All eyes are on the slowdown in GDP growth in China, a trend that is undoubtedly worrying for both the Asian country and the world economy. However, this ‘bad’ data hides a much more promising side: the ‘Asian giant’ is growing by 5% annually amid a serious demographic crisis. This means that China’s economy is growing, for example, five times faster than that of the euro area, despite the fact that the active population (one of the great factors of production) is declining. If this trend continues, it will result in staggering growth in per capita income for the Chinese.
Although this indicator is not perfect, per capita income is more accurate than total GDP for analyzing a country’s level of development. The consensus among economists indicates that a country reaches the desired level of development only when per capita income increases. Above the $12,000 – $15,000 area (There is another section that Consider it up to $25,000 cannot be considered developed)
In fact, with a per capita income of around $12,500, China is currently struggling to escape the middle-income trap. This area is called the ‘trap’ because many countries have achieved rapid growth in per capita GDP in recent decades, starting from a very low level, but reaching a $12,000 – $15,000 range. If they are, their speed slows down.
become a developed country
Reaching that limit is usually relatively easy, at least this has been the case for many Asian countries. This first change is usually the result of a move from an agrarian economy to one with a more intensive productive structure and low added value industries. The problem arises when industry and services in these countries have to make the leap towards higher added value goods and services, which helps that economy cross the threshold that separates it from the ‘developed world’ .
“Intuitively, when countries are in the early stages of their development, their productivity growth is higher than when they are in the ‘catch-up’ stage of their development, adopting pre-existing models and technologies In a simple and no-nonsense way: When it comes to copying something that already exists, everything becomes easier and faster,
“However, as an economy approaches the technological frontier, it becomes more difficult for productivity to grow at a higher rate,” he explains. Sivon Hur and Braden StrackmanResearchers at the Dallas Federal Reserve. China is taking this leap now when its GDP expansion is slowing down. Could this recession hinder the further prosperity of Chinese citizens?
Although China’s overall GDP is slowing, everything indicates that per capita GDP will continue to grow at a rapid pace. What is the explanation? China’s population has begun to decline (by 850,000 people in 2022), while GDP is growing at about 5%. Dividing this GDP growth by population results in a much larger increase in per capita GDP.
“China’s expected economic performance in the coming years, compared to other countries, when their level of economic development (measured in terms of GDP per capita) was similar to China’s today, the proposal Generally favorable forecasts on China’s ability to escape the middle-income trap“, he assures Alicia Garcia HerreroHead of Economics for Asia-Pacific at investment bank Natixis.
For their part, Dallas Fed economists say that, taking into account expected productivity, the ratio of capital per worker, the aging of the working-age population and the average number of hours worked by each worker, it is expected That China’s GDP per worker will grow at 5.7% over the next 10 years and only 4.2% by 2032-41, according to Dallas Fed economists.
While according to García Herrero’s calculations, total GDP could grow by an average of 4.9% by 2025, 3.6% between 2026 and 2030, and 2.4% between 2030 and 2035. Is it a lot or is it less? Everything indicates that this growth will fall short of the ‘miracles’ of South Korea or Japan, but it will be enough for China to achieve a much higher GDP per capita. The miracle of GDP is over, but the miracle of per capita GDP is still alive.
$10,000 ‘trap’
“After surpassing a per capita income of $10,000, only two countries were able to continue growing at a rate of at least 4%: South Korea, with an average GDP growth of 5.5% between 1994 and 2004, and Japan with growth of 4% during the 1980s,” explains García Herrero.
“While all other countries had much lower average growth rates in the ten years after crossing $10,000 per capita, Poland (3.6%) was closest to Japan’s rate. In this respect, As South Korea, Japan and Poland have escaped the middle-income trap, China is expected to do the same., This expert says, “In fact, according to reasonable growth estimates, China should reach $20,000 per capita in 2030 (ten years after reaching $10,000 per capita).
The long shadow of South Korea and Japan
The ‘miracles’ of South Korea and Japan are tremendous success stories, which were also supported by the US and Western countries. On the other hand, China will not only have the support of these countries, but will also have to ‘fight’ against the veto being imposed on the Asian giant in terms of technology. China must find a way to move up the value chain without direct help.
Nevertheless, García Herrero’s calculations suggest that China’s economy will exceed $25,000 per capita by 2034, with income levels well above that. Today they represent countries such as Greece or Portugal, Whether it is considered a developed country or not, this level of income represents absolute success for a country in which people were dying of hunger until a few decades ago. The point is that the constant comparisons with South Korea and Japan seem to belittle China’s ‘miracle’.
“Korea and Japan’s leap from middle-income to high-income class meant a transition from primarily industrial exporters to economies based on innovation and services. China has laid some of the foundation for this change, such as investing heavily in higher education and creating adequate infrastructure. “Both conditions are necessary to become a high-income country,” explain Dallas Federal Reserve researchers Sivon Hur and Braden Strackman.
“However, until now China has maintained restrictions on foreign investment and has been slow to move beyond heavy reliance on manufacturing exports. Huge real estate and infrastructure investment has marked a turning point in the Chinese real estate sector,” Experts warn. From Dallas Fed. China can achieve this, but it will have work to do if it wishes to emulate the miracle of its neighbours.