Effective Capital Formation And Overstep"Middle Income Trap"

It is more than thirty years since1978from which our country began to reformand open up. China’s economy has made considerable development, and now ChineseGDP ranks second in the world. In the whole period capital formation has played afirst important role for economic growth. But in recent years, economy appearsphenomenon of Asset bubble, Inflation and overcapacity. The growth effect of capitalaccumulation is declining. Some economists begin to question that whether “Chinesegrowth miracle” could continue, and think of that China is face with “middle incometrap”.In the paper, I discuss the problem of “middle income trap” under the frameworkof theory of economic growth. The purpose of my research is trying to answer thequestions as following:(1) what is “middle income trap”.(2) Is it possible for Chinaof entering to “middle income trap”.(3) Which kind of economic operationmechanism causes china entering to “middle income trap”.(4)How does Chinaoverstep “middle income trap”. The four questions above constitute the core contentof the four pants of the paper.In the first part, I summarized three theoretical models of the neoclassical theoryof economic growth: the Solow-Swan model, Ramsey-Cass-Koopmans model, andthe Diamond model. Then I discussed the process of capital accumulation anddiscrimination conditions of dynamic efficiency in the three models. In theSolow-Swan model, the savings rate is exogenous, and the economy is dynamicinefficiency when savings rate exceeds the optimum savings rate which the economicoptimum growth is required. In Ramsey-Cass-Koopmans model, the savings rate isendogenous, and the choice of maximization of consumption made by householdresults that capital stock convergence to a point below the Golden Rule level whichmeans there is no dynamic efficiency in Ramsey-Cass-Koopmans model. In theDiamond model, the economy is populated by over-lapping generations ofentrepreneurs who live for two periods. The capital stocks depended on decision ofeach generation is likely to exceed the Golden Rule capital stock which meansdynamic inefficiency. On this basis, I analyzed the features of "middle income trap",and explains its economic connotation, it is that”in a certain constraints of economicoperation mechanism, the economic surplus can’t be converted for the effective capital stocks, leading a country into economic development stagnation which thecapital stock is less than the balanced growth path level”.In the second part, I reviewed literature related to capital accumulation dynamicefficiency, and summed up three ways to distinguish capital accumulation dynamicefficiency: the return on capital method, the equivalent proposition of AMSZ criterion,the optimal savings rate method. The paper draws conclusions about capitalaccumulation dynamic efficiency by using the three methods that: China’s capitalstock is less than the level of gold rate less than the balanced growth path level.Meanwhile, China’s per capita capital stock is far less than the developed capitalistcountries. This means China has huge space for capital accumulation. Then, Icalculate the capacity utilization of the calendar year by three methods which includethe growth rate projection method, the HP filter method and the production functionmethod. Declining capacity utilization means that the low conversion rate ofinvestment into capital is limiting effective capital formation. Economic surplus iswasted by inefficient investment, and then the capital stock of the economy maintainscertain level. This will lead our country into "middle income trap" in2014. In addition,I analyzed different types of “middle income trap”, and pointed out that the primaryrisk of facing "middle income trap" is the government’s macro-control policies, andthat the second is the risk of capital outflows.In the third part, this paper firstly calculated impact of inflation on corporate tax.The calculated results show that inflation results the revaluation of fixed assets andinventory and additional taxation of6509.41billion Yuan in2010, accounting forGDP1.62%. The same time, the paper also calculates excess returns which extractiveindustries gain by raising the price shocks of extractive industries. The excess returnsare2.6trillion Yuan, accounting for6.51percent of GDP. Economic operationmechanism leading to stagnant of capital accumulation is that: inflation and the priceimpact of extractive industries distort margin and deteriorate return on capital, andlower margin leads to stagnant of capital accumulation. Secondly, the article alsoanalyzes the reason for the failure of Keynesian policies in condition of margindistortion. The mechanism is that: Keynesian economic policies lead to inflationwhich exacerbate margin distortion, and return on capital become lower. SoKeynesian economic policies will not only fail to stimulate the growth of investment,but also limiting effective capital accumulation.In the fourth part, I review U.S. tax policy and fiscal policy in1980s, and the core idea of the U.S. economic policy during that period is: restoring the level of themarginal rate of return of capital, and taking the economy back to the capitalaccumulation. The economic policy mainly includes:(1) Tax policy. On one handthe enterprises which could earn excess profits take more taxes, and on the other handtax cutting restore the level of the marginal rate of return of capital. The taxationchange is in two different directions which encourages private investment and try tomaintain a balanced budget.(2) Fiscal policy. The introduction of the balanced budgetbill limit the expansion of fiscal expenditure, and reducing federal governmentspending means that the private sector can obtain more economic resources. Based onAmerican experience, the paper gives policy recommendations which include threeparts: reforming the formation mechanism of resource price and environmentalprotection charges; improve the tax structure, and redistribute the tax burden; promotethe reform of the budget system.