Item — HN Reader

Yet, median income [0] and HDI [1] both at the macro level and at the prefecture level are comparable to Brazil [2][3] and lag behind both Russia [4][5] and Mexico [6][7].

There is no denying the amount of growth the service sector in China has seen, yet a lot of this growth and development is among a sliver of the population living in better developed regions such as the various coastal prefectures. Beijing, Tianjin, Guangzhou, Shanghai, etc can be treated as developed, but what about the hinterlands such as Sichuan, Ningxia, Hunan, Guangxi, etc? This middle income trap is not a good thing by the way - I take no joy pointing this harsh truth out because this means hundreds of millions of PRC nationals are stuck in less than ideal economic positions.

Also, if we are talking about the value chain, Brazil is very high in the ONG (Petrobras, Odenbrecht), Aeronautics (Embraer), Automotive, and Defense (Odenbrecht, Embraer) value chain thanks to economic policies in the 90s and 2000s that are comparable to those the PRC has started adopting in the past 10-15 years.

[0] http://www.stats.gov.cn/english/PressRelease/202201/t2022011...

[1] https://en.wikipedia.org/wiki/List_of_administrative_divisio...

[2] https://en.wikipedia.org/wiki/List_of_Brazilian_federative_u...

[3] https://agenciabrasil.ebc.com.br/en/economia/noticia/2017-02...

[4] https://en.wikipedia.org/wiki/List_of_federal_subjects_of_Ru...

[5] https://tass.com/economy/1301957

[6] https://en.wikipedia.org/wiki/List_of_Mexican_states_by_Huma...

[7] https://www.efe.com/efe/english/life/mexican-households-have...

2 comments

>Yet, median income [0] and HDI [1] both at the macro level and at the prefecture level are comparable to Brazil [2][3] and lag behind both Russia [4][5] and Mexico [6][7].

This is the present. It does not mean China is a middle income trap nation. It continues to grow and advance in innovation.

Also, China's GDP PPP per capita has already surpassed Brazil. GDP PPP is a much better measure of stand of living than GDP/capita.

The biggest factor in whether a country stays in the middle income territory is innovation.

China is innovating. In some areas, it's already leading.

GDP and GDP PPP both quantify production, not income and living standard metrics. While there is often a correlation between production and rising living standards, it is a lossy indicator that fails to take into account inequality and differing regional CoLs. For this reason Median income plus HDI is the standard metric used in developmental economics to gauge QoL, as they give you insights on access to healthcare, education, inequality, and other metrics critical to the functioning of societies.

Countries can have cutting edge industries AND still lag behind in development - Brazil (Defense, Aerospace, ONG, Automotive), South Africa (Defense), Turkey (Defense, Automotive, ONG), Mexico (Defense, Automotive, ONG), Russia (ONG, Defense, Aerospace, Automotive), Malaysia (Automotive, ONG, Electronics), etc are all countries that are major innovators and even leaders in STEM/innovtion heavy industries, yet still have significant issues with spreading development across their countries. The PRC is facing a similar issue, and it is a hard nut to crack - I can't think of a single middle income to upper income economy that didn't also

1. receive a massive subsidy from either the EU (southern Europe, eastern Europe, Ireland) or the US (South Korea, Israel, Taiwan)

2. have a small population (<30mil at time of transition)

It is harder to lift a nation of 400 million poor (using PRC poverty definition) people than to lift a poor nation of 30-40 million.

Also, this same trap that China is in is something that India, Vietnam, Indonesia, and the Phillipines will face in 20 years

>GDP and GDP PPP both quantify production, not income and living standard metrics.

Purchasing power parity (PPP) allows for economists to compare economic productivity and standards of living between countries.

https://www.investopedia.com/updates/purchasing-power-parity...

>Countries can have cutting edge industries AND still lag behind in development - Brazil (Defense, Aerospace, ONG, Automotive), South Africa (Defense), Turkey (Defense, Automotive, ONG), Mexico (Defense, Automotive, ONG), Russia (ONG, Defense, Aerospace, Automotive), Malaysia (Automotive, ONG, Electronics), etc are all countries that are major innovators and even leaders in STEM/innovtion heavy industries, yet still have significant issues with spreading development across their countries. The PRC is facing a similar issue, and it is a hard nut to crack - I can't think of a single middle income to upper income economy that didn't also

Brazil does not lead in Aerospace, ONG, Automotive. South Africa does not lead in defense. And so on. They do not possess technology that other countries depend on. For example, Embraer's revenue in 2021 was 4.2 billion. Puny compared to Airbus' 52 billion. If Embraer stopped operating tomorrow, the world would not notice.

