Will China be caught in the middle-income trap? the economic path of South Korea and Malaysia may help provide the answer

Abstract

This thesis investigates the feasibility of China’s transforming to a consumption-led economy. Specifically, it seeks to determine whether China is destined to be caught in the middle income trap, whereby it fails to graduate to high-income status, and thus is trapped in an economic state of equilibrium that is very difficult to change with short-term forces. To investigate this question, this thesis compares China’s economic development with the economic trajectories of South Korea and Malaysia, which have experienced similar economic growth pressures, to assess the likelihood that China’s growth will stagnate over the near to middle term. To do so, this thesis will examine the effect of rule of law, education, and demographics on economic growth. Given China’s rapid economic ascent based on its export-led and investment-dependent economy, the evidence suggests China’s economic growth is decreasing despite popular belief China is on a trajectory to overtake the United States as the world’s top economy. Although the Chinese Communist Party has slowly implemented phased economic reform since the Deng Xiaoping era, it still lacks many institutions necessary to transform into a consumption-led economy. This thesis concludes with a scorecard analysis that will provide insight into China’s economic future.