China in Transition

Xi Jinping's Regime Facing Two Traps:
Will it be able to overcome the "middle-income trap" and the "transition trap"?

Chi Hung KWAN
Consulting Fellow, RIETI

Two traps await China

At the 18th National Congress of the Communist Party of China held in November 2012, Xi Jinping was elected general secretary of the Chinese Communist Party, succeeding Hu Jintao, and there was a significant reshuffle of the members of the Politburo's Standing Committee. At the first session of the 12th National People's Congress (NPC) that followed in March 2013, the highest ranking members of the government were replaced, including the state president (from Hu Jintao to Xi Jinping) and the premier of the State Council (from Wen Jiabao to Li Keqiang). This drew attention both in China and abroad as to where the country is heading under the new regime.

In retrospect, during the decade under the Hu Jintao regime, while the economy expanded significantly in terms of gross domestic product (GDP), many structural problems steadily worsened. Against this backdrop, China's growth rate has fallen, and its society has become increasingly unstable. To understand these phenomena, the World Bank and researchers from Tsinghua University have put forward the concept of a "middle-income trap" and a "transition trap," respectively. The former focuses on the problems China faces in its economic development process, while the latter focuses on the problems involved in its transition from a planned economy to a market economy.

Figure 1: Two Traps Awaiting China during its Economic Development Process and Market TransitionFigure 1: Two Traps Awaiting China during its Economic Development Process and Market Transition
Source: Chi Hung Kwan, Chugoku, Futatsu No Wana [Two traps for China] (Nikkei Publishing Inc., March 2013)

The "middle-income trap" hypothesis advocated by the World Bank

The "middle-income trap" is a concept introduced by the World Bank (Gill and Kharas 2007; World Bank 2012) to describe the situation in which once a country's per capita income reaches the median global level, its economy fails to find new drivers of growth and remains weak for a long period of time due to its inability to change its development strategies or pattern. Common characteristic of such countries include a slower rate of growth and rising social instability that result from the surfacing of factors hindering economic growth—such as the drying up of surplus labor, stagnated industrial advancement, a widening income gap between rich and poor, a deteriorating environment, and corruption among government officials—built up in the early stage of economic development. Latin American countries such as Brazil and Argentina are typical examples of this.

China has increased its presence in the international community, and the lives of its people have generally been improving through the reform policies and the opening up that have been occurring for over three decades. However, its growth rate has been declining in recent years, and public discontent has been increasing due to the widening income gap, worsening environmental problems, and corruption among government officials. As symbolized by the emergence of the anti-Japanese demonstrations in many parts of the country that turned into riots in mid-September 2012, Chinese society has become destabilized. These phenomena are regarded by some scholars as signs of the middle-income trap.

To overcome this middle-income trap, the Chinese government has tried to change the economic development pattern and move toward a harmonious society.

Changing China's economic development pattern consists of the following three transformations in its growth engine: 1) from investment and exports to consumption in terms of the country's demand structure; 2) from an industrial economy to a services economy in terms of its industrial structure; and 3) from expansion of inputs to higher productivity in terms of its mode of production. The primary objective is to improve the quality of the economy in addition to expanding it quantitatively.

Also, to realize a harmonious society, the government has to narrow the gaps between the urban and rural areas, between the eastern and western parts of the country, and between the rich and poor. To that end, the government has to eliminate the discrimination faced by farmers under the current household registration system and keep corruption in check.

The "transition trap" hypothesis proposed by researchers at Tsinghua University

In contrast to the middle-income trap, which focuses on the problems that occur in the process of economic development, the Tsinghua University Research Group (2012) introduced the concept of a "transition trap," focusing on the problems that occur in the process of transition from a planned economy to a market economy. A transition trap here refers to a situation whereby vested interest groups that emerged in the process of shifting from a planned to a market economy, such as state-owned enterprises, hamper further reform and try to maintain the "mixed system" created during the transitional phase. The consequence is distorted economic and social development and worsening associated problems such as income gaps and environmental destruction.

The fact that China has been promoting "incremental reforms," dubbed "crossing the river while feeling the stones," in contrast to the radical "big bang approach" taken by Russia and East European countries also provides an environment favorable to the creation of vested interest groups.

