August 30, 20127
Economies with a low per capita income – reflective of a low capital stock and a low level of technology absorption – find it easier to generate high economic growth rates than high per capita economies operating near the technological frontier. Naturally, low per capita income is only a necessary, not a sufficient condition, hence ‘conditional convergence’. Japan ceased to converge with US income levels in the wake of the 1990 financial crisis. Both Japan and Korea experienced a significant downward shift in their growth rates after their per capita income reached around 50% of US income in the late 1960s and late 1990s, respectively. This is by and large consistent with the Eichengreen middle-income trap according to which growth slows down by on average 350 bp once the critical level of USD 15,100 (in 2005 dollars) is reached. China will reach this level in 2016. However, China’s per capita income is projected to remain below 40% of US income by 2020 and not reach 50% (much) before 2030. It is therefore not clear that Chinese growth needs to lose significant momentum. This is not to suggest that history will repeat itself. Economic growth and development are extremely complex social phenomena. Economic policies matter. So do other factors such as global economic trends, demographic change and economic size. These and other factors will affect China’s growth trajectory. That said: if technological catch-up and distance from the technological frontier were all there is to economic growth, China would have quite a few years of strong growth to look forward to.