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Chapter 9 discusses the possibility of China falling into the middle-income trap in terms of three checkpoints: innovation capability, big businesses, and inequality. The main finding is that China is performing well in terms of the first two criteria, but there is some uncertainty in the last criterion of whether it generates Kuznets curve-type dynamics of growth leading to better equality. First, China has increasingly become innovative; thus, it differs from other middle-income countries. It has been pushing strongly for considerable R&D expenditure and has been ahead of the typical middle-income countries. Second, China has many world-class big businesses, which is more than its size predicts, not only in finance, energy, and trading as in the past but also increasingly in manufacturing. Thus, it differs from other middle-income countries with few globally competitive large businesses. Third, China faces some uncertainty in terms of inequality. The Gini coefficient continuously increased from approximately 0.3 in 1981 to reach its peak of 0.49 or so in 2008–2009 but has decreased to 0.42 since then. This recent decrease may be a sign that China is following the Kuznets curve. However, China is now facing new sources of inequality, such as wealth (including financial and real estate assets) and non-economic factors (including corruption).

Volumes have been written about calorie and protein deficiencies in poor countries. However, much less research has been compiled on the food security problems of middle-income countries with personal incomes in the $3,000 to $10,000 range. This chapter focuses on these nations, describes the middle-income trap into which many have fallen, and uses China as a case study of food security as both a cause and a consequence of such traps. As countries move to middle-income status, labor costs rise, and countries must improve education, boost productivity, and master innovation if they expect to continue growing. Data from a dozen middle-income countries, particularly those with quite unequal income distributions, show widespread deficiencies in iron, vitamin A, and micronutrients. Specific survey data from rural China show that these deficiencies are leading to cognitive difficulties and excessive dropouts among rural children. This second food security challenge can thus be a severe constraint on the skilled labor force that China needs and desires for continued economic growth in the years and decades ahead.

The chapter discusses the existence of potential economic traps that limit the capacity for middle-income countries (MICs) to converge towards high-income status. It presents an empirical exploration of the two interpretations (absolute and relative) of middle-income traps (MITs) and considers transitions between country categories that occurred during the last three decades. Even if transitions are a rare phenomenon, the authors conclude that evidence is not able to settle the existence of MITs, but it is enough to illustrate the severity of the challenges that MICs face in their development path. The chapter analyses the theoretical arguments offered to justify the presence of these pitfalls, as well as the main policy responses required to overcome them. Even if more analytical work is required, the chapter underlines that the debate around MITs has revitalized reflection on the active policies required to promote growth in MICs. Finally, the chapter presents an overview of the book, underlying the main contributions of each chapter.

This chapter argues: first, if inequality is not mediated during economic growth and structural change, middle-income countries (MICs) may, in the future, face a new kind of middle-income poverty trap. Second, that this middle-income trap is neither inevitable nor unavoidable. It can be characterized as follows: rising inequality constrains the growth of a secure middle-income group and instead creates a new ‘precariat’ group living precarious lives, just above absolute poverty but not by a large margin, and not in a sufficiently secure position to drive economic growth and pay significant taxes and thus drive political change and more significant welfare regimes. In short, there is an opportunity cost of rising inequality during economic development: the elimination of absolute poverty and the emergence of a secure, consuming class in the foreseeable future. Third, this trap provides a basis for continuing development cooperation with MICs which is different from ‘traditional’ aid.

Multilateral Development Banks (MDBs) have two financing windows, with different terms, dedicated to low- and middle-income countries. Countries are presumed to cross those windows as their income per capita rises, with middle-income countries (MICs) eventually “graduating” to non-client status once they reach certain criteria. However, due to what may be called “middle-income traps,” such progression toward graduation has been limited to a small number of countries. This chapter suggests areas where support by MDBs would yield the highest results toward the “graduation” of MICs. Item 1 reviews the criteria that have been used to justify graduation, whereas item 2 approaches middle-income levels as a stage of growth and development. Finally, item 3 proposes an interface between MDBs’ support to MICs and the policy agenda to overcome middle-income traps.

Economic catch-up is defined in the literature as the narrowing of a latecomer firm’s or country’s gap vis-à-vis a leading country or firm. However, latecomers do not simply follow the advanced countries’ path of technological development; rather, they sometimes do something new, skip certain stages, or create a new path that is different from those of the forerunners. Although the path-following strategy based on the initial factor–cost advantages helps in the gradual catch-up of late entrants’ market shares, a sharp increase in the latecomers’ market shares is likely to occur when a shift in technologies or demand conditions occurs. Such a shift is utilized by the path creation or stage skipping of latecomers, both of which can be considered a case of leapfrogging. That is, leapfrogging is a latecomer doing something differently from forerunners, often ahead of them. Technological leapfrogging is a precondition for success in technological catch-up or in closing the gap with incumbents in terms of technological capabilities. Then, such technological catch-up in several sectors may lead to economic catch-up in terms of the growth of per capita GDP or economic power. This eventual linkage from technological leapfrogging to economic catch-up via technological catch-up is what we mean by the title of this book. We focus on this main hypothesis with the Chinese experience in this book. One conclusion from this book is that China’s successful rise as a global industrial power has been due to its strategy of technological leapfrogging, which has enabled it to move beyond the middle-income trap and possibly the Thucydides trap, although at a slower speed.

In the context of emerging economies, long-run economic growth and development encompass mechanisms from technological catching-up to moving forward by one’s upgrading. However, as the economy reaches the middle-income range, economic growth mostly slows down unless adopting strategies for building technological capabilities. To identify the bottleneck in sustainable technological development and the ways to avoid the middle-income trap, therefore, this chapter focuses on the development patterns of two different types of technological capabilities: implementation and concept design capabilities. Our first finding from the empirical study emphasizes the need for the development of the concept design capability, describing the middle-income trap as a “capability transition failure” or “middle-innovation trap”. Secondly, discussing difficulties of the capability transition from the institutional rigidity perspective, this chapter highlights “innovation commons” as a coherent transition platform for the development of concept design capability.

