[CEAMeS DP15] – “The Middle-Income Trap 2.0: The Increasing Role of Human Capital in the Age of Automation and Implications for Developing Asia”

CEAMeS Discussion Paper No 15 | 2018

Linda Glawe and Helmut Wagner

Also distributed as SSRN Paper No. 3263458

In our paper, we modify the concept of the middle-income trap (MIT) against the background of the Fourth Industrial Revolution and the (future) challenges of automation (creating the concept of the “MIT 2.0”). In particular, we analyze the impacts of automation, artificial intelligence, and digitalization on the growth drivers of middle-income countries and the MIT mechanism. We show that automation reduces the initial growth push for developing countries and leads to an earlier MIT at the lower end of the middle-income range. In addition, once wages start rising, the necessary shift in the growth strategy (from an export-manufacturing based to an innovation-productivity based growth model) is afflicted with higher requirements, particularly regarding human capital. This in turn, will lead to a higher persistence of the trap and it will become more difficult to break out of it. Thus, the MIT 2.0 will be much more challenging than today’s “normal” MIT. Our findings suggest that improving human capital accumulation, particularly the upgrading of skills needed with the rapid advance of automation, will be key success factors for overcoming the MIT 2.0. Against this background, we elaborate the implications for developing Asia regarding their probability to experience an MIT 2.0 (with a special focus on human capital as well as higher cognitive and information communication technology skills).

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[CEAMeS DP14] – “Avoiding the middle-income trap: Korean lessons for China?”

CEAMeS Discussion Paper No 14 | 2018

Michael Murach, Helmut Wagner, Jungsuk Kim and Donghyun Park

We analyze and compare the pattern of economic growth and development of China and South Korea in the postwar period. Geographical proximity and cultural affinity between the two countries, as well as the key role of the developmental state in the economies of both countries, suggests that an analytical comparison would be a meaningful and valuable exercise. Furthermore, Korea is one of the few economies that jumped from middle income to high income in a short period, and thus offers potentially valuable lessons for China. The Asian giant moved from low income to middle income very quickly but now faces the challenge of graduating to high income. In this paper, we empirically assess the main drivers of economic growth in China and Korea, and then identify the time period when Korea was at a similar state of structural change as today’s China. In addition, we examine the trend and pattern of Korea’s economic growth from that point on. We will analyze and compare key reforms that promoted growth in the two countries. Lastly, we sift through our empirical evidence to assess the prospects for China to follow Korea’s footsteps in transitioning from middle income to high income relatively quickly.

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[CEAMeS DP13 ] – “Structural change, rebalancing and the danger of a middle-income trap in China”

CEAMeS Discussion Paper No 13 | 2018

Helmut Wagner

China is currently experiencing a structural change toward tertiarization and an implied growth slowdown associated with it. The paper investigates whether this growth slowdown is merely cyclical or a negative trend, and further what China is doing or should do to avoid falling into a “middleincome trap,” a problem many emerging economies have experienced in recent decades. The pitfalls of the current “soft” rebalancing policy in China are analyzed in the context of this development.

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[CEAMeS DP12] – “The Deep Determinants of Economic Development in China – A Provincial Perspective”

CEAMeS Discussion Paper No 12 | 2018

Linda Glawe and Helmut Wagner

There is a significant body of literature arguing that institutional quality is the key for long run economic growth and development. While the majority of these studies are based on cross-country growth regression, in our paper, we focus on the institution-economic growth nexus within a particular country, namely China. China is often regarded as an exception by having achieved miraculous growth for more than three decades despite relatively low institutional quality. However, our key findings suggest that at the provincial level, institutional quality played in fact an important role for the economic success of a province in China, “trumping” geographical factors and integration which only have an indirect effect by influencing institutional quality. We employ instrumental variable estimation techniques to address the endogeneity problems regarding the institutions-development relationship.

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[CEAMeS DP11] – “The Deep Determinants at More Subtle Stages of Development – The Example of the Middle-Income Trap Phenomenon”

CEAMeS Discussion Paper No11 | 2017

Linda Glawe and Helmut Wagner

The so-called ‘deep determinants’ of economic growth and development (namely, geography, institutions, and integration) have been found to be decisive for the break out of stagnation and for explaining cross-country income differences by many empirical studies. However, so far, very little has been done to examine to which extent they are also crucial at more subtle stages of economic development. Our paper aims to close this gap by focusing on the phenomenon of the middle-income trap (MIT) which has reached increasing attention in the last 15 years. In particular, we test whether the results of the empirical studies conducted by Acemoglu et al. (2001), Rodrik et al. (2004), and Easterly and Levine (2016) also remain valid when analyzing the MIT. We are the first to analyze the relationship between the deep determinants and the MIT, especially regarding the causal effect of institutional quality on the probability of experiencing a growth slowdown at the middle-income range. Our analysis reveals that while, in general, the deep determinants also seem to play an important role for the middle-income transition (and the question of whether a country falls into an MIT), some differences compared to the results of the standard literature become apparent.

