ISBN: 9787508630625

Publisher：CITIC Press Group

Issued: November, 2011

China's GDP has exceeded that of Japan and it has become the second largest economy in the world, since 2010, with its per capita income going from low or medium to medium to high.

In looking back, we can see that some of the countries that began industrializing and brought their per capita income to mid-level, fell in the "medium-income trap" and could hardly reach any higher, while others managed to rank among high- income countries.

So, what will the case be in China? Will it fall into the "medium-income trap" as did Latin American countries, or will it become a high-income country in the future? This matter has attracted a lot of attention both in China and abroad.

Based on theory and analysis, and by comparing global experiences with China's situation, the book Trap or Wall? Real Challenges and Strategic Choices in China's Economy comes to the conclusion that it is less likely for China to fall into the medium-income trap before its rapid industrialization ends, regardless of the fact that China also faces real and serious challenges, such as how to remove structural contradictions and fiscal and financial risks in an effective way and how to transform its growth pattern to cross the wall and have high incomes after the industrialization period.

Introduction

China's economy has witnessed a rapid growth for over thirty years, but how long could China maintain such a momentum. Before answering this question, we would like to address the concern first about when China's fast-growing period will phase out. It is not hard to infer that a rapid-growing period lasting for so long a time is indeed a blessing for China and that the growth could not be an everlasting one. The core question is when will China's fast-growing period come to an end and in what form and what consequences will be brought about. The study of this question is in fact echoing with another concern, that is, whether China will fall into the so-called "medium-income trap". As China's per capita GDP, measured by foreign exchange rate, exceeded 4000 US dollars and as we are facing numerous challenges and conflicts, debates and concerns on the possibility of China falling into the medium-income trap heated up. Against this backdrop, the Development Research Center of the State Council conducted a research project on "Stepping Over the Medium-income Trap" and this book is one of the outcome of this project. I would like to take this opportunity to illustrate my views on some of the major issues as an introduction to this book.

1. Two Major Tasks of Far-reaching Significance

Economic growth is one of the everlasting and most talked-about topics in economic studies. With the deepening advance of globalization, China's economic growth is, in essence, an important issue in global growth, the study of which should be conducted upon broader international comparison. Prior to the start of the project, we made some preparations which are still considered meaningful. One is the building of a database that includes hundreds of major economic indicators covering dozens of nations and regions that have entered industrialization at different phases. The data came from varied sources and were sorted out by "System Integration" to suit the demand of our research work. This was a delicate and trivial task that required great patience, dedication and professional knowledge and it cost research members much time and energy. The building of database had remarkably facilitated the study, as with the unfolding of such a large amount of data, some of the typical or repetitive phenomena gradually came to the surface. This basic building also provides essential support for future research projects.

Another major work is the choosing of benchmark in international comparison. For instance, to choose current US dollar or Purchasing Power Parity means different benchmarks and algorithm. After repeated comparison and discussion, we decided to take nations' long-term economic growth data, which is developed by the prestigious expert in economic history Angus Madison, and the 1990 International dollar as the benchmark for comparison. Apart from its authority and popularity, this data cover a wide range and a large span of time and could click with the requirement of a cross-border and cross-time comparison. And it is proved through measurement and examination of major entity indicators that this database are better in line with the actual development level than any other data collections.

2. Several Findings about "Squeezed Growth"

We conducted research into the historical progress and experience of industrialization while making data analysis. We divided countries and regions that had successively embarked on industrialization into five categories: 1. The UK, the US and other nations that have led the development and remain on the technological front; 2. European second-movers that successfully caught up with the-first-category countries; 3. Emerging industrialized countries and regions in Eastern Asia with second-mover advantages to have achieved long-term high-speed growth and made some progress in innovation-driven development; 4. Latin American nations and Southeastern Asian countries that had long pursued the import substitution strategy and created growth wonder but had got stuck later for a time in the medium-income trap; 5. Former Soviet Union and Eastern European countries that had long adopted the planned economy system and attained rapid growth yet also once got locked in the medium-income trap. In the industrialized growth history comprised of the above-mentioned categories of countries and regions, there exist first-movers as well as periodical second-movers, among which some succeeded, and yet quite a few were less successful or failed.

We noticed some significant typical facts in the international comparative research. Here we use "typical facts" instead of "laws" etc. because although repeatability of such facts is observed, the internal and continual reason for repeated occurrence of these facts remains unclear. The term of "typical facts" well defines the current state of our research.

