that 20 years ago. However, the smog turns more severe. Today, Beijing suffers a serious air pollution as a big issue. It is OK for me to attend the meeting in Beijing for one to two days but I dare not come to the northern China in winter to stay for a long time.


2. Distribution. The income and wealth distribution are getting increasingly unequal. With the increase in average income of China and India, the world is becoming more equal. However, the domestic equal distribution of every important country is declining.

3. The abuse of power, power-for-money deal, etc.

4. The low moral level of China is not caused by the Reform and Opening up but the Cultural Revolution and one-child policy.

5. Fail to take full advantage of the market. For example, Beijing limits car models by the license plate numbers and distributes license plate numbers by drawing lot rather than auctions. There are limitations in 1.8 billion hectare redline, population policy, etc.

The misunderstanding of population and migration. When the subway is crowded or flood with traffic jams, you would think that you might drive freely or have seat available if the numbers of vehicles on the road and passengers in the subway could reduce by one half. Due to this, many people think that traffic jams and pollutions are mainly caused by overpopulation. Why this is a misunderstanding? If the per capita investment is set, when the number of population and vehicles reduce by one half, then the width of the road will shrink by one half as well which could result in more severe congestion. If there is only one half of the population and passengers, why would there be so many subway lines and buses? With less population and less vehicles, it could be less convenient as well. More than 50 years ago, when I studied for my Bachelor’s Degree in Singapore in Nanyang Technological University which is the same university that I work in now, the total population was only around one million. At that time, there was only one bus that we could take to leave the university. If we missed one, we had to wait for half an hour as there were only two buses per hour. When I went back to work in Nanyang Technological University, once I had to take Bus No. 179 and I missed two of them when I walked to the bus station. I thought I would have to wait for another 20 to 30 minutes for the third one. However, it only took one to two minutes for the third Bus No. 179 to come. That is the benefit of having a larger population. When there are more people, there will be more buses as well.

The house rents of large cities are quite high especially in cities like Beijing and Shenzhen. If given the same work and salaries, most of the people will choose to live in big cities rather than villages or small and medium-sized cities. It is clear that the advantages of large population outperform the disadvantages. According to one of this year’s report, doctors in the small city with two million people in New Zealand were so busy that they had to hire assistant doctors. The salary they offered is two times of the average salaries of doctors, at around 1.8 million RMB. In addition, the assistant doctor will only have to work 4 days a week and enjoy 12 weeks off annually. In two years, they contacted 4 medical professional companies but no applicant applied. That was because doctors thought that city was too small and they didn’t want to work there. According to the data published by Ministry of Internal Affairs and Communications of Japan on 26th February, 2016, the total population of Japan decreased compared with previous investigation but the population of Tokyo increased. If it is bad to have too many people, why the population in big cities is increasing while that in smaller cities is decreasing? Thus, I think it is wrong to say having too many people is bad.


If one-child, two-child, five-child and six-child policy was dominant in my birth time, I wouldn’t have come to the world because I am the seventh child in my family. I don’t think my birth has caused any great loss to anyone. My parents didn’t regret to have me. I strongly oppose to the policy that not allow my birth. In view of big cities, with the increase in trade level, average income and urbanization, the problem in the future will be low birthrate. Therefore, I don’t think we need to worry about population. Instead, we should completely loosen the population policy.

Thank you!   





◆please indicate the source if authorized: National Economics Foundation

◆photo:National Economics Foundation