Decades of rapid economic growth have enabled China to pull 680 million people out of poverty from 1980 to 2010 and raised its per capita annual income from $310 to $15,395. However, China’s growth has been slowing down since 2012. The GDP growth rate has declined to 6.7% in 2016, down from the average annual growth rate of close to 10% since 1980s. This poses the question: is the recent growth slowdown a temporary deviation from the long term trend, or is China experiencing the oft-cited “middle income trap” like many other developing countries?
Middle Income Trap (MIT) refers to the economic slowdown that most fast-growing developing economies experience when they reach certain income thresholds[1]. There are numerous factors as to why MIT exists. My research intends to investigate the role of inequality in affecting the economic slowdown. In theory, inequality could engender both positive and negative impacts on economic growth. On the one hand, inequality may aid growth. Inequality allows the wealthy to amass savings and invest in projects that could advance technologies and create employment and income. Inequality could also ensure the existence of a destitute “industrial reserve army” that supplies low-cost labor to industrialization. On the other hand, inequality could hinder economic growth through various channels. First, inequality undermines the formation middle-income class whose consumption provides the necessary demand to drive economic growth. Second, inequality could lead to economic and financial instability and thus hampering economic growth. And finally, inequality could lead to imbalances in political power and economic agency, whereby undermining effective policy-making and institution-building to promote technological and skill improvements.
It is not clear, in the case of China, how income and wealth inequality affects economic growth. My research would focus particularly on the last impact of inequality on MIT mentioned above: that is, how inequality between rural and urban areas, between inland and costal regions and between different social classes shape economic policies and developmental institutions in promoting skill upgrading and technological advancement. The research questions include: first, what are the various manifestations of inequality in China (rural-urban inequality, income inequality among urban areas, and inequality between inland and coastal cities)? Second, how does such inequality affect policy making in terms of financial, institutional and policy support to promote technological advancement? And finally, would technological progress benefit disproportionally the economically disadvantaged areas and groups whereby alleviating inequality?