The Path Breakthrough of Escaping the “Middle-income Trap” in China: Based on an Identification Method of Growth Convergence Theory and “Two-wheel Drive” Test

Liu Jinquan; Wang Qiaoru; Liu Dayu

doi:doi:10.16538/j.cnki.jsufe.2018.01.003

Summary

The " middle-income trap” is a primary problem for China because it is at the stage of middle income level. The essence of this problem can be attributed to the convergence of economic growth. In other words, the " middle-income trap” can be understood as a relatively stable state in which a country converges at the middle-income level. Then, does the decline in potential growth in the new normal period mean that our country is converging to the middle-income level? This proposition can re-examine the changes in speed, structure and momentum in the new normal period from the perspective of " middle-income trap”, and then provide a new theoretical thought for cognizing and leading the new normal. For this reason, this paper demonstrates the convergence path of China’s economic growth through the theory of economic growth convergence. The results show that China’s current economic growth is in the convergence curve of middle income, and it is difficult to successfully converge to the high-income stage along the existing curve. Further, it is not enough to discuss whether there is a trap, what is more important is how to overcome this trap and connect the " Chinese dream”. As the replacement of traditional economic drivers during the strategic transition period, the two major drivers of science&technology and finance, namely, " two-wheel drive”, have become two important engines for China’s innovation-driven development. These two factors will be the key to our success in crossing the middle-income trap. For this reason, the LT-TVP-VAR model is used to study the dynamic influence of the two driving factors on the economic growth, so as to judge whether China has the essential momentum to jump to the high income stage. The results show that the promotion roles of technological progress and financial efficiency in economic growth are highly coincided with the convergence path identified in this paper, and they have been improved obviously in the new normal period. The two driving factors play the endogenous role in a mutually reinforcing way and have a higher level of integration in the new normal period, which indicate that the staggered transformation of momentum in China has taken effect. Therefore, in order to successfully jump to high income levels and achieve " catching-up” strategy, we need to promote the in-depth integration of technology and finance through governments and market jointly, and explore the development potential of the two major factors.