Countries desire to a protracted path of economic growth and development to uplift the lives of their populace. Highly-developed countries enjoy happier societies because the citizenry can meet their basic needs alongside the finer things in life amongst desirable outcomes, such as good health and societal progression across generations. Indeed, nations direct a significant amount of resources into development to rise up the national income ladder among their peers and gain a competitive advantage that can help spread the economic benefits to the populace. However, Felipe, Abdon, and Kumar (2012) argued for the complexity of economic development by noting that it involved i) changing social beliefs and institutions, ii) urbanizing, iii) industrializing and manufacturing new products using new production method, iv) accumulating capital, and v) transferring resources from low to high productivity activities. Besides, the smooth progression from a low-income country to a high-income economy is often marred by economic downturns along with unprecedented changes in the internal and external economic, social, political, technological environments that a country may have control or no control over (Bulman, Eden, & Nguyen, 2014). While several countries are known to have transited into the middle-income and high-income levels since the end of the Second World War, many others have been caught in between the low and high income segment for an extended period (Larson, Loayza, & Woolcock 2016). This is often worrisome to country’s political regime and its economists and policymakers because the risk of receding back to the low-income status is persistent, while the effort needed to transcend to the high-income levels appears insurmountable as the economic becomes less favorable. This phenomenon is known as the ‘the middle-income trap’ because it not only extinguished the economic development ambition of a state but also consumes resources without seeming to yield the desired outcomes.

China is faced with the risk of the middle-income trap after having entered their middle-income level following a sustained economic growth rate since 1978 when it decided to open up its economy to join the global community of nations and undertake far-reaching economic reforms. Its protracted economic growth propelled the country to the middle-income level in 2010 and anchored its position as an upper-middle income economy in 2012 (Wang & Zheng 2013). However, the impressive economic growth has slowed down, creating concerns on whether it would recede back to the low-income level like Brazil or leap into the high income level like its South Korean neighbor. According to Congressional Research Service (2019), China’s rate of economic growth has declined considerably since the financial crisis of 2007. It has dropped from 14.2% to 6.6% between 2007 and 2018, and is expected to fall further to 5.5% by 2024 (Congressional Research Service 2019). These concerns are justified considering that the country the most populous country in the world, the second largest economy after the United States, the world’s factory, and the only country pursuing central planning economics to post impressive growth rates in an environment dominated by neoliberal adherents led by the western countries. Moreover, China is a critical stakeholder in many global issues including those related to the environment and security, and as such, the stagnation of its economy creates apprehension regarding the continuity and success of environment protection and global security interventions.

1.2 Scope of the Study

This study focuses on China as a middle-income country that has experienced meteoric economic development in a relatively short period compare to established first world countries in the west. China is also the most populous country in the world, with its population nearing the 1.4 billion mark, according to The World Bank (2020). However, its economic development is not equally distributed across the vast country covering almost 9.6 million square kilometers, which is ranked 4^th globally, by land area (Worldometers 2020). The eastern and southern regions of China are the most developed, while about 16.6 million of its citizenry, which translates to 1.7% of its population, is below the poverty line, earning less than 2,300 yuan annually (The World Bank, 2020; Worldometers 2020). Moreover, about 400 million Chinese are considered to be in the middle-class, which is 140 million households comprising 39% of its population (Cyrill 2019). However, this population segment is projected to rise to 550 million people by 2022, by when it will be the equivalent of over one-and-a-half times the current entire population of the United States (Cheng 2019). In this respect, the large and rising middle-class in the country constitutes an expansive market that is attractive to foreign investors and businesses. Therefore, a sustained economic empowerment of this population segment is critical for the progress of the global economy. In contrast, the middle-income trap would endanger the position of China as the largest market globally and present untold social challenges to its populace, who are highly-motivated to join the ranks of the high-class echelons (Bulman, Eden, & Nguyen, 2014). Moreover, the stagnation of economic growth would deflate the country’s ambition of elevate the country into the high-income status.

