China should adopt a new growth model

These countries fell into the "middle-income trap" because they attached too much importance to their economic growth model for too long, while ignoring the significance of a fair wealth distribution. And the lack of a simultaneous income growth for the wider middle class caused domestic demand to stutter.

A country's economic growth is usually driven by its production factors, investment, innovation and its wealth accumulation. However, a country, after its per capita GDP crosses $4,000, should gradually abandon the dependence on resources, capital and investment to drive its growth and, instead, use technological innovations to boost its economic and social development. This is the model some developed countries embraced when their per capita GDP reached a certain level.

Corresponding changes will also emerge in a country's industrial structure when its per capita GDP crosses $4,000, which will be most prominent in the rise of its tertiary sector. The three-sector hypothesis tells us that the contribution of a country's primary (raw materials) sector to GDP will decline considerably, and its economic activity will shift to the secondary (manufacturing) sector and then to the tertiary (service) sector as its per capita GDP increases.

A per capita GDP of $4,000 or higher will boost a country's service sector and fuel a rapid increase in consumption, which will help make consumption and services the new driving force of its economic growth. A higher per capita GDP will also catalyze changes in a country's microeconomic structure.

In the initial period of industrialization, small and middle-sized enterprises usually serve as the most important industrial pillar. But a country's continuous economic development and entry into a post-industrialized era will transform its large enterprises and transnational companies into a driving force of economic development and push its per capita GPD to a higher level.

A country's workforce and employment structure will also experience some changes when its per capita GDP reaches a certain level. The history of economic development tells us that all developed countries once benefited from "demographic dividend".

But when their costs of production factors entered the period of a cyclic rise, they took some measures to improve the life and livelihood of their peoples and made changes in human resources-related fields. In particular, they made some profound changes in their labor division, industrial and employment structures, savings, investments and social security, which helped expand their economic and social development.

A country has to finally base its economic development on its capability to accumulate capital and efficiency to utilize resources. Industrialization based on excessive dependence on foreign capital will not last long. With China's economic development reaching a certain stage, it has to expand its outward investment as a way of achieving higher development. Making outward investment more efficient and sharpening the competitive edge of domestic capital will facilitate such a transformation.

Whether China can stride over the "middle- income trap" and move toward a higher level of economic development depends on whether it can make some much-needed changes in its workforce, demand, industrial structure and economic growth pattern.

The author is an economics researcher with the State Information Center.

(China Daily 11/03/2012 page5)