First, we identified "squeezed growth" and growth rate declines after high-speed growth. Compared with first-movers, second movers spent less time finishing similar "workload" of industrialization and urbanization; the later economies became industrialized, the shorter time they spent. For instance, to accomplish the same growth targets, if the UK and the US spent over a century, Japan around 70 years, the ROK and other Eastern Asian economies about half a century, then China (or the developed regions of China) might spend even shorter time. We use the notion of "squeezed growth" to describe this phenomenon. The growth rate rises under "squeezed drive", hence a high-speed growth period; once potential of "squeezed" growth is completely unleashed, a decline in growth rate will reasonably occur. Previous growth theories pay more attention to how such rapid growth happened or the issue of "economic take-off", while the current concern has to be the decline after such growth or the issue of "economic slowdown" as well as the complete description and illustration of the "squeezed" high-speed growth process.

Second, we noticed two different types of growth decline in the process of industrialization. One type is weakened growth when a country falls into the medium-income trap, a prime example being Latin American countries. Meanwhile, we found in the research that former Soviet Union and Eastern European countries generally witnessed sharp slowdown in growth in the mid-and-late 1970s, which can be considered as another type of the-middle-income-trap victims. This was less discussed in previous studies. It is thought-provoking that such growth decline occurred when the planned economy system of former Soviet Union and Eastern European countries remained in its prime, which suggests that once the system lost its power, growth slowdown was inevitable even though the system seemed still powerful. The other type of growth decline occurred in what we call the category of "successfully catching up" economies, including typically Germany, Japan, the ROK and other Eastern Asian emerging economies. Weakened growth occurred in these economies when potential for rapid growth was basically exhausted. In a sense, the growth rate decline marks smooth steering out of the high-speed growth period into a stage of medium-speed growth and high income.

On the surface, the two types of growth both declined in the wake of a high-speed growth period (or golden age of economic growth). But it is the difference between them that drew our attention. In terms of per capita income, those falling into the medium-income trap differed when growth rate began to fall, Latin American countries standing at 4000-6000 International dollars and former Soviet Union and Eastern European countries 5000-7000 International dollars; while "successful pursuers" witnessed growth decline at around 11000 International dollars in per capita income. The former got "stalled" when there was still potential for high growth, whereas it happened to the latter when the growth potential and second-mover advantage were basically lost. Most importantly, those middle-income-trapped countries, be those in Latin America or the former Soviet Union and Eastern Europe, had some severe flaws in the systems, strategies and policies for promoting industrialization, such as the enclosed import substitution strategy of Latin American countries and the planned economy system of Soviet Union and Eastern European nations. With such flaws already existing in the primary stage of industrialization, economic growth was doomed to be unsustainable in a certain stage. The reason why those "successful pursuers" succeeded is that they managed to avoid flaws mentioned above. We made a "six-factor" mode in our research to give some initial descriptions and explanations for those issues.

A question in point is the relationship between external impact and downward growth rate. Observed form historical experience, some countries' growth downturn was accompanied by severe external shocks, such as stalled growth of Latin America in 1980s accompanied by the debt crisis, growth rate decline of Japan in 1970s by the outbreak of oil crisis and disintegration of the Bretton Woods system, and growth slowdown of the ROK in the 1990s by the Southeastern Asian financial crisis. A question arising therefrom is whether growth rate moving to lower levels will occur without major external impact, which actually implies another question: is growth decline a result of external or internal reasons? We hold that growth rate moved to lower levels mainly due to internal reasons and merely in specific circumstances when external reasons were triggered or intensified. Among the middle-income-trap victims, the foreign debt crisis confronted with Latin American countries chiefly stemmed from demerits of their own structures and systems; while huge external shocks were absent when the former Soviet Union and Eastern European nations witnessed falling growth rates, whose systems appeared to be in its prime on the surface. On the other hand, among "successful pursuers", Japan and ROK, featured by high dependence on foreign petroleum, both experienced oil crisis in the beginning of 1970s. Japan witnessed a decelerated growth in the wake of the oil crisis, but the ROK did not. It was around the Asian financial crisis over two decades later that the ROK's growth began to slow down. The fundamental reason lies in the fact that in the beginning of 1970s and the mid-1990s Japan and the ROK respectively reached "the time window" for the end of high growth period.

The third finding is that the growth decline of "successful pursuers" was accompanied by huge shifts in economic structure. The typical structure of high growth period is that with the accelerated growth of the industrial sector, it accounts for a larger share of GDP and becomes the dominant power in economic growth. In mid-and-late stage of industrialization, the heavy industry grows faster and takes up more in the industrial sector, occupying a leading position during that period. Extensive resources are put into the "roundabout production" process. With the dropping of agriculture's share, the proportion of service sector rises steadily but is not yet the major growth driver. Corresponding to such industrial structure, investment to GDP ratio remains high, becoming the chief driving force on the demand side while consumption is kept at a relatively low level. When high growth draws to an end and growth rate begins to fall, the economic structure will undergo dramatic changes. The trend is that the industrial sector's percentage levels off and comes to decline while the service sector becomes the primary growth driver in the place of the industrial sector. Correspondingly, investment falls while consumption rises in percentage. What is prone to misunderstanding is that "the structure is adjusted" at this time not because the service sector grows faster than the past and replaces the industrial sector to become the frontrunner with an advanced productivity, but because the industrial growth slowdown relatively elevates the status of the service sector. The investment to consumption ratio also belongs to this kind of "relative change".

