Study On Economic Growth In The Stage Of Middle Income:China’s Challenges And Lessons From Some Other Countries

Most of the Latin American countries and some of the South Asian countries had fallen into the so called "middle income trap" in the twenty years after1980. As China’s per capita GDP entered the range of upper middle income in2010, it is widely concerned that whether China can avoid from falling into the "trap", a state of economic stagnation or slow growth. In addition, some phenomenon show that economic growth in China is entering a new stage, such as the fundamentally finished process of transfer "surplus lobar force" out of the rural areas; the falling of outside demand. The rapid growth up to now has accumulated many structure problems, which will impact the sustained growth potentially. The aim of this paper is to illustrate what lessons can we learn form other countries for China to keep sustained growth, what factors will make China’s growth to slowdown, and what transition is needed for China in the new stage.This paper established some "style facts" about the growth of the developing countries. By surveying and analyzing of literature, the explanation of the phenomenon of the "middle income trap" is examined, and the debate about expectation of China’s growth in the future is also analyzed. It is found that two most important factors that prevent economy from growing sustainably are the weak ability of technological creation in domestic and structural imbalance.In this study, some challenges to economic growth in future and their impacts are analyzed. These challenges are decline of the growth of labor force supply and increasing labor cost, dependence on the foreign technology, expanding public passion expenditure led by urbanization and aging of population and the imbalance of high investment rate, high saving rate and low consumption rate.To solve these challenges, we can make efforts in following three aspects: improving the ability of technological creation, avoiding sharp increase of penssion expenditure by adopting an urbanization process of gradual character, shifting to policy promoting balanced growth from the undergoing strategy of catching up. Using a simple model, it is illustrated that as the technology of a less developed country approaching to the world frontier of that, one’s technological improvement will slowdown for the declining effect of learning will. To narrow the gap between a less developed country and the developed one, the former need to increase input on research and development of technology. This conclusion is supported by regressions based on cross-national data.As a supplement to the study on Latin American economic growth, it is proved that the centralized land ownership in this area led to enormously rapid urbanization, which caused a large number of unemployment in urban area and expansion of unregulated sector, and also the sharp increase of pension expenditure, leading to heavy burden of tax on firms. As a result, the heavy burden of tax on firms prevents the industrial sector to increase employment. So, in this process, the centralized land usage and rapid urbanization impeded economics growth, especially the process of industrialization, and this mechanism is an important cause of the stagnation of Latin American economies. A simple dynamic model is built in this paper to illustrate the mechanism. On the contrary to Latin America, the East Asian economies had commonly implemented reform on land ownership and the centralized land ownership had been destroyed after the World War Two. Especially in China, thanks to the decentralized land ownership and family fanning which provided the function of pension, labor’s wages was kept on a much low level in the last30years, one of the most important factors promoted China’s economic growth. It is also found that small family farms are widely exist in the world. Theoretically, small family farming has high efficiency for its advantage in incentive and supervising mechanism. All these means that China should adopt a process of urbanization with gradual character so as to avoid rapid expansion of social pension expenditure. We should promote urbanization by increasing social pension in urban areas rather than by enforce farm land centralizing. In other words, we should increase the "force to pull" rather than the "force to push".Japan, South Korean and Chinese Taiwan are the three economies reached the high income level in much short time after they entered the middle income stage. To take some lessons from them,I analyzed their experiences of catching up, especially the function industrial policy. It is found that all industrial policies in these economies have a character of "rent creation", providing rent to particular sector or firms by giving them the monopoly opportunities in certain fields. Although this kind of policy promoted industry upgrade, it is effective in the certain stage of catching up or taking off. I argued that such policies are more and more unadoptable for their heavier negative effects. China should adopt policies to promote balanced growth, for instance, the competition-enforce policies.Finally, this paper analyzed the causes why the catching up strategy have been utilized for so many years, which impeded the adjustment to balanced growth. It is found that one obvious structure imbalance, low labor income share, can be explained by the rapid increase of heavy industry in the manufacture sector and capital deepening, these phenomenons are closely related to the competition among local governments. The most important reason is that capital intensive sector can bring more tax income for local governments. This paper also provides some empirical evidences by econometric regressions. Based on these explanations, the policy implicit is also illustrated.