Reforms can earn China high-income status before 2030: ADB

Saturday, October 27, 2012
Shanghai Stock Exchange
[PHOTO: Baycrest]
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Beijing: The People’s Republic of China (PRC) could achieve high income status before 2030 if it adopts an economic strategy which fosters innovation, upgrading, inclusivity and green growth, says a new report by the Asian Development Bank (ADB) and Peking University.

“Tilting the balance of the economy from low cost to high value production, from relying on government to relying on markets, from investment to consumption and from external to domestic demand will allow PRC to grow beyond its current middle income status,” said Juzhong Zhuang, report co-author and ADB Deputy Chief Economist. “Under such a scenario, the economy could grow 8% a year from 2010 to 2020, and 6% from 2020 to 2030.”

The report, Growing beyond the Low Cost Advantage: How the People’s Republic of China can Avoid the Middle Income Trap, says despite its spectacular growth over the past 30 years, PRC is now at a critical juncture where a new development model is urgently needed to lift the economy to a higher level. With the right strategy, that could still be achieved before 2030.

The low-cost, factory-driven growth model, aided by massive foreign investment, has helped transform PRC into the world's second largest economy. However, with wages rising fast and the population aging, its cost advantage is declining. The need for a new approach has been given added urgency by the slump in demand for exports from Europe and the US, an alarming rise in domestic inequality, and increasing environmental stress.

The report acknowledges change will not be easy, with many economies such as Brazil, Colombia, Mexico, and South Africa still stuck at middle income level after decades of slow and volatile growth. However, there are successful Asian economies which offer role models, including Hong Kong, China; Japan; Republic of Korea; Singapore; and Taipei,China.

The ingredients for turning PRC into a high-income economy include policy steps to encourage more innovation and industrial upgrading. Deepening reforms of enterprises, the labor and land markets, the financial sector, and the fiscal system is key. Increasing support for education, developing high-value services, managing urbanization effectively, and creating conditions for ‘greener growth’, are other crucial elements of a healthier development model, the report says.
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