In light of these considerations, and while recognizing that shifting an economy from a middle-income to a high-income one requires the confluence of complex factors, this study focused on industrial structure as one of the overarching factors for this transition. Specifically, this study concentrated on the differences in industrial structures of China and some selected countries, and the impact of industrial structure upgrading on the economic growth of different countries. This was to enable the gaining of insights and understanding the strategies that China could employ to avoid falling into the middle-income trap.

1.3 Relevance of the Study

The middle-income trap continues to concern governments, policymakers, and economics. Many countries that exhibited promising economic growth rates in the 1980s and 90s, such as Brazil, have been entrapped in the middle-class level with no surety that they would ascend into high-income economies under the current economic environment. However, some countries, such as Panama and Argentina, were inaugurated into the high-income club of countries by the World Bank in 2018. Moreover, the four Asian Tigers, namely Singapore, Taiwan, Hong Kong, and South Korea, which neighbor China, transcended into high-income economies in a relatedly short period. Although, China is endeavoring to emulate their impressive growth rates, it has a contrasting economic regime, which is still anchored on central planning, unlike its neoliberal neighbors. In this regard, it is critical to device ways of avoiding China from slumping into the middle-income trap to ensure that the country maintains its standing as an economic power in the region and globally. Moreover, this study could provide valuable lessons to other countries entrapped in the middle-class level and wish to transcend into the high-income status, alongside those that wish to avoid a similar predicament.

1.4 Problem Statement

China is faced with the likelihood of falling into the middle-income trap if its economic growth rate continues to decline as it has been doing since 2008. Notably, the country was enjoying an above 10-percent growth in its gross domestic product (GDP) between 2003 and 2007 before slumping to sub-10% in the following year, a situation that has not been remedied to date. Although the country’s GDP per capita is currently at $9,770 according to The World Bank its rate of increase has reduced dramatically while its GDP growth rate has stagnated at 6.9% since 2015. A proposal that would help the country avert this looming crisis is critical for China and the global economy, considering the pivotal role played and position held in the global economic dynamics.

1.5 Research question

An unchanging industrial structure is a tell-tale sign of a stagnating economy. Larson, Loayza, and Woolcock (2016) noted that robust macroeconomic stabilization policies, solid institutions supporting the adherence to the rule of law, high quality human capital and open, competitive markets were the ingredients of sustained and long-term economic growth. Accordingly, the decline or absence of these aspects in the industrial structure of an economy would lead to economic stagnation or even decline. In light of these insights, this study sought to answer the question, ‘how can china avoid falling into the middle-income trap?’ An investigation of the condition of these fundamental pillars of economic growth would help unearth how China could escape the middle-income trap.

1.6 Study Aim and Objectives

The study aimed at devising strategies that China would employ to avoid being entrapped in the middle-income level. Therefore, the objectives of this study were:

To project and compare the change in per capita GDP of China with that of selected countries (Poland, Chile, Singapore, South Korea, Brazil, Iran, Malaysia, and Russia) up to the year 2030 using the existing data
To compare the industrial structures of China with those of Poland, Chile, Singapore, South Korea, Brazil, Iran, Malaysia, and Russia
To identify the similarities and differences in industrial structure upgrading strategies of China with those of high-income countries (Poland, Chile, Singapore, and South Korea)
To identify the similarities and differences in industrial structure upgrading strategies of China with those of countries in the middle-income trap (Brazil, Iran, Malaysia, and Russia)
To predict the likelihood of China falling into the middle-income trap by 2030
To propose ways of avoiding china from falling into the middle-class trap

1.7 Study limitations

This study was limited by the lack of accurate economic data of some countries, including China, Taiwan, and Hong Kong. Moreover, due to the changing political dynamics between China and Taiwan, and Hong Kong, the inclusion of these two members of the four Asian tigers was avoided because their economic future could not be predicted up to the proposed data set predictions of 2030. Besides, the data sources were confined to secondary data sets obtained from renowned organizations, like the World Bank and Worldometers, because of the difficulty in collecting primary data under the prevailing coronavirus pandemic.

