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Peking University, Apr. 23, 2011: Professor Cai Hongbin, dean of the PKU Guanghua School of Management, expounded the key to avoid the “middle-income trap” for China by changing social structure and increasing social mobility. Excerpts follow:

Professor Cai Hongbin

What is “middle-income trap”?

Looking back on global economic development, we could see that if a country fails to change its economic growth mode in time when its per capita GDP exceeds US$3,000, it is likely to fall into the "middle-income trap," that is, per capita GDP will stay at a middle-income level in a long time.

Currently China is in the critical period of economic transition. In order to successfully realize  the transition and avoid the "middle-income trap," China needs to focus on maintaining reasonable high social mobility.

China has made tremendous achievements since the reform and opening up. In terms of nominal exchange rate, China’s per capita GDP in 2008 exceeded US$3,000 for the first time. However, most countries are caught in the "middle income trap" for a long time when their per capita GDP reach a certain level, only few could continue to grow and become developed nations.

Therefore, a widely discussed issue today is whether China will fall into the "middle-income trap." And what are the factors that may trap China into this dilemma?

The key to avoid the “trap"

Government size, income distribution gap, human capital accumulation, and national healthcare system attract people’s attention because of their close link to China’s current problems and challenges. Our quantitative studies show that there is a positive correlation between economic development and the former two, and a negative correlation between economic development with the latter two. Through further multiple regression analysis, we could get the conclusion that the key to avoid the “trap" lies in social mobility, but not the widely mentioned structural factors such as import and export percentage and foreign investment percentage. Specifically, it represents the impact of one generation’s income, education and social status on those of the next generation. Low social mobility and solidified structure of social interests are the main reasons of the country’s dynamic inequality and long-term stagnation of economic growth.

According to the data provided by Hertz in 2007, we examined the correlation between social mobility and GDP growth. The result shows positive correlation between social mobility and economic growth.

In summary, the key to avoiding the "middle-income trap" is to maintain reasonably high social mobility instead of adjusting certain structural factors as is often discussed.

China: how to maintain reasonable social mobility

At earlier stage of the reform and opening up, China's social mobility was still relatively high. However, there are various indications showing the downward trend of its social mobility during the last 10 years. Thus it is critical for China to make efforts to reverse the downward trend from the following four aspects:

First, in terms of administrative systems, the state needs to reform the household registration system and break down the urban-rural dual structure, in order to ensure equal opportunity in all sectors of society. Besides, measures should be taken to prevent and eradicate all forms of institutional barriers restricting social mobility and to relax a variety of market access restrictions and career access restrictions.

Second, in terms of policy-making, China should greatly increase financial input in education and health and improve the per capita level of human capital. In addition, we must focus on solving the education and health inequalities regarding to the structure of investment.

Third, various institutions and organizations should take their responsibilities to maintain social mobility.

Fourth, a collective social awareness of increasing social mobility should be aroused.  Only by doing this could we truly implement the issue. 

In short, facing the significant issue of economic transition, China is moving on a new stage of development. Yet a much more critical issue for China is how to change the social structure and increase social mobility. This is the real way to get rid of "middle-income trap" and maintain the nation’s long-term growth.

Written by: Wang Shiqin

Edited by: Zhang Chunlan

Source: Caing.com