The fourth finding is that as growth rate slows down, moving from high-speed growth to mid-speed growth, the mechanism of growth driver will also change substantially, resulting in the transformation of growth mode. Although growth rate decline draws attention, it is still a phenomenon on the surface or a matter of form. It is first a result of dramatic structural changes, behind which lie remarkable changes and regrouping of conditions for growth demand and supply. While demand growth slows down, the costs of production factors including labor force, land and resources rise increasingly faster, technology available for direct introduction decreases, and population aging contributes to lower savings ratio, all highlighting one single question: can productivity continue to remain at a relatively high level? Obviously, the original growth mode can no more adapt to transformed economic structure and shifted mix of production factors. Transformation of the growth mode is neither smooth even for those "successful pursuers". Actually it is a kind of systematic transformation of systems, strategies and policies. Especially for those systems, strategies and policies that proved to be effective and have made huge achievements, the transformation is still more difficult. For example, Japan had for quite some time pursued expansionary macro-policy as an attempt to recover previous growth rate, which did not work and even brought problems like capital bubbles and huge national debt. But generally speaking, these countries fared relatively well in shifting to a growth approach more reliant on innovation, a crucial symbol of which is that these countries have formed respectively a batch of industries and enterprises approaching the international level and possessing stable global competitiveness.

3. The "Time Window" for the Slowdown of China's Economy

Based on the above "typical facts", we conducted our observations against the backdrop of international industrialization and economic growth.

China has experienced a high-speed growth of 10% with an average annual growth rate for over thirty years, which is beyond doubt a classic case of "squeezed growth". The study of China's economic fluctuations should be conducted in the entire process of "squeezed growth". We calculated with three different yet checkable methods and found that there's a great possibility that China's economic growth will step down around 2015. The time lag will be between 2013 and 2017 and the growth rate will decline by 30%, for instance, from 10% to 7%.

One of the essential subjects is the estimate of the current per capita income in China, or the question of "where we are". The recent studies relating to medium-income trap often raise such questions: as Latin American countries entered medium-income trap after their per capita income exceeded 4000 US dollars, China likewise will be at risk of being stuck in the same situation when reaching the same income level. However, we believe such a comparison is too straightforward and simple, and it tends to lead to misunderstanding. As mentioned before, we adopted the 1990 International dollar of high popularity and comparability based on Maddison's database, crosschecked and proved with varied means so as to improve the precision of the cross-border historical data comparison. The outcome shows that China's per capita income in 2010 was very close to 8000 International dollar, which has already surpassed the average income level of Latin American countries when they got stuck in medium-income trap. That is to say, different ways of calculation on average income level can result in different judgments on the same problem.

The second question is in what way should China, a super large economy, effectively refer to international experience. In terms of the total number of people, China has already surpassed the total population of the OECD countries. According to the latest demographic statistics, among the 31 provinces of China's mainland, 27 boast a population of over ten million, with the top ten exceeding 50 million and the top three surpassing or reaching 100 million. However, during international comparison, the population of some relatively large economies is approximately the same as that of a provincial administrative region in China. Besides, unbalanced development is prevalent among different regions in China and to some extent, China itself stands as a "world". To increase the comparability of international experience, we divided China's provincial administrative regions into several types. For example, we compare metropolitans like Beijing and Shanghai with urban economies like Singapore and Hong Kong. And we drew a comparison between provinces with favorable conditions for economic development and a large population with economies such as Japan and ROK, and compared provinces with poorer development conditions with economies of lower development level in the world, and based on that pooled the outcomes of the analysis on a single province into a national database.

Frankly speaking, making predictions on economic outlook is both arduous and fruitless. It is our wish that China's economy can continue to grow at a rate of 10% or so for 30 years or more. However, we have to admit that, as regards squeezed growth, it is natural to see a spiral fall after a rise to a certain "valve value". But it is insufficient to highlight such a trend, we should also point out the timing of this decline based on further research. In fact, we laid out a "time window", a period between 2013 and 2017, or around 2015. In other words, any rise and fall occurred in this period may be viewed as an event in all probability, or as a "normal" event no matter in what specific year it arises. Compared with the high-speed growth in the past three decades, a period of four years' deceleration doesn't seem to be too roughly predicted.

