China could become a high-income country this year, but can it stay one?
joining the ranks of the club of developed countries, is much more difficult.
While the jury is still out on exactly when it might happen, it is possible that 2025 is the year China
becomes a high-income country . The data points to it passing that threshold this year, but the question remains whether it will address the structural challenges that could push it back down to middle-income status.
It is important to define what economists mean by
the middle-income trap . According to the China 2030 Report, jointly issued by the World Bank and China in 2013, only 13 out of 101 middle-income countries (classified by gross domestic product per capita) made the transition to high-income status between 1960 and 2008. The reason so few countries have been able to make the transition is the difficulty in achieving both the structural transformation and the technological and industrial upgrading needed.
As economies and wages grow, the things these economies produce must advance as well. Countries that continue to make rather simple products while
their wages continue to grow put themselves in an increasingly uncompetitive position in the global economy. This makes industrial and technological upgrading a major challenge that middle-income countries must overcome.
If countries wish to continue developing and
avoid the middle-income trap , the structure of the economy and the institutions that govern it must transform to meet the new reality created as economies and industries mature. When economies are poor and productive forces are yet to be fully cultivated, economic growth can solve most of their problems as developing countries still have the ability to grow rapidly.
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