Convergence or Divergence : Middle Income Trap of China

Abstract

China’s economic growth has been slowing down since 2008. The Middle income trap concept is getting an increasing attention in the context of China. China pursed a similar development strategy to Korea focusing on increase in capital accumulation and labor. The effect of this strategy has weakened in recent years. The middle income trap is referred to the phenomenon that the economic growth of developing countries is to slow down at around the middle income level. GDP of China is expected to reach $10,000 in 2018 which is classified as Middle Income by World Bank Classification. As another alternative to explain the growth slowdown of China in terms of Middle Income Trap, the theory of growth convergence was tested by comparing to development of Korea. The hypothesis is that the multiple growth convergence lines exist, therefore, the middle-income steady state can be arrived at through a gradual slowdown. The existence of different convergence path was tested using the data from Penn World Tables from 1995 to 2015. As for a proxy for steady state income level, the value of GDP per Capita PPP for the year t as compared to value of the GDP per Capita of the United State for the same year were calculated. The convergence hypothesis can be demonstrated as a negative correlation between the average rate of GDP growth per capita for the period and the level of GDP per capita at the beginning of the period. The results show that Korea made a jump to the high income convergence path, whereas China is at the inflection point where it could fall into the middle income trap or make a jump to the higher convergence line. From this points of development, only the endogenous factors such as human capital, innovation, R & D investment and elimination of corruption will be the ultimate drive for the sustainable growth. The economic structure transformation and enhancement of the total factor productivity are important factors in order to cross the line.