4. A Proper Understanding of Economic Restructuring from the Perspective of Development at Different Stages

More importantly, a probe into the slowdown in the late stage of the squeezed growth could deepen our understanding of the long-discussed issue of economic restructuring and change in the mode of economic development.

The industrial structure and the investment-consumption structure are mainly what we often discuss about the economic structure. In view of the course of the squeezed growth, the high proportion of industry in the industrial structure and that of investment in the investment and consumption structures are highly relevant to the rapid growth of macro-economy. An analysis on the statistics of China's economic growth in the past years shows clearly that consumption growth in general is relatively stable whereas net export growth is quite uncertain and that growth rate is determined chiefly by the proportion of investment which is closely tied with that of industry. Due to institutional and policy factors, China does face the problem of having excessively high proportions of industry and investment. Yet a distinction should carefully be made between "excessively high" and "normally high". With the termination of the squeezed growth and a shift of economic growth from a high speed to a moderate one, proportions of industry and investment will become stable and fall gradually while that of services and consumption will rise accordingly. It is worth mentioning that such "economic restructuring" is a relative change brought about by a declining growth of industry and investment rather than by a faster growth of services and consumption. The result is a decrease in the overall economic growth. When there is still potential for a high-speed growth, keeping the proportions of investment and industry artificially low in order to "adjust and optimize the economic structure" does not lead to "a proper structure and a higher efficiency", but instead a decreasing growth and worsening enterprise performances in profit-making and finance. What's worth noticing and guarding against is that such a situation is very similar to one when Latin America nations got caught in the middle-income trap. After the potential for a high-speed growth is exhausted and the growth rate declines, substantial changes in the economic structure will naturally occur.

A related question for discussion is: What is the position of and role played by China's industry especially the manufacturing sector in the future? It is believed that attention should be paid to drawing on experience and lessons from the industrial "hollowing-out" and weakening of the real economy caused by the massive reduction of manufacturing industry in some developed countries. Even though the proportion of China's manufacturing industry in the future would drop, the drop should not be too sharp, and the proportion of manufacturing industry should be kept at around 30%. Development of the service industry should focus on producer service industry including research and development, finance, logistics, training, information service and after-sale service so as to drive and boost the efficiency and upgrading of manufacturing industry. Another issue is related to prospects for the future competitive advantage of China's industries in the world. Against the background of an ever-deepening globalization, any nation (including big powers) cannot or need not to enjoy a competitive edge in all industries but only in a few, with some nations being strong in just a limited number of industries. When the speedy expansion of industries on a larger scale basically comes to an end, cultivating a long-term and stable competitiveness in China's industries will be ever more important than before. However, which industries shall possess such international competiveness in the future depends largely on market competition. With regard to manufacturing and service industries, it is predicted that in the near future, although service industry has ample room to grow, the international competiveness of China's industries may continue to be found in manufacturing industry to a large extent. Therefore, that China should own a manufacturing industry that takes a higher proportion and is highly competitive will be required by a longer period of participating in international competition.

5. How to Evaluate and Understand the Present Growth

The change in development mode, or growth mode, involves firstly the evaluation of the present growth mode. At present, there exists a strange phenomenon, i.e. the discrepancy in the evaluation of China's growth mode between domestic voices and the rest of the world. The latter, in general, shows great interest in "China Mode" and rates it positively thanks to the continued rapid growth of China's economy and its outstanding performance after the international financial crisis. whereas the sound of criticism prevails domestically. To evaluate China's growth mode in an object, historic and correct manner remains an important issue. It would be a paradox to acknowledge in one hand that China's economic development in the past thirty years is a miracle, and in the other hand criticize China, believing its growth mode to be backward and unacceptable. In fact, we can easily spot many important yet unique advantages in China's growth mode when it is compared with other developing countries from a global perspective. For example, a common consensus has been reached across the board that development is of overriding importance and with the wide and strong backing of the people, this principle has evolved into the concept of "scientific development"; the pragmatic and effective market-oriented reform is spurred by the theory of "crossing the river by feeling the stones" and the "double-track" system; the deep involvement in international labor-distribution system through the implementation of the multi-layer and stable opening up; an unbalanced yet complementary domestic market system bolstered by the largest population in the world; and the pursuit of a balanced promotion between reform and development through maintaining a stable social and political environment, etc. One of the characteristics in China's market economy system is "regional competition". Different provinces, cities, counties and governments at the community level all compete with each other to earn resources for their own development, usually by improving local environment conditions for investment. Different levels of government means different competing entities. Such unique structure resulted from the integration of China's traditional government governance and market economy. As commodities and resources driven by market mechanism flow across regions, a "strong government" exhibits advantages in promoting infrastructure construction, providing dealers' credits, mobilizing local elements and improving their qualities and enhancing government efficiency. Such advantages are even more obvious in the initial phase of industrialization. And the competitions between local governments further increased the utilization of such resources. One noteworthy point is that this characteristic of the so-called "development-oriented government" was not by design, but was formed gradually through reform, and observed afterwards. This is exactly the feature of China's reform.

