How China can avoid the middle income trap
Juzhong Zhuang suggests four things that China can do - after years of spectacular gains - to prevent its economy from reaching a plateau, now that it is starting to lose its low-cost edge
The recent deceleration in China's economic growth is of concern, and not just because it raises questions over whether internal and external demand is needed to keep the economy growing. It also raises a flag as to whether China is settling into a protracted period of subdued growth, better known in economic circles as the "middle income trap".
Like many fast-burning economies, China's double-digit growth in gross domestic product was to a large part attributed to its low-cost advantage - an ability to manufacture goods cheaply thanks to its pool of surplus labour and a "demographic dividend" in the form of a youthful workforce.
However, China is beginning to lose this edge. Since 2008, real wage growth in urban China has consistently exceeded labour productivity growth. And the surplus of rural labour is shrinking; in fact, labour shortages have been noted for several years, especially in coastal areas.
Population ageing will also make labour more expensive. China's working-age population is likely to peak in a couple of years. Soon, China will no longer be able to benefit from its demographic dividend.
This is familiar territory for many Latin American countries and several Southeast Asian nations, which fell into the middle income trap when they failed to fully implement upgrades as surplus labour shrank and wages rose. Most worked up to middle income status in the 1960s and have remained so after 50 years.
There are role models, many of them here in East Asia: Hong Kong, Japan, South Korea, Singapore and Taiwan all successfully upgraded their industries through innovation, and jumped from low to high income within three to four decades.