1.8 Overview of the Structure

This dissertation is organized in 6 chapters. Chapter 1 introduces the study and expounds on the background, scope, relevance, problem statement, research question, aim and objectives, and limitations of the study. Chapter 2 reviews and analyses the existing literature to explain the concepts and theories related to the study topic and unearth the gaps therein. Chapter 3 explains the methodology used in the study. Chapter 4 presents the findings of from the secondary sources. Chapter 5 discusses the findings and relates them to existing literature. Finally, Chapter 6 concludes the study and offers recommendations to china regarding how it can avoid the middle-income trap.

Chapter 2: Literature Review

2.1 Introduction

This chapter discusses the extant literature that is related to the pertinent concepts and theories relevant to this study. The first part delves into the theoretical framework underpinning this study. This section explores the theories underpinning the two main concepts in this study; economic growth and industrial structure upgrade. After that, the concept of the middle-income trap and is associated issues are discussed. The application of the theories in explaining the middle-income trap and its manifestations will be discussed. Finally, the knowledge and information gaps in literature will be identified.

2.2 Theoretical Framework

2.2.1 Economic Growth

Economic growth is the change in material production of a country for a specified period, usually a year (Ivić 2015). This production change is often expressed as the rate of growth of national income or gross domestic product of a country, which is adjusted for market value distortions. Consequently, the growth rate is inflation-adjusted to present it in real terms. For comparison purposes, the economic growth rate of countries is expressed as the percentage per capita income change from one year to another, calculated from the GDP: population ratio (Ivić 2015). In simple terms, economic growth is included by an increase in aggregate demand and supply. In turn, aggregates demand is stimulated by lowering interest rates, increasing government spending, increasing real wages, devaluing the exchange rate, and raising house prices, enhancing financial stability, and increasing consumer confidence. Similarly, aggregate demand is promoted by technological improvements, labor force increments, raw material discovery, labor productivity enhancement, and investment growths (Klimczuk 2017).

2.2.2 Economic Growth Theories

Economic theories have evolved over time to reflect the economic realities in society in different eras, mindsets, and worldviews. Although the growth theories have evolved from classical, through neoclassical, to new growth theories, their underpinning concepts continue to inform economic development to date.

Acemoglu (2012) explains that the classical growth theory was formulated at a pivotal moment in economic history during the advent of the industrial revolution in the 18^th century in Great Britain. At the time, the subsistence concept informed economic theorists, and any income that surpassed what was needed for survival was considered as profits by society. Also, agricultural technology was yet to have an impact on production and output, as it was still being developed and not yet established. Renowned classical economic theorists at the time that contributed to the theory’s development include Adam Smith, David Ricardo, and Thomas Malthus. The theory relates to economic growth, population, and finite resources. Specifically, it postulates that a population increase causes the reduction or cessation of economic growth as the finite resources become directed towards subsistence only without generating any profits. In other words, the real GDP per capita causes a dramatic increase in population, which, in turn, decreases the average income of individuals in society. In this regard, the increase in GDP per capita was temporary because it was bounded by the size of the population. This situation assumes that the technologies of production remain unchanged while the factors of production, specifically, capital and labor, delivered diminishing returns in an environment of limited resources. This theory draws its concepts from the Malthusian theorization about agriculture in which production could be increased by increasing the land under cultivation and the people working on the land (Jones 2016). However, such production was limited by the land size and unlimited by technological advancements. The theory was advanced by David Ricardo, who refined the application of the concept of diminishing returns in explaining the shrinkage of output due to the dwindling quality of inputs.

The Malthusian theory posits that population growth has been promoted historical technological progress over the history of human beings, although it has not influenced the per capita income in the long term. The theory advanced by Robert Malthus to explain the relationship the influence of population on economic growth and development and the factors that hinder such growth. According to Malthus, production and distribution are the primary components of economic advancement.

