Growing Beyond the Low-Cost Advantage: How the People’s Republic of China can Avoid the Middle-Income Trap

Abstract

The economic success of the People’s Republic of China (PRC) over the last 3 decades has brought with it new challenges. Rising wages and population aging mean that future growth needs to rely more on productivity improvement through industrial upgrading and innovation, and transition from “low cost to high value” is critical. What makes this transition particularly challenging is the PRC’s incomplete reform, which, compounded by rapid growth, has led to economic imbalances and contributed to rising inequality. Resource constraints and environmental degradation could also hinder growth. This report analyzes the challenges the PRC faces and examines policy options that could help its transformation from a low-cost to a high-value economy, bypassing the “middle-income trap.”