In fact, our understanding of China's economic growth rate still has much room for improvement. China's economy has achieved the miracle of continuous and rapid development. However, we only know the hows but not the whys. Therefore, we might deny or neglect something precious. China's high saving rate and investment are major driving factors behind its high growth, but they are now considered as tangible problems in growth mode. If we look at most of the developing countries, we will easily find that they are just lacking these driving factors, and for long it has been difficult for them to get hold of these factors.

The observation, of course, does not deny the defects of China's economic growth mode. How to understand those defects is still the point in question. It is generally accepted that the existing growth mode lead to several imbalances, including internal and external imbalance, imbalance beween consumption and investment, industrial structure imbalance, regional development imbalance and income distribution imbalance. People may ask whether those imbalances are real problems or outward manifestation of some deep-seated issues. We believe that the attention should be paid mainly to the deep-rooted problems and our major concern should focus on two aspects of them. One is the distorted factor market which lead to resource distribution and structural imbalance to different extent such as energy, land, finance, labor, etc. For instance, distorted factor market contributes to "irrational strong" export competitiveness and an excess proportion of resource consumption industries. The other one is the dual structure composed of basic industry-based non-trade departments and trade departments represented by export-oriented industries. The former concentrates on state-owned economy with market monopoly, while the latter concentrates on non-state-owned enterprises and has a competitive edge. Many studies indicate that the output efficiency of the former with the possession of rich resources and yet accumulated financial risks is much lower than the latter. As a result, a major source of China's industrial competitiveness stems from the latter.

Defects of the present growth mode are directly related to its characteristics or advantages. This mode, which is in a sense like two sides of a coin, is deep-rooted in the government intervention on the allocation of resources. It creates high growth and investment while bringing with it endogenous structural imbalance and the low efficiency and risks. China's economic growth cannot be sustainable if the above problems are properly addressed. An ideal solution is to correct imbalances by deepening reform, which can be described as "promoting what is beneficial and abolishing what is harmful". Although substantive progress failed to be achieved as expected, the economy can still maintain a high growth. Thus we need to draw our attention to another feature of the present growth mode, namely high growth itself can alleviate the potential risks relating to imbalances and low efficiency. Trillions of bad loans stripped of from banks were gradually disposed during the high growth period in the late 1990s. Although some people have many doubts about taking investment-driven growth as dominant force to fight the global financial crisis, China's present trend of economic growth will not be interrupted as long as the high growth potential remains.

6. Serious Challenges Brought about by the Timeliness of Growth Pattern

The next question facing China's economy is that what will happen if the high growth of China's economy is unsustainable? The unsustainable high growth rate does not refer to the result of "active regulation and control" but the deceleration of potential growth rate. Hence, we deem that China's economy will be challenged by the following two aspects.

First, the conflicts and risks that were concealed during high growth period could no longer be covered up. The reasons resulted from slowed-down expansion rate and asset revaluation relating to the change of expected growth. If it was excessive consumption that led to subprime mortgage in America, then China should take preventive measures against financial risks or even crisis which might be triggered by excessive and inappropriate investment.

Second, the deceleration of growth is due not only to the change of speed, but also to the change of economic structure and driving force. To find and cultivate new motive force is a common problem for all economies that have experienced that period of development. Unlike those catching-up economies, China would encounter a different one in terms of the change of driving force.

To sum up, China is challenged by the prevention of financial crisis and the conversion of driving force under the background of a declined growth rate. Specifically, the study comes up with a series of issues to be addressed, which include: how to effectively prevent and resolve financial risks accumulated during the rapid development of economy; whether enterprises could adapt to the environment with a low economic growth and gradually change their profit mode of overstressing growth rate and underemphasizing efficiency; whether the government could adjust macroeconomic objectives with declined economic growth; whether the government could create a beneficial environment that helps to produce innovative and large enterprises and SMEs and cultivate knowledge-intensive manufacturing and service industries with long-term competitive technology; whether the government could further open the market, relieve the threshold for market access to monopoly industries, especially to service industry, to provide ample room and driving force for their development; whether the government could, on the basis of coordinated development between urban and rural areas, speed up the process of migrant works becoming citizens and promote the optimized allocation of farmers' contracted land while protecting their rights and interests; whether the government could establish a suitable university and research system in the call for building an innovative society; whether the government could enlarge the size of middle-income group by promoting employment, encouraging entrepreneurship and reforming the income distributing system; whether the government could build a modern financial system to effectively defuse and prevent financial risks in light of the requirement of development and innovation at the new phase; and whether the government could transform its function from growth-oriented one to public service-oriented one.