We're talking about actual innovation and a technology advantage. You mentioned that Mexico leads in automotive. What? Mexico does not have any cutting edge automotive technology that other nations depend on. Mexico is a hub for car manufacturing because it's close to the US and provides cheap labor. They do not produce any car tech that other countries cannot produce.

Real innovation is something like China's CATY new car battery which outcompeted Tesla's 4680 battery. https://medium.com/predict/tesla-is-about-to-lose-its-tech-a...

Before Tump's ban, Huawei was set to provide 5G technology to the UK, a country that could not produce 5G equipment on its own. A true middle-income country could never do this.

>This middle income trap is not a good thing by the way

One of OG researchers who coined the term believe phenonmenon is overstated, to the point of not being useful or existing at all. Fundementally, middle income trap is not a good concept in evaluating PRC because even according to the original middle income analysis countries with proper industrial policies designed to move up value chain (like PRC) is likely continue out grow developed countries and in PRC's case, close capability gaps. It's less about being trapped within arbitrary per capita bracket (which PRC is set to to reach upper income by years end anyway) and more about industrial stagnation that would theoretically lead to economic stagnation.

Reality is PRC as you recognize is almost like two countries, rich developed coastal that is still rapidly developing, and developing (really neglected) interior. This segregation was by design (Deng's let some get rich first policy), but that "sliver" living in T1 region is ~200M people, which is about Japan, South Korea, Taiwan combined. And really one should include another 200-300M T2 cities due to industrial synergies. Essentially you have a 500M strong rapidly developing country that is spilling out comparable STEM graduates as OECD countries combined while rapidly moving up value chain in every industry, not just a select few like in Brazil. This is the component of PRC that is globally competitive and building up comprehensive national power to the point of becoming pacing threat with US, even if it's dragged down by the interior poor. Just look at record youth umemployment which is absolutely not something to brag about but reflects just how much oversupply of talent resulted from education reforms 20 years ago meanwhile PRC moving up every research and innovation index controlled for quality and have indigenous industries in almost every sector, many of which are increasingly competitive. Even with demographic crisis looming, rich PRC is really just getting started because it is increasingly oversatuated with talent for moving up value chains.

Yeah there's still 600M undereducated poor that can't really be integrated into modern economy, hence common prosperity wealth transfer programs. Think of it as rich high-growth high-income PRC giving handout / economic aid to lower income PRC, not enough that rich PRC stops growing, but just enough that poor PRC isn't spiraling in subsistence and ready to rebel. Ultimately it's useful to think of PRC as massive developed China supporting massive low income China. It's better to have a country with 100 people where 50 rich people can build advanced tech but 50 are stuck being poor farmers then a country with 100 people with equal wages that can only make shoes or farm. Now consider India with 1400M people has 20% of PRC GDP... and while a drain, it really does not take crippling amount of resources relative to PRC GDP to subsidize 600M poor. Last time I did the math, if PRC spends 6% of GDP / 1 trillion per year, it can double income of the 600M poor on 1000rmb per month to 2000rmb. Which isn't great but enough to maintain stability especially if spread out over multiple years so people percieve they're getting richer YoY.

What you have described is BY DEFINTION the middle income trap. Economic growth and development is not linear - the type of strategy that brought incomes up from $400 to $2000 a year are not going to be the same to bring them up from $2000 to $10000.

The kind of regional income transfers you mentioned is a MASSIVE legal undertaking that will inevitabely face a significant amount of opposition from the richer coastal prefectures that would be subsidizing said development. You would need a revamping of tax brackets and also, you would still need to work on getting education quality in hinterland regions up to speed. We all want to say China is doing it's own thing for the first time, but this is the exact same story we saw with Malaysia and Mexico in the 90s and Turkey/Russia/Brazil in the 2000s-2010s. And it's not like economists and policymakers in the PRC are blind to this - Shaojie Zhou and Angang Hu at Tsinghua are two econometricians I can think of off the top of my head who are doing reseach on this conundrum specifically while also still in China. Li Keqiang himself is a former developmental economist btw and I wouldn't be surprised if a number of the recentish reforms that have started happening were lobbied by him.

