Detailed background studies were provided by scholars at Peking University, including Xiaoyan Shirley Lei, Lixing Li, Guixia Guo, Yiping Huang, Feng Lu, Ho-Mou Wu, Jianguo Xu, Yang Yao, Miaojie Yu, Chuanchuan Zhang, and Yaohui Zhao. Scholars from the Chinese Academy of Social Sciences, Fang Cai and Meiyan Wang, from the People’s Bank of China, Zhong Xu, and from the Institute for Fiscal Science Research, Jia Kang and Junmin Liu, contributed thematic papers. International scholars who provided studies on the Chinese economy or on countries that have faced similar challenges include: Loren Brandt, Nora Lustig, Jaime Ros, Ligang Song, and Wing Thye Woo. ADB staff who contributed studies include: Jingmin Huang, Yi Jiang, Donghyun Park, Suphachol Suphachalasai, Paul Vandenberg, Guanghua Wan, and Juzhong Zhuang.
We also wish to thank the experts who participated in two workshops in Beijing where ideas and draft papers were presented and discussed. They include: Athar Hussain, Maria Socorro Bautista, Biswa Nath Bhattacharyay, Yang Du, Michael Han, Don Hanna, Dong He, Jianwu He, Liping He, Paul Heytens, Dayuan Hu, Nicholas Lardy, Jong-Wha Lee, Shantong Li, Xin Li, Tun Lin, Minquan Liu, Yolanda Fernandez Lommen, Mai Lu, Ming Lu, Donghyun Park, Dwight Perkins, Yan Shen, Hyun Son, Min Tang, Geng Xiao, Ping Yan, Linda Yueh, Fan Zhai, Bin Zhang, Liqing Zhang, Ling Zhu, and Ji Zou.
Invaluable comments were received on drafts from ADB’s East Asia Department and we would like to thank Klaus Gerhaeusser, Hamid Sharif, Robert Wihtol, and Qian Ying for their support and cooperation. In particular, we wish to thank Yolanda Fernandez Lommen and her team in the Economics Unit at ADB’s Resident Mission in the PRC for contributions through the unit’s ongoing economic analysis and policy work and for reviewing drafts. We are also grateful for insightful comments from Xianbin Yao of the Pacific Department, Lei Lei Song of the Office of Regional Economic Integration, and Jun Tian of the Regional and Sustainable Development Department on earlier drafts. Thanks also go to Jesus Felipe and Iris Claus of the Economics and Research Department for their contributions on export and import sophistication in Section 4 and on tax reform in Section 5, respectively. Support from Fan Zhai and Wen Jianwu in modeling structural change and Damaris Yarcia for carrying out long-term growth projections reported in Section 6 is also gratefully acknowledged. The report was edited by Guy Sacerdoti. The design, layout, and typesetting were carried out by Joe Mark Ganaban. Research assistance at ADB headquarters was provided by Anneli Lagman-Martin, Lilibeth Poot, and Emmanuel San Andres.
Finally, we would like to thank Jong-Wha Lee, the former Chief Economist of ADB, for initiating this study, and the International Department of the Ministry of Finance of PRC and the China Center for Economic Research of the National School of Development at Peking University for their support throughout the study.
Abbreviations and Acronyms
| ADB | Asian Development Bank |
| BAU | business-as-usual |
| EU | European Union |
| FDI | foreign direct investment |
| GDP | gross domestic product |
| GNI | gross national income |
| IEA | International Energy Agency |
| Lao PDR | Lao People’s Democratic Republic |
| MSME | micro-, small-, and medium-sized enterprise |
| NBS | National Bureau of Statistics |
| OECD | Organisation for Economic Co-operation and Development |
| PRC | People’s Republic of China |
| PPM | parts per million |
| PPP | purchasing power parity |
| R&D | research and development |
| SOE | state-owned enterprise |
| TFP | total factor productivity |
| UK | United Kingdom |
| US | United States |
Symbols and Measures
| $ | United States dollar |
| CNY | Chinese yuan |
| GtCO2 | gigaton of carbon dioxide |
| Mtoe | million tons of oil equivalent |
| toe | ton of oil equivalent |
Executive Summary
Key drivers of the PRC’s economic performance in recent decades
Economic performance in the People’s Republic of China (PRC) has been spectacular over the last 3 decades. GDP growth has averaged about 10% per year and per capita income increased by a factor of 13. Rapid growth has led to significant improvement in human wellbeing and the quality of life. From the early 1980s to late 2000s, the incidence of poverty at $1.25-a-day declined from 85% to about 13%, life expectancy at birth increased from 67 to 73 years, and child mortality under the age of 5 years declined from 65 to 18 deaths per 1,000. Economic expansion has also led to a sharp rise in the country’s influence on the global economy. The PRC is now the world’s largest exporter and the second largest economy.
This success can be attributed to three key drivers—market-oriented reform, low-cost advantage, and the role of government—along with other supporting factors. Market-oriented reform has unleashed powerful economic incentives and improved the efficiency of resource allocation and utilization. The liberalization of foreign trade and investment has given PRC firms access to the global market, external capital, advanced technologies and management know-how. The economy’s low-cost advantage, due largely to a vast pool of surplus rural labor, has made the manufacturing sector globally competitive. The government’s active role in development has helped address problems often associated with market failure—such as information and coordination externalities typical of structural transformation in developing countries. Other supporting factors include high savings and investment, major improvements in infrastructure, a young and educated labor force and the associated demographic dividend, and macroeconomic and social stability.
The PRC’s impressive achievements, however, should not make one lose sight of the major challenges it faces. With a per capita gross national income (GNI) of $4,930 in 2011, the PRC has just passed the threshold of upper-middle-income status and it still has a long way to go before becoming a high-income country. But with rising wages and population aging, growth will have to be increasingly driven by productivity improvement through innovation and industrial upgrading—the PRC needs to move from a low-cost to a high-value economy. Moreover, rapid growth has exposed several structural problems, in particular, economic imbalances, rising inequality, resource constraints, and environmental degradation. To some extent these are often associated with rapid structural transformation, but incomplete reform is also a major contributing factor. If not addressed, these problems could hinder PRC’s efforts in moving toward a high-value economy and increase the risk of getting caught in what is increasingly known as the “middle-income trap.”
Middle-income trap and lessons from international experience
Many countries experience a growth slowdown after achieving middle-income status. Some 18 countries globally have been “middle income” for the past 50 years, including 12 in Latin America and three in Asia—Malaysia, the Philippines, and Thailand. At their current pace of growth, many will remain trapped for years to come. On the other hand, 14 economies have escaped the trap since 1965, including five in Asia—Hong Kong, China; Japan; the Republic of Korea; Singapore; and Taipei,China. These Asian economies completed the transition from low to high income within 3 to 4 decades.
Avoiding the middle-income trap requires continuous industrial upgrading through innovation and moving from a low-cost to a high-value economy. Low-income countries possess a large pool of surplus labor that limits wage increases when urban industrial and service sectors expand. Firms employ low-level, established technologies that are easily imported and mastered locally, and compete on low cost. Upon reaching middle income, the pool of surplus