As regards growth pattern transformation, we can divide all problems into three categories: structural, institutional and timeliness ones. Outwardly, the structural problem is caused by a series of imbalances, but inwardly there exist institutional defects in the distorted allocation of resources. It should be understood that the relationship between institutional disadvantages and advantages are likely to be symbiotic. Although people hope that reform could "promote what is beneficial and abolish what is harmful", in fact that is very difficult, not because of no space for reform, but because the space for reform has been greatly compressed. However, the momentum of economic growth is still sustainable as long as the economy boasts high growth potential. This indicates that the present growth mode can very well adapt itself to the high growth stage. It can start and maintain high growth, more importantly, it also can accommodate, resolute, or push back the serious imbalances, and address low efficiency and potential risks. This can be interpreted as "timeliness".

When "timeliness" has become a problem, which means the potential growth rate declines and moves into a new growth platform, we can't turn a blind eye to the contradictions caused by the original structural and institutional problems especially risk impacts. A new growth mode needs to be built to adapt to the growth characteristics of the new stage. This is the historical mission to be fulfilled by future reform.

7. Define the Goals and Values of Reform in the New Period

Many problems needs to be solved in the reform, and what have been illustrated are most urgent ones. Effective and successful reform requires a series of conditions. Some successful experience in China's reform in the past is not obsolete, but new elements needs to be added in the new period. We think it is necessary to further clarify the reform goal of the new period. From another perspective, the reform should establish a more definite value.

In a common sense, reform should achieve various targets, such as the liberation of productive forces; expansion of man's free space; improvement of people's living standards, and so on. These objectives, from different angles, have its rationality, but there may be conflicts between each other. Beyond this, we should have higher level goals, that is to bring the potential of each social member into full play. This target belongs to the category of "normative analysis", which seems to be rather abstract, even far away. But if we look at it in the process of empirical analysis, we will find it is very specific and targeted. In fact, in putting forward the goal, we try to probe the logical mainline to value judgment and clarify relevant relations in the complex reform pattern.

For example, the widening gap relating to income distribution is one of the most prominent social problems at this moment. How to solve this problem? Should we change the measures for redistribution, even "rob the rich and assist the poor", or should we, based on improving the development ability of social members, especially the vulnerable social groups, enable them to possess generally fair development opportunities, and through their own efforts raise the level of income to narrow the income gap ? Ths is no doubt necessary, but the current problem is the inequality of development ability and the opportunity among the social members. For an example, there are two young men, one is from the city, with good education background either at home or abroad, has certain social relations, and works in a financial institution with high pay; the other is a migrant worker from the countryside, with only junior high school education and poor pay. If they are viewed as two ordinary men without any social relations, what is the difference of the potential between them? The gap, normally, is not huge, at least not bigger than what is seen in the actual income gap, or maybe the opposite. That is to say, the potential of rural youth is greater than the urban youth. The income and ability difference between them mainly result from relevant historical, cultural, institutional and policy factors. The way to alleviate such differences mainly lies in reform, innovation, policy adjustment and sustained development as well as improved environment for them to cultivate their abilities. With such a condition, even if there are such differences, it would be easier to be accepted and addressed.

For another example. If we are to transform the society into an innovation-driven one, it is essential for social members to display their inner creativity to a higher and wider degree. The lack of innovation for a society would cause impediments to people's creativity. It could only rely on imitation for its development. To change this situation, we need to expand areas like employment, entrepreneurship and innovation. Besides, we need to protect the intellectual property rights of innovators and give them adequate incentives; provide them with equal access to resources; and cultivate an environment to encourage innovation and respect innovators even if they make errors.

One more example. low consumption could arise from artificially depressing the income growth of laborers, and it may also be caused by the lack of public services. The former is revealed in underestimating the contribution of laborers ( the exertion of abilities), while the latter is due to the deficiencies in social security, health care and education as well as other aspects, all of which are extremely important to the development of laborers' ability.

There are more examples similar to what have been illustrated. It can be said that China's economic development imbalance is substantially connected with social members' capacity building as well as the way the capacity is leveraged. We have every reason to believe that if people's potential can be brought into full play, the society must be permeated with innovation and vitality. In such a society, the proportion of investment, consumption and other major economic indicators is relatively rational, and income gap is relatively small with a high degree of social tolerance.