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[CEAMeS DP10] – “The Deep Determinants of the Middle-Income Trap”

CEAMeS Discussion Paper No 10 | 2017

Linda Glawe and Helmut Wagner

The fundamental, underlying factors of development are often neglected when analyzing the question why countries experience a growth slowdown at the middle-income range. Although these so-called ‘deep determinants’ such as geography and institutions have been found to be decisive for the break out of stagnation and for explaining cross-country income differences by many empirical studies, so far, very little has been done to examine to which extent they are also crucial at more subtle stages of economic development. Our paper aims to contribute to close this gap by focusing on the phenomenon of the middle-income trap (MIT) which has reached increasing attention in the last 15 years. In particular, we are interested in whether the deep determinants have positive or negative impacts on the possibility of a country to experience a prolonged stay within the middle-income range. We focus especially on exogenous variables to avoid endogeneity/reverse causality problems. By using simple statistical hypothesis testing, we show that not all findings of the deep determinants literature can be easily transferred to the MIT phenomenon, especially regarding institutional variables. This may raise the question whether we need new deep determinants of growth for the MIT or at least a modified version taking into account the specific circumstances and characteristics of middle-income countries.

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[CEAMeS DP09] – “The Changing Patterns of Investment in the PRC Economy”

CEAMeS Discussion Paper No. 9 | 2017

Carsten Holz

The investment-intensive growth model of the People’s Republic of China (PRC) is often viewed as state-driven and ultimately unsustainable. But largely unnoticed, a shift has taken place. This paper examines the changes in investment patterns since 2003 and the potential impact of industrial policies on these patterns. The point of view is macroeconomic, based on economy-wide data with various breakdown. Significant shifts in investment patterns across sectors and ownership forms have occurred over time, supporting a new growth model with a reduced role of the state, and these shifts appear driven more by market factors than by government policies.

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[CEAMeS DP08] – “How severe will the growth slowdown in China caused by structural change be? – An evaluation based on experiences from Japan and South Korea”

CEAMeS Discussion Paper No 8 | 2017

Michael Murach and Helmut Wagner

preliminary version of an article published in: 
Journal of Chinese Economic and Business Studies 15 (3), pp. 269-287, on 12 Jul 2017.

China has been growing at high rates during the previous three decades. The current process of rebalancing from an investment- and manufacturing-led growth model towards a consumptionand service-led model is associated with decreasing growth rates. We show that China’s current state of structural change in terms of sectoral employment shares is similar to the historical
developments in Japan and South Korea. We derive plausible scenarios for future growth rates in China and (by isolating the allocation effect, i.e. the pure effect of structural change) look at the effects of tertiarization on economic growth in China for the period 2016 until 2030 by applying a simple simulation study.

All CEAMeS discussion papers are also available at the deposit_hagen website.

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[CEAMeS DP07] – „Government Efficiency and Exports in China“

CEAMeS Discussion Paper No 7 | 2017

Antonia Reinecke & Hans-Jörg Schmerer

also published in: 
Journal of Chinese Economic and Business Studies 15 (2017)

This paper investigates the role of local governments’ efficiency on exports in China. We argue that firms located in provinces characterized by high governmental efficiency export more due to a positive productivity effect that lowers transaction costs. The analysis builds on NBS firm-level data that covers a representative sample of Chinese establishments. We find a positive correlation between provincial governments efficiency and Chinese firm’s exports. Moreover, we are able to show that the positive link between firm size and exports is magnified by governmental efficiency. Larger firms export more and this relationship is much stronger in provinces with more efficient provincial governments.

All CEAMeS discussion papers are also available at the deposit_hagen website.

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[CEAMeS DP06] – „On the (non-)sustainability of China’s development strategies“

CEAMeS Discussion Paper No 6 | 2017
forthcoming in: “Chinese Economy”, vol. 50 (2017)

Helmut Wagner

also published as: 
SSRN Paper No. 2946768, 2017

This paper summarizes the main characteristics of the two major Chinese growth strategies since 1978, namely the Deng strategy (named after Deng Xiaoping) between 1978 and 2011 and the Xi strategy (named after Xi Jinping) since 2012/13. After a brief description of both strategies, I analyze in depth whether the respective reforms of the two strategies have caused sustainable or unsustainable growth and economic development. Furthermore, I derive some implications concerning the danger of a Chinese middle-income trap and pro- pose some policy recommendations (also against the background of the Korean experience). I finally develop a growth-theoretic systematization of the arguments elaborated previously.

All CEAMeS discussion papers are also available at the deposit_hagen website.

