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Will China Follow Latin America’s Middle-income Trap?

Fecha:2012/09/26 Autor:translated by Qi Chuanjun, written by Guo Cunhai

  On May 24, the Department of Social and Cultural Studies at ILAS held the first seminar of its series of "Reading Group Discussion Programs". Dr. Qi Chuanjun had a presentation: Will China Be the Next? Lessons from LAC's middle-income trap". The activity was mediated by Dr. Fang Lianquan, Associate Researcher and sub-director of the Department.

  Dr. Qi's speech focused on four fields. Firstly, he explained the definition of middle-income trap, illustrated its dynamics, and analyzed how LAC has become the first region in the world falling into the middle-income trap. Then, he pointed out the rapid decline of Total Factor Productivity (TFP) is a major reason behind such a phenomena in LAC. Finally, he put forward some suggestions for China to avoid such a pathway in Latin America's history..

  Dr. Qi argued that the concept of middle-income trap could be understood from three aspects. Firstly, it is an economic phenomenon in which developing countries are facing challenges in entering into a high-income society after having been middle-income economies for many years. Secondly, it is not a standardized and measurable economic concept, but a descriptive and relative one. The so-called "middle-income trap" does not necessarily refer to the absolute stagnation of economic growth or negative growth, since it usually occurred with a relative stagnation of economic growth in developing countries when their growths are compared with those in high-income OECD countries. Finally, it doesn't represent the short-term economic growth volatility, but a problem of long-term economic growth; in addition, it doesn't refer to the process of Schumpeterian creative destruction, but an inefficient economic growth mode.

  As a typical region falling into the middle-income trap, LAC has two highlighted characteristics. On the one hand, LAC countries have stranded in the middle-income stage for too many years. LAC region as a whole have been in the middle-income society since 1974. But over the past 40-50 years, LAC countries were still struggling in such a stage. By contrast, France (1979), Japan (1985), Britain (1986), Spain (1990) and Portugal (1995) had stepped out of middle-income stage in succession and consequently turned into high-income countries. On the other hand, it is a widespread phenomenon in the region, witnessed by the facts that the majority of LAC countries (21 upper-middle-income economies)-- 90% of the total population and 97% of the GDP across the region had encountered such a economic growth trap.

  Dr. Qi Chuanjun concluded that Latin America's middle-income trap could be interpreted by the decline in TFP. Estimations show that the reduction in labor input and capital input only accounted for 0.3 and 0.6 percentage of the decline in economic respectively, while the decline in TFP explains the residual of relative stagnation of economic growth. Further analysis turned out that the decline in TFP can be attributed to two factors, namely, the inefficiency of resource allocation, and the insufficient R & D and innovation capability. The former is mainly manifested in the following aspects: weak international competitiveness resulted from long-term protection of domestic industries, limited domestic competition caused by high cost of doing business, inadequate microeconomic innovation deriving from poor financial availability, and weak allocation of human resources in related to the rigid labor market rules. The latter can be explained as follows: the low stock and poor quality of human capital compared to developed countries and emerging economies, unreasonable allocation of limited research resources among different sectors, limited R & D spending in enterprise sector, and weak basic research capacity.

  Based on the analysis above, Dr. Qi concluded that raising TFP should be the only source of long-term sustainable economic growth. So, it is important to continuously improve the efficiency of resource allocation in order to break through the bottleneck of economic growth. In addition, the enhancement of human capital is vital for promoting the quality of economic growth. Moreover, it is essential to input more R&D investment toward the enterprise sector to enhance the economic vitality.

  Comparing with LAC's cases, Dr. Qi deemed that China should take four approaches to avoid falling into the middle-income trap. Above all, the economic restructuring should put more emphasis on the "endogenous growth" rather than "domestic demand ". Then, monopoly of state-owned enterprises should be gotten rid of or be constrained to improve the efficiency of resource allocation and enhance innovation capability. Furthermore, fluid and upward social mobility is the most important factor to improve the quality of education. At last, it is urgent and necessary to remove the obstructions from the vested interests groups in order to further and deepen the reform process.

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