Based on the people-oriented principle and the scientific outlook on development, we put forward these reform targets and values. As we know, promoting people's all-round development is the starting point and core content of Marxist theory. Economics has distinguished the difference between growth and development, just as people do not necessarily equate wealth growth and their own development. Poverty to a large extent is caused by the inequality in developmental opportunities, but wealth does not necessarily come from the realization of the developmental ability. For example, this can be proved by the fact that there are wealthy residents of the petroleum exporting countries, successors of huge property and individuals who illegally occupy or steal social wealth. We should stick to the intrinsic consistency between the pursuit of wealth growth and human development. In other words, when a man falls into poverty, we should pay more attention to his unfulfilled potential; when one's potential has been fully tapped, his wealth will grow accordingly. More importantly, it will bring more joy of greater value to the person who has given full play to his ability and earned social recognition. This state is the supreme realm of the harmonious society that we are committed to building, for only after people's potential has been fully extended, can a society get sustainable stability.

Based on the above thinking, this research puts forward the issue of "getting involved in promoting reform". With respect to the implication of such an issue, it has a lot to do with the goals of promoting social members to participate in industrialization and modernization in wider areas and at higher levels and with great vision and foresight, further releasing the potential of social members and making breakthroughs in the reform of related areas. Its main points can be summarized as increasing participation opportunities, improving participation abilities, and perfecting the system and policy of entrepreneurship and innovation, as well as creating a law-based environment with stable participation expectations.

This research is the outcome of collective wisdom. Members of the research team reached consensus on major issues through full discussions. However, some chapters still retain each author's own research and writing styles as well as his or hers different views. It is hoped that ample room could be left for various opinions relating to further discussions. Readers are kindly requested to give their comments and point out deficiencies in the book. It is also wished that some common endeavor could be made to deepen the research on the theory and policy issue of "Ways for Striding Across the Middle-Income Trap", so as to make our joint contribution for China to address the risks and challenges during the economic transition period and successfully usher in a high-income society.

Contents

Preface

Overview Trap or Wall? Stern Challenges and Strategic Options in China's Economy

By Liu Shijin, Zhang Junkuo, Hou Yongzhi &Liu Peilin

Part One Trap and Wall: Challenges with Different

Characteristics during the Process of Industrialization

Part Two System and Strategy: Key Factors Determine the Development of Industrialization

Part Three China's Entrance into the Time Window Followed by a Declined Growth Rate in 2015

Part Four Cross the Wall: Real Challenges in China's Economic Development

Part Five Transforming China's Development Pattern

Through "Participating in Active Reform" to Achieve Substantial Progress

References:

Section I Medium-income Trap and Challenges in China's Economy

Chapter One Medium-income Trap: How Did the Problem Come up and Research Progress

By Gao Shiji & Zhuo Xian

1. Medium-income Trap: A Policy Issue

2. Discussion on the Theories and Polices of Medium-income Trap

3. Why Could a Country Fall into the Medium-income Trap

4. Enlightenments and Policy Options

References:

Chapter Two An Analysis of Global Experience during Medium-income Period

By Xuan Xiaowei & Chen Changsheng

1. An Analytical Framework of Index Related to Medium-income Trap

2. Viewing Global Experience from Different Perspectives at Medium-income Stage

3. Some Significant Inspirations Drawn from Global Experiences

References:

Chapter Three Basic Background for Striding Across Medium-income Stage in China

By Zhang Junkuo & Hou Yongzhi

1. China's Advantages for Striding across Medium-income Stage

2. Serious Challenges in Social Development

3. New Prominent Problems That Might Loom up in the Next Phase of Development

Chapter Four The Time Window for China's Potential Economic Growth Transition

By Liu Shijin, Xu Wei & Liu Peilin

1. Typical Facts of Economic Growth and Structure Change of Successful Catch-up Economies

2. Basic Methods for Calculating the Time Window for China' Potential Economic Growth Transition

3. Calculations by Taking China as an Entity and Making a Comparison with Successful Catch-up Economies' Experience

4. Calculations of Each Province with Reference to Global Experience

5. Calculations according to the Production of Bulk Industrial Products and the Change Rule of Consumption

6. Major Conclusions: China's Potential Economic Growth Will Have an Obvious Drop around 12th Five-Year Plan Period

Appendix 1: Income Gap Comparison Calculations in accordance with Purchase Power Parity (PPP) and Exchange Rate

Appendix 2: GDP (PPP) Comparison between Madison and the World Bank WDI database

Chapter Five Impact on Some Economic Indicators due to Decline of China's Economic Growth