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[CEAMeS DP05] – “A Stylized Model of China’s Growth Since 1978”

CEAMeS Discussion Paper No 5 | 2017

Linda Glawe and Helmut Wagner

also published as: 
SSRN Paper No. 2917433, 

This paper develops a stylized multi-sector growth model of China’s economy. We choose a neoclassical modeling approach and focus on the reform process under Deng Xiaoping as China’s main growth driver since 1978. Following the literature, we distinguish between three major reform periods, namely the agricultural (1978–1984), the industrial (1984–1992) and the foreign-trade reform period (1992–present). Reflecting the neoclassical view, our model explains China’s growth process since 1978 as a sequence of transitory growth phases generated by the reforms. We discuss our model’s implications for China’s future growth and the middle-income trap as well as growth-stimulating policies in China.

All CEAMeS discussion papers are also available at the deposit_hagen website.

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[CEAMeS DP04] – „China in the Middle-Income Trap?“

CEAMeS Discussion Paper No 4 | 2016

Linda Glawe and Helmut Wagner

also published as: 
SSRN Paper No. 2830439, August 2016

Over the last decade, a growing body of literature dealing with the phenomenon of the “middle-income trap” (MIT) has emerged. The term MIT usually refers to countries that have experienced rapid growth and thus reached the status of a middle-income country (MIC) in a considerably short amount of time, but have not been able to further catch up to the group of high-income economies. Especially, since the beginning growth slowdown of the Chinese economy in 2011, there has been rising concern that China is or will also be confronted with such a trap. This paper analyzes the Chinese MIT situation taking into account both the (absolute and relative) empirical MIT definitions and MIT triggering factors identified in the literature. We not only survey the recent literature, but also make our own MIT forecasts and analyze under which conditions China could be caught in an MIT.

All CEAMeS discussion papers are also available at the deposit_hagen website.

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[CEAMeS DP03] – “The Building Up of New Imbalances in China: The Dilemma with Rebalancing”

CEAMeS Discussion Paper No 3 | 2016

Helmut Wagner

also published as: 
SSRN Paper No. 2779510, May 2016

and in:
International Economics and Economic Policy, vol. 14 (2017), issue 4, pp. 701-722

This paper offers a theoretical basis for the concept of rebalancing and applies it to China, where it is  currently a topical issue. Rebalancing here means the correction of economic and social imbalances  built up during industrialization. This correction is accompanied by a structural transformation to‐ wards a more inward‐ and consumption‐driven growth path, associated with growth slowdown. At‐ tempts to mitigate this growth slowdown by either retarding this structural reform process or by us‐ ing expansionary stimulus programmes as done over the past decade in China create new imbalances  that have to be corrected (rebalanced) again. Managing these multiple rebalancing tasks together is  a tremendous undertaking, as this paper shows.

All CEAMeS discussion papers are also available at the deposit_hagen website.

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[CEAMeS DP02] – “The Middle-Income Trap – Definitions, Theories and Countries Concerned: A Literature Survey”

CEAMeS Discussion Paper No 2 | 2016

Linda Glawe and Helmut Wagner

also published as: 
SSRN Paper No. 2777521, May 2016

and in:
Comparative Economic Studies, vol 58 (2016), pp. 507 – 538.

In recent years, a growing body of economic literature has focused on the phenomenon of the so-called middle-income trap (MIT). The term usually refers to countries that have experienced rapid growth and thus quickly reached middle-income status, but then failed to overcome that income range to further catch up to the developed countries. This paper surveys the MIT literature. It begins by laying out different approaches to defining the MIT (with a focus on the distinction between absolute and relative approaches) and by presenting as well as classifying the most important empirical studies. After a short overview of the currently identified MIT countries, the article summarizes the main explanatory approaches, taking into account both the theoretical foundations and the empirically identified triggering factors.

All CEAMeS discussion papers are also available at the deposit_hagen website.

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[CEAMeS DP01] – „The effects of external shocks on the business cycle in China: A structural change perspective“

CEAMeS Discussion Paper No 1 | 2016

Michael Murach and Helmut Wagner

also published as: 
SSRN Paper No. 2741579, March 2016. 

We study the effects of external shocks on the business cycle in China and its sectors (agriculture, industry, and services) in terms of real GDP growth using several small dimensional VAR models with Cholesky identification for the period 1996 – 2014. We show that China – in particular its industrial sector – is susceptible to shocks, which can be related to a trade channel, a financial channel, and a confidence channel of business cycle transmission from major trading partner countries to the Chinese economy. If interpreted from the perspective of ongoing structural change and rebalancing in China, our findings can be interpreted as the result of a still very dominant industrial sector, and a previously export- and investment-driven growth model. Tertiarization in China could be one way of increasing the economy’s future resilience to external shocks. However, the future structure of both the industrial and service sectors may be very decisive.

All CEAMeS discussion papers are also available at the deposit_hagen website.

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