A rising middle class is the yardstick by which emerging economies are measured, and there is no more widely analyzed middle class than China’s.
Since China opened in 1979 her economy has had the air of inevitability surrounding it. Analysts and economists trumpeted the arrival of the Chinese century and told the western world to prepare to be eclipsed in both economic and military might. It seemed that China had been unleashed and that its pan-pacific destiny was soon to be manifest.
With such an unstoppable juggernaut what could possibly go wrong…
…Perhaps a phenomenon economists label the “Middle-Income Trap” (MIT). The MIT can be defined as “when a developing country has come close to the lower bound of the income level of the industrialized countries in its catch-up process but does not open its economy to free markets and entrepreneurship, further economic progress will fail, and the country remains in the middle-income range” (Mueller, n.d.).
To relate this specifically to China in laymen’s terms the basic situation is this:
China experienced meteoric growth at a rate of 9.5% since 1979 (Congressional Research, 2019).
The answer seems to be companies engaging in economic arbitrage, where manufacturing is located in a country with an extremely low cost of production and then sold to a wealthier market for below what the competition can set prices at while still maintain profitability.
This arbitrage pumped billions of dollars into China and rapidly raised wages and living standards.
As wages and living standards increase, so do the costs of production in said country, until there is no longer an economic incentive to do business in the country. Businesses then pull out for more fertile soil and as a result the host economy is forced to restabilize at a far lower rate. This further exacerbated when the host country has a highly centralized “planned economy” and is unable to resist the siren song of taxing the foreign companies to stuff the state coffers. (Cough, cough, China…)
This economic observation has (of course) been politicized here in the west and especially in the US. Hawkish sectors of the political scene are using the red spectre of 1980s Cold War fame, and simply spelling USSR PRC. They ignore the economic instability observers have long pointed out with China and gin up fears of hegemony lost.
So, is there any hope for China’s economy to reach escape velocity and avoid this economic quagmire?
Perhaps, but time certainly is not on China’s side. Former senior director for Asia in President Barack Obama’s National Security Council, Evan Madieros said this “Are Xi Jinping and [Premier] Li Keqiang ready to pay the necessary political costs [to avoid the middle-income trap]?” Medeiros asked. “I would say the jury is still out on that”. “I don’t think Xi Jinping necessarily is a reformer,” he added. “I think he is a modernizer, and the reason that distinction is critical is because Xi Jinping’s views about the economy are informed by a series of Leninist and nationalist political beliefs, not a full-throated embrace of the market. So, I think what we’re going to see in the next five years is a tension play out between those nationalist Leninist beliefs and market forces” (Asia Society, n.d.).
Asia Society, (n.d.). China may be running out of time to escape the middle-income trap. Retrieved from, https://asiasociety.org/new-york/china-may-be-running-out-time-escape-middle-income-trap.
Congressional Research Service. (2019). China’s economic rise: History, trends, challenges, and implications for the United States. EveryCRSReport.com. Retrieved from https://www.everycrsreport.com/reports/RL33534.html.
Mueller, A. P. (n.d.). The middle-income trap in the perspective of the Austrian capital theory. MISES. Retrieved October 14, 2021, from https://www.misesjournal.org.br/misesjournal/article/view/961