The People’s Republic of China has made few moves towards free market reforms in the past decade and has little incentive to do so with a robust economy and record-breaking growth rates. However, a Communist Party congress later this year will see the PRC with a new leader and potentially a new vision for China’s economy in the future.

The World Bank has issued a report entitled “China 2030″ where it has recommended policy measures that the PRC must undertake to keep China’s economy from falling into what is the “middle income trap.”

The “middle income trap” is a term coined by Barry Eichengreen in an influential paper entitled “When Fast Economies Slow Down: International Evidence and Implications for China.” In his research, Eichengreen analyzed the economies of countries that had risen above the level of absolute poverty since 1957. He found that, once per capita incomes averaged between $12,000 and $15,000 per year, economic growth stalled and incomes then began to fall by 2% per year.

The implications of this are that subsidizing the economy in China will lead to its weakness later and while it guarantees political stability in the short run, it insures a lack of economic competitiveness in the long run. Escaping from the “middle income trap” like South Korea and Japan have done requires a full range of institutions to support a competitive internal market.

Recommendations in “China 2030″ range from devolving state-owned enterprises and having interest rates set by the market. What makes this report from the World Bank unique is that it  is produced in collaboration with a Chinese government agency named the Development Research Centre of the State Council, a think-tank that provides policy recommendations to the PRC leadership.

The DRC’s involvement in crafting the “China 2030″ report gives reformers the cachet needed to undertake these reforms while simultaneously dissuading old guard communists from thinking the World Bank’s recommendations are directed at undermining one-party rule in China. While some are hesitant to undertake substantive reform, there are those within the Communist Party who have warned of the dangers of only reforming piece-meal. Yet, given the current composition of the PRC’s leadership, anything terribly drastic cannot be expected in the near future.

 

[The Economist]

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