By Liu Yunzhong & He Jianwu

1. Declined Economic Growth Will Lead to Decreased Job Opportunities

2. Declined Economic Growth Will Lead to Decreased Fiscal and Tax Revenue

3. Declined Economic Growth Will Bring About an Impact on Industrial Enterprises Profit

4. Declined Economic Growth Will Deteriorate Bank Asset Quality

References:

Section II Winners and Losers in Striding Across Medium-income Trap

Chapter Six First Movers: The United Kingdom and the United States

By Zhang Liping

1. Britain and American also Experienced the Transition from High Growth to Mid-to-Low Growth

2. Main Conditions for Keeping High Growth in UK and US during the Industrial Revolution

3. Changes Conditions for a Declined Growth in UK and US

4. Conclusions and Enlightenments

References:

Chapter Seven Second Movers in Europe: The First Successful Pursuers

By Yuan Dongming

1. Development Process of the Second Movers in Europe in Medium-income Stage

2. Development Bottlenecks Faced by and Countermeasures Taken by Italy in the Initial Period of Industrialization

3. Causes and Countermeasures of Stagnated Economic Growth during Economic Transformation Period in France

4. Conclusions and Enlightenments

References:

Chapter Eight Successful Pursuant Economies after World War II

By Fang Jin

1. Postwar Economic Take-off in Germany and Japan

2. The East Asian Four Tigers: Successful Striding across the Medium-income Phase Through High-speed Growth

3. An Exception of Latin America: Experience of Chile in Getting out of Medium-income Trap

4. Factor Analysis: Ways for Striding across Medium-income Trap and Achieving Smooth Development

5. Enlightenments to China

Chapter Nine Latin American Countries: Typical Cases of Falling Into the Medium-income Trap

By Wang Xiaoming

1. Introduction

2. Development Experience in the Initial Stage of Industrialization

3. Experience and Consequences after Falling Into the Medium-income Trap

4. Reform and Impacts after the 1980s

5. Main Reasons of Falling into the Medium-income Trap

6. Conclusions and Enlightenments

References:

Chapter Ten Four Southeast Asian Countries: Medium-income Trap Sufferers Similar to that of Latin America

By Wang Xiaoming

1. Introduction

2. Development Process of Industrialization

3. Experiences and Impacts of Falling Into Medium-income Trap

4. Main Reasons for Falling into the Medium-income Trap

5. Conclusions and Enlightenments References:

Chapter Eleven Former Soviet Union and Eastern European Countries: Another Type of Trapped Sufferers

By Chen Jianpeng

1. Industrialization Process Review: Brilliant Experience in the 1970s

2. Stagnation of Economic Growth in Former Soviet Union and Eastern European Countries after the 1970s

3. Main Reasons of Economic Growth Stagnation

4. Conclusions and Enlightenments

References:

About the Author

Liu Shijin, Former Vice-President (Former Vice-Minister) and research fellow of DRC, was born in Xi'an, Shaanxi province, in January 1955. He graduated as Bachelor of Economics from the Department of Economics of Northwest University in February 1982. He worked as a lecturer at the school from March 1982 to October 1986 and Director of the Teaching and Research Section, while continuing study for a Master's Degree. He got his PhD in economics from the Graduate School of the Chinese Academy of Social Sciences (CASS) in November 1989 and worked as Senior Research Associate and Division Chief at Industrial Economics Institute of CASS from December 1989 to March 1994. He began working with DRC in 1994 and took the posts of Deputy Director-General of the Institute of Market Economy, Deputy Director-General of Research Department of Macro-economy and Director-General of Industrial Economy Department respectively. From September 2004 to March 2005, he was a member of the Leading Party Members' Group and concurrently Director-General of the General Office of DRC. From March 2005 to June 2015, he was Vice President of DRC and a member of the Leading Party Members' Group. From June 2015-present, he has been a research fellow of DRC, member of the 12th Chinese People's Political Consultative Conference (CPPCC) and member of the Ethnic and Religious Affairs Committee.

He is Executive Director of China Federation of Industrial Economics (CFIE) and Deputy Director of CFIE's Academic Committee, member of the National Consulting Committee for Industrial Policies, member of Expert Committee of the Commission of Science, Technology and Industry for National Defense, member of Academic Committee of China Reform Foundation and Director of China Development Research Foundation. He is tutor of PhD candidates, advisor to relevant enterprises and professor of a number of universities. He has long been engaged in the research of economic theories and policies covering enterprise reform, evolution of economic system, macro-economic policies, and industrial development and policies. Many of his papers and articles are published in major domestic and foreign journals and he has written or edited over 10 academic works and a series of internal study reports. He is winner of the prize for excellent papers on economic science, including Sun Yefang Economics Prize, CASS Prize for Excellent Papers and the First Prize for China Development Research.