Paraphrase from previous comment:

1. receive a massive subsidy from either the EU (southern Europe, eastern Europe, Ireland) or the US (South Korea, Israel, Taiwan)

2. have a small population (<30mil at time of transition)

It is harder to lift a nation of 400 million poor (using PRC poverty definition) people than to lift a poor nation of 30-40 million.

Again, these countries do not have any innovation advantage in those industries.

Here are actual leaders in those industries:

Aerospace --> USA, EU, UK, Japan

Defense --> USA, EU, China, Israel, Russia

Automotive --> USA, EU, Japan, South Korea, and soon to be China

ONG --> USA, UK

Electronics --> USA, Japan, EU, China, South Korea, Taiwan

Energy --> USA, EU, China

Gaming --> USA, Japan, China

You're confusing having a large industry with leading SUSTAINED innovation.

When was the last time you bought a Malaysian brand electronic? When was the last time you drove a Mexican brand car?

High income countries produce innovation, hence the ability to move up in the value chain, hence moving above middle income trap.

I don't think we're disagreeing that equitable development is a huge challenge for PRC, at PRC scale, but my main point is middle income is not a useful lens to evaluate PRC, because 1) it's arbitrary cutoff that PRC is going to pass sooner than later 2) stupid large countries operate on different dynamics/expectations. It's even very not useful to lump 32M malaysia together with 200M Brazil let alone 1400M PRC.

> BY DEFINTION

Conceptually middle income trap is about countries stops moving up value chain and income gets stuck in middle income levels. It's a dumb blunt indicator that has no bearing on equity of development. If country has 100 Tony Starks making 20Trillion dollars in GDP of wizard widgets, while 1.4 billion subsists on crippling poverty but GDP per capita is above middle income, then congradulations, that country has escaped the middle income trap and all the wizard widget would categorize it as an advanced economy even if 99.99% of the impoverished people starves. Techncially if PRC is stuck at +$1 above middle income, it has escaped the trap, but the real question is weather PRC can continue moving up value chain and build competitive comprehensive national power, even at the cost of extreme inequity, not how/whether such equity can be addressed, which obviously is still important consideration for policy makers.

On that note PRC per capita gdp is set reach upper income this year, if not already even with revised slow growth numbers. Official CCP stats is $12,551 for 2021, which will put PRC in upper income of $12,696 with 2% growth this year. If you entertain the Shanghai police leak demographic extrapolations seriously, PRC today has 100M less people and entered upper income years ago. Meanwhile PRC is climbing value chain rapidly in essentially every sector, it's not specializng in a few, like the mid sized countries, but issue is, PRC simply has too many people for everyone to be lifted into upper income range. The difference with Malaysia/Mexico/Turkey/Russia/Brazil is on paper, extrapolating from recent Asian Tiger and other historic medium size country development trends, there should be enough opportunities for middle sized countries of 20-200M to specialize and be competitive in some higher tier sectors and escape the middle income trap.

PRC is not a middle sized country.

My opinion expectation suitable for middle size countries is ridiculous to apply to PRC with 1.4B people where 200M-300M tier1/2/3 workforce (very course guestimate) are already specializing in most sectors + 100s of millions of bullshit makework jobs by SEOs just to keep people busy, while 100s of millions more drift in informal economy. Think of USA with 160M workforce who can do pretty much everything there is to do, except manufacturing, which during peak, PRC employed ~300M. There's simply not enough domestic opportunities or global demand for 1.4B people. A good example is central gov reluctantly holding on to inefficient collective agriculture that employs 450M when realistically mechanization will axe 440M of those jobs and provide better food security.

>MASSIVE legal undertaking

Yes, there's going to be a lot of policy changes and reforms to get common prosperity rolling, or address rural education, vocational training etc. But TBH and blunt, opportunity for education and training has already passed for 100s of millions who are stuck in informal economy. Interior provinces neglected for too many generations. I don't know if they'll be taken care of by safety net or simply neglected - even Xi stressed common prosperity is not about handouts/welfare - but whatever they get, it's unlike to uplift them into upper income. They're never going to experience 25000 per capita China Dream by 2049. I think going forward PRC will remain a 2 tier society, something like gulf state with professional class and migrant labours that goes back to their less developed homes where PPP stretchs further. There's going to be reforms to improve QoL of of the bottom, but the classes are never going to converge. And hot take: CCP probably wants it that way, modern PRC is built and likely can only be sustained by 2 tier society with massive cheap migrant labour pool.