China, the Middle Income Trap and Beyond

Emerging market countries can be categorized according to the level of prosperity achieved by their populations.  Generally, poor countries, with lower GDP per capita, should grow faster than richer countries, as they adopt well-known technologies to boost productivity. Assuming a stable social and political environment and basic legal and economic conditions, high growth, driven by urbanization and basic manufacturing, can be achieved for long periods. India and Indonesia, for example, today are in this “catch-up” phase, growing their GDP at well above average global rates. China has achieved phenomenal growth since it launched economic reforms in the late 1970s, following the path previously taken by its neighbors South Korea, Taiwan and Japan.

However, once middle-income status has been achieved most countries are unable to further reduce the gap with the United States and the other highly developed countries. This is called the “middle-income trap.” Aside for a few city-states (Singapore and Hong Kong) and oil-rich sheikdoms,  few  have broken the trap.  The exceptions may be Taiwan, South Korea and Israel. These three have benefited from a special relationship with the U.S. hegemon and successfully pursued education-intensive, high-tech strategies. On the other hand, some countries regress after reaching middle-income level; Argentina, Venezuela and South Africa are examples of this. Brazil is another worry; it has grown GDP/capita at less than 0.9% per year since its “miracle” came to an end in the late 1970s.

China clearly sees itself following the path of Taiwan and South Korea. Though it will not enjoy U.S. support, some indicators point to good prospects.

For  a middle-income country to sustain high growth it needs to move up the value chain which means higher innovation and productivity, which requires a highly educated workforce. The Global Innovation Index ranks countries in terms of their innovative capacity and has been doing this for 10 years using the same methodology. In its 2017 report, GII highlights the stagnation of middle-income countries in bridging the gap with rich countries, but singles out China as the exception. GII ranks China as the 22nd most innovative economy, closing in on the elite. This compares to its 37th ranking in the 2008 GII report

China’s growing capacity to innovate is confirmed by its increase in patent filings. In fact, according to the World Intellectual Property Organization (WIPO),  in 2016 China filed for over 38% of international patents, surpassing the  United States with 20.4%.

The OECD Program for International Student Assessment (PISA)  evaluations point to China’s spectacular rise in science and technology and give credence to its ambitions. According to the 2015 PISA report, the most developed parts of China, as represented by Beijing-Shanghai-Jiangsu-Guangdong, already score in line with the best Asian performers and well above the United States and European levels, particularly in mathematics.

Chinese policy makers are well aware of the “middle-income trap,” and are determined to avoid it. The legitimacy of the authoritarian political regime to a degree rests on its ability to sustain growth and rising living standards. That is why promoting innovation was given the highest priority in the governments 13th Five-Year Plan for Economic and Social Development, 2016-2020, and a commitment was made to harness resources to achieve breakthroughs in key technologies. The 13th plan goes so far as to specify the technologies that China must dominate and makes an explicit commitment to provide the financial and institutional support to promote success.

 

Us Fed watch:

 

Brazil Watch :

India Watch :

China Watch:

Xi Jinping’s War on Financial Crocodiles (FT)

China and Africa (Mckinsey)

China Technology Watch:

China Shows off New Generation of High-Speed Trains (Caixin)

CRRC Wins Train Supply Deal in Montreal (Caixin)

Chinese Phones Take over Indian Market (SCMP)

Tech Titans in China Take Battle to a New Frontier (Bloomberg)

 

China Consumer Watch:

  • P&G Refocuses Strategy on Premiumisation ( SCMP)

 

Commodity Watch:

  • China Scap Metal Exports Balloon (Caixin)
  • “The mining methods of the past have changed. And where we’re controlling mines from for the future from pit support is located in office buildings instead of the mine sites…I was talking to a customer last week about autonomy and they have a goal to be fully autonomous on every mine site by 2025. And they have thousands of pieces of equipment. So, you’ve got these bold goals being placed out there. So, clearly, the momentum is moving.” —Caterpillar Resource Industries President Denise Johnson (Mining)
  • And this chart from Martin Katusa shows how weak demand and declining production costs lead to low prices, and commodity prices at all-time lows relative to the S&P 500.

  • The Collapse of South Africa’s Mining Sector Valuewalk

Technology Disruption Watch:

Anti-Globalization Watch:

 

Notable Blogs:

 

Notable Quotes:
• “Xi’an only has a little over 40 Starbucks at the moment. This is definitely not enough. I think 400 would be more appropriate.” Wang Yongkank, Party Secretary of Xi’an, as reported by Week in China.
• “The reality is that as a planned economy and with the government having control of the major banks and large companies, a financial crisis is simply not in the cards.” Mark Mobius, Templeton Investments on China.