According to the Tsinghua University Research Group, the Chinese economy, which has fallen into a transition trap, is exhibiting the following five "symptoms." First, its economic development has been distorted. Vested interest groups are pursuing strong growth to earn profits in a short period of time with little concern about wasting an enormous amount of resources. Second, as symbolized by the lag in the transition of the government's role and the reform of state-owned enterprises, institutional reform is stagnating, and the transitional regime has persisted. Third, social mobility is low, and the social structure is solidifying. Fourth, the maintenance of social stability has become the most important national issue. Massive resources are being devoted for that purpose, while reforms are being postponed in its name. Finally, signs of social disruption, corruption among government officials, and the abuse of power, in particular, have become increasingly prominent.

Based on this recognition, the Tsinghua University Research Group has made the following suggestions as a way for China to break away from the transition trap.

First, China must join the global mainstream of civilization, which is based on universal values such as a market economy, a democratic government, and a society governed by laws. The main reason why China has fallen into the transition trap is because it has rejected the global mainstream of civilization, which at the same time has become its excuse for vested interest groups to maintain the status quo.

China must also accelerate the reform of its political system. Widespread corruption has weakened the authority of the government as well as its ability to carry out policies effectively. China's political reform must begin with the creation of a mechanism to constrain power in a way that increases government transparency.

Also, the government's decision-making process regarding reforms must be changed so that decisions are made based on an overall plan (or "grand design") formulated by the upper echelons of the central government, instead of delegating decisions to local governments and government ministries, as in the past. When carrying out reforms, the government must listen to the people to gain public support and at the same time place a basic value on equity and justice.

Overcoming these "traps" is the most important issue for the new government

China has already shown symptoms of these two traps, and overcoming them has become the most important issue for the new government led by General Secretary Xi Jinping. To that end, it is not only necessary to speed up economic reforms, but also political reforms.

With respect to economic reforms, the need for the upper echelon to create an overall plan, including specific road maps and timetables, was highlighted in the 12th Five-Year Plan (2011-2015) and the Hu Jintao report at the 18th Party Congress. The full picture of the new economic reform plan the new government will follow will be seen at the third plenary session of the 18th Central Committee of the Communist Party of China, to be held in the fall of 2013.

Meanwhile, since taking office, General Secretary Xi Jinping has shown a positive stance regarding political reforms, declaring, "power must be confined within the cage of institutions" (Xi, 2013a), and "The Communist Party of China should accept sharp criticisms" (Xi, 2013b). Still, resistance from vested interest groups is expected. Recognizing that "trying to control [vested] interests is often more difficult than controlling the soul," Premier Li Keqiang, who was recently elected by the NPC in March 2013, expressed his determination to move forward boldly with reforms, which are "crucial to the destiny of the country and the future of the people" (Li, 2013).

However, since conservatives who are resistant to reforms still have a strong influence on the current leadership, even if they seriously plan to work on reforms, General Secretary Xi Jinping and Premier Li Keqiang will probably have to wait until their second term, when a greater number of reformers will become members of the leadership through the 19th National Congress of the Communist Party of China in 2017. For the meantime, they have to consolidate their power base in their first five-year term in a way that will build public support.

The original text in Japanese was posted on April 5, 2013.

  • Gill, Indermit and Homi Kharas (2007). An East Asian Renaissance: Ideas for Economic Growth. World Bank.
  • Li, Keqiang (2013). Statement at a press conference after the close of the first session of the 12th National People's Congress, March 17.
  • Tsinghua University Research Group (2012). "'Middle-Income Trap' or 'Transition Trap'?" (Joint research by the Social Development Research Center of the Kai Feng Development Research Institute at Tsinghua University and the Social Development Task Group of the Sociology Department at Tsinghua University) Kaifang Shidai (The Era of Opening Up) , no.3.
  • Xi, Jinping (2013a). Important speech at the second plenary session of the 18th Central Commission for Discipline Inspection, January 22.
  • Xi, Jinping (2013b). Statement at a New Year celebration that Xi Jinping hosted at Zhongnanhai for leaders of parties other than the Communist Party, new and old top officials of the All-China Federation of Industry & Commerce, and representatives of non-partisan groups, etc., February 6.
  • World Bank (2012). China 2030: Building a Modern, Harmonious, and Creative High-Income Society (Joint research with the Development Research Center of the State Council of the People's Republic of China). World Bank.

April 5, 2013