Analysts from NTD’s Chinese-language program “Pinnacle View” warn that China is currently walking into a middle-income trap.
Challenges to State Intervention
Henry Wu, a Taiwanese macroeconomics scholar and chief economist at AIA Capital, said on “Pinnacle View” on May 9 that the middle-income trap means reaching a point where further economic development becomes difficult. He noted that some countries had successfully overcome the middle-income trap, but most did not.Mr. Wu pointed out that in developing nations across Asia, the Middle East, and Africa transitioning from low to middle-income, various development paths would yield good results in the short term. Some countries opt for state intervention in the economy, such as promoting growth through capital investment in infrastructure or key industries led by state-owned enterprises. This was the path China took during its rapid economic development.
Taiwan’s Success
Mr. Wu noted that Taiwan and South Korea successfully overcame the middle-income trap. Taiwan’s key success lies in cultivating entrepreneurs during its economic development. These entrepreneurs played vital roles in designing business models, organizing economic resources, driving innovation, and bearing risks, all of which are functions that civil servants cannot perform.In Taiwan’s case, after the Kuomintang government retreated to the island following the Communist Revolution in mainland China, local landlords were encouraged to surrender land in exchange for stocks in state-owned enterprises, effectively transforming them into entrepreneurs, according to Mr. Wu.
He explained that many early Taiwanese enterprises, especially in cement and glass production, were all owned by such landlords. Therefore, he said, economic development in Taiwan followed the principle of “enriching the people before the nation,” contrary to China’s approach of “enriching the nation before the people.”
Mr. Wu continued: “In many countries, the failure to overcome the middle-income trap stems from the inability to cultivate a generation of entrepreneurs who can innovate and contribute to economic growth. In China, the first two decades of the ’reform and opening up' saw significant progress due to numerous emerging entrepreneurs.
“However, private entrepreneurs in China typically require political connections, leading to some form of political intervention. Currently, many private entrepreneurs in China are leaving the country to seek financial security.”
Lack of Innovation, Institutional Reform
Mr. Wu said that while China has a surplus of college graduates, its education system failed to foster talent and innovation—this stems from China’s lack of institutional reform.“Institutional reform is crucial, particularly in preventing the formation of entrenched interest groups, as they impede institutional reforms,” he said. “The Chinese Communist Party [CCP] has not evolved into a normal political party. Instead, it has become an entrenched interest group itself. The absolute power and corruption within the CCP inhibit any political reform.”
Mr. Wu said that retaining absolute power, as exemplified by the CCP, inevitably leads to corruption. This results in the suppression of political reforms, treating the people as mere resources for exploitation. Thus, he said, China cannot have technical innovation without institutional reforms and is almost destined to be caught in the middle-income trap.
A Vicious Cycle
Under authoritarian regimes, where those in power monopolize or control all resources, a sustained exclusion effect severely suppresses the entrepreneurial drive, thus impeding economic development, according to Ms. Guo.She pointed out that China adopted the East Asian economic development model, similar to Taiwan and South Korea, relying on exports and Western markets to boost its economy. However, China’s failure lies in its severe social inequality and regional disparities.
“The fundamental problem in China is its authoritarian system,” she said. “Those in power seek to convert their power into tangible benefits. This tendency results in the continuous reinforcement of the regime’s [centralized] power, exacerbating social injustice and instability.”
Ms. Guo said that the CCP elites are aware of these issues, and they do strive for change, as evidenced by occasional policy shifts like Chinese leader Xi Jinping’s idea of “common prosperity,” but their efforts are destined to fail. She remarked that it’s impossible to implement reforms that undermine the interests of regime officials for the sake of benefiting the people. She further noted that this fundamental flaw within the authoritarian system obstructs sustainable political reform.
When an economic downturn occurs, those in power further harm the common people to preserve their own interests, creating a vicious cycle, she added.
In summary, Ms. Guo believes that China’s inability to navigate the middle-income trap is rooted in its lack of innovation and political reform and that the CCP’s authoritarian system perpetuates corruption and social inequality, hindering economic progress.
