Improving social welfare is critical for China to avoid the middle-income trap

Will China get caught in the middle-income trap due to the negligence of improving social welfare?



A report released recently by the Chinese Academy of Social Sciences (CASS), the country's leading State-run think tank, has been gaining attention after it stated China had joined the ranks of upper middle-income nations. This is a remarkable achievement for China, but makes it more urgent to ask whether the country will be able to shift into a high-income nation, or if it will become stuck in the middle-income trap and therefore bring uncertainty to the global economy.



It seems the report sought to provide an answer, saying promoting sustainable urbanization would be a critical factor in helping China escape the middle-income trap. This represents the popular view that new growth momentum coming from areas such as urbanization and industrial upgrading will help the country maintain its economic growth in the future.



At the same time, China's wealth and income inequality is getting worse while the country encourages urbanization. The results of an official survey released last year found that the average income of the richest 20 percent of Chinese households was around 19 times that of the poorest 20 percent. This widening income gap is a sore spot for the continually booming economy.



A number of emerging countries have reached middle-income status in the last decades, but most of them have ended up stuck in the middle-income trap, where wealth and income inequality pose a huge obstacle to economic growth. Taking a close look at some Latin American countries, their rapid urbanization resulted in an unexpected surge in unemployment as well as housing shortages in cities due to the inflow of a large number of farmers, exacerbating the gap between the rich and the poor and triggering serious economic problems.



In contrast, some economies that have made the successful transition into high-income status began improving social welfare at an early stage of urbanization to reduce the income gap.



Based on the development experience of Japan, South Korea and Singapore, the establishment of a comprehensive welfare system and the implementation of measures to tackle income inequality should be a key priority on the Chinese government's agenda to help the country avoid the middle-income trap.



In this regard, the advice offered in the CASS' report may need to be reevaluated. Some economic observers need to clear up misunderstandings that the sustainable growth of the Chinese economy depends solely on its urbanization, industrialization and globalization. Improving social welfare will be critical as China's economy gains momentum.



The author is a reporter with the Global Times. bizopinion@globaltimes.com.cn