This chapter begins with a brief overview of the current literature on economic growth and innovation, and the process of technology upgrading. It defines the key concepts that will be used throughout the book and sets the stage for the challenges and issues around economic growth that will be addressed in later chapters. It then outlines the contribution of each chapter and the Schumpeterian or neo-Schumpeterian perspective in which they’re framed, and the four major themes that run throughout the book: the relationship between technology capability and economic growth from new methodological angles, including the middle-income trap; technology capability upgrading from structural, sectoral, and micro-level perspectives; the emerging paradigm of technology capability upgrading which is about sustainability, green growth, inclusiveness, and socio-economic and political determinants of technology capability building; and the several dimensions of innovation policy which reflect a state of transition or changing policy philosophies.

The policies and institution building needed to overcome the middle-income trap are costly, lengthy, and difficult. At the same time, major social groups in many middle-income countries are fragmented—especially in terms of business and labor—impeding and complicating coalition building. This chapter looks first at these disarticulation politics and how they affect outcomes such as low taxation, and then turns to some exceptional cases of centripetal politics and coalition building in quality infrastructure (testing and research centers) in Asia and vocational and technical education in Turkey and Latin America.

Chapter 10 analyzes the issue of whether China would fall into the Thucydides trap, which is defined here as a situation where the US causes China to stop expanding as an economic power. Before the Trump administration, China was navigating steadily to grow beyond the middle-income trap (MIT), building its China-led global value chain (GVC) and localizing formerly imported goods into domestic production. However, it suddenly faced another trap, of Thucydides, because of the US measures for containing the further rise of China as a superpower. China will not collapse unless the US dares to wage an all-out war by taking drastic measures across various fronts of confrontation. The sudden emergence of this new trap disrupted the China-led GVC formed around Asia, which still relies on the West for key high-technology goods. Such disruption would have further repercussions on the prospect of China’s growth beyond the MIT because China must now reallocate resources away from economic competitiveness and “Made in China 2025” to socio-economic stabilization and job creation. China remains a developmental state. Its Asian neighbors have gone through their path of political democratization, but China now faces the challenge of crossing this unknown territory. This situation may be a more challenging trap compared with the MIT and the Thucydides trap. Thus, China now faces triple traps.

After a period of rapid growth, developing countries often experience a slowdown in growth and productivity, falling into what has come to be known as the “‘middle-income trap.” Production chains in East Asia, North America, and Western Europe have imposed a new model of production. Participating in global value chains became a policy issue. Market friendly trade policies—be it multilateral reductions of tariff and non-tariff barriers or preferential trade agreements with selected economies—are an essential part of this model. The relationship between value chains and regional integration has gained momentum, partly because participation in value chains is identified as a source of competitiveness, much needed for economies facing the middle-income trap. The relationship between preferential trade and participation in value chains as a means to deal with the middle-income trap is the subject of this chapter.

Employment and skills are at the heart of economic development and the ‘middle-income trap’. Chapter 6 charts the evolution of ‘standard’ employment, and an expectation that the informal sector would disappear with industrialization. However, not only does the informal sector and informal employment now persist, but ‘nonstandard’ employment has been imported from developed countries, creating new forms of structural dualism. This diminishes the positive feedback loops between technological and economic upgrading on the one hand, and social upgrading or development on the other, intensifying ‘middle-income traps’. Such disjuncture is observed in global value chains, and in specific compressed-developer-country contexts, notably India and China.

This chapter considers the prospects for China’s future growth. China’s per capita growth is expected to slow down as it narrows the gap with the USA. From an average of 9.3 per cent over the years 2001 to 2010 growth will slow to about 7.3 per cent on average from 2011 to 2020. Sceptics cite a variety of reasons to doubt this projection. They claim that in the past decade China’s growth has been flattered by excessive rates of investment. In the decade ahead, they expect China’s demographics to prove less favourable. Finally, as China advances, it will fall into the so-called ‘middle-income trap’ that has interrupted the progress of other once-promising countries. The chapter examines each of these dangers in turn.

Southeast Asia has achieved impressive economic performance over the years, which positions it well for future economic and social progress. The two largest economies in the world—the United States and China—have recognized the enormous economic and strategic potential of Southeast Asia and have made the region a core element in their regional and global plans. At the same time, Southeast Asia is confronting many challenges that could derail its continued rapid economic and institutional development. Some of these challenges emanate from outside the region, such as the region’s vulnerability to global economic instability, while other challenges come from within. Political, ethnic, and communal tensions threaten stability and development in some countries. This chapter first examines the factors behind Southeast Asia’s long-term economic progress and the development of a regional institutional structure that has helped make this progress resilient over several decades. It then examines the economic outlook for the region and assesses the important risks that could slow—or even disrupt—its continued rapid and resilient growth.

From an economic perspective, Turkey is at the crossroads where it could break the middle-income trap and become a high-income country provided that the right socio-economic policies are implemented. Turkey’s current leadership has set itself an ambitious goal to that effect, that of becoming one of the top ten economies in the world by 2023, the one hundredth anniversary of the foundation of the Turkish Republic. This will require policies to ensure that per-capita GDP more than doubles over its current level to reach US$25,000. Such an economic performance would allow Turkey to pack a much stronger punch in both regional and global affairs—economically and geopolitically. Meantime, the country continues to stand at the crossroads trying to chart its path forward. This chapter provides a historical perspective, a comparative macro-analysis, and an institutional analysis, and concludes with an analysis of the Turkey–EU relationship now and into the future.