Boianovsky (2018) explains that Harrod-Domar theory posits that the economic growth rate is dependent on saving levels and capital-output ratio. Economic growth is realized at a high rage when large savings induce more investments and low capital-output ratio enhances the efficiency of investments. In this case, the level of savings is the national savings: national income ratio, while the capital-output ratio is the reciprocal of the marginal product of capital or the amount of capital required to raise output, after factoring in capital depreciation. Piętak (2014) noted that the theory introduces the concepts of the warranted growth rate and the natural growth rate. The warranted growth rate is realized then all savings in a nation are invested in the economy and the capital to output ration is maintained at 4. Contrastingly, the natural growth rate is realized when full employment is achieved provided the productivity of labor remains unchanged. This theory explains that low saving rates are the cause of low economic growth rates in developing countries, which, in turn, creates a vicious circle that incorporates low output and low investments. Conversely, increasing domestic or foreign savings can enhance the rate of economic growth creating a virtuous cycle of self-sustaining growth rather than a vicious circle. However, the theory is oversimplified because it does not account for the myriad of complex factors associated to economic growth, such as corruption levels, technological innovation, labor productivity, wage changes. Moreover, the model was set in a highly-industrialized and therefore, not applicable for countries struggling with high levels of poverty the importance of good security overshadows that of boosting national savings ratios. Besides, it does not explain the economic growth rate of a country like Thailand, which has been huge despite the absence of savings.

Weber (2010) explains that neoclassical theory of economic growth, which is credited to Robert Solow and Trevor Swan, is also known as the Solow-Swan long-run economic growth model because it explains economic growth in the long rather than short-term. It states variations in capital and labor in production lead to short-term economic equilibria, which can only be transformed to economic growth by the integration of technological advancements. According to Neto and Claeyssen (2015), the implications of this theory are that the existence of diminishing returns to labor and capital and that technological advancement or enhanced proportion of investments from the GDP can deliver economic growth. Under these conditions, although the capital and unskilled labor present exponentially reducing returns, technology has a limitless contribution to economic growth.

According to Greiner, Semmler, and Gong (2016), endogenous growth and exogenous growth models are variants of the neoclassical growth theory that attribute economic growth to internal, interdependent and external, independent factors, respectively. In this regard, although both models recognize the importance of technological advancements in sustaining economic growth, the former presupposes long-term economic growth as being bolstered by happenings inside an economic system that lead to technological development, while the latter posits that technological advancements external to the economic system are sufficient in maximizing economic productivity. Notably, the internal growth factors recognized by these growth models include labor force, population expansion, conducive policy statements, and capital investments, while the external factors comprise the savings rates and the technological advancement rate (Tavani & Zamparelli 2017). Altogether, these models suggest that economic growth ceases once production reaches an equilibrium that is imposed by factors related to internal demand, provided technology is static and labor supply is fixed. However, Ju, Lin, and Wang (2015) argued that economic growth can be reactivated from the equilibrium state using exogenous factors that lead to endogenous structural changes.

Unified growth theory was advanced by Oded Galor and Weil to bridge the contradictions presented by the Malthusian and neoclassical conceptualizations of economic growth and attend to the realities of the entire process of economic growth and development that cuts across human history (Galor 2011). According to this theory,

‘…the transition from stagnation to growth is an inevitable by-product of the inherent Malthusian interaction between population and technology, and its ultimate impact on the demand for human capital and thereby on the onset of the demographic transition’ (Perrin 2011, p. 264).

Therefore, this theory sought to unify economic growth from the Neolithic revolution, through the Malthusian and neoclassical eras, and into the modern times, while explaining the transitions in between. It also consolidates the influence of technology and population across the human economic history, and introduces parameters such as education, facility rates, cultural factors and institutional characteristics into the economic growth concept. In this regard, the theory argues that over time, the growth in population has continued to offset the economic effects of new technologies at every turn. However, the speed of technological advancement has increased over time due to the interaction between the populations’ composition and size, and the technological progress rate (Dellink, Chateau, Lanzi, & Magné 2017). At the same time, education has grown to enable individuals adapt to the technical environment changes while lowering fertility rates thus facilitating the steady growth in per capita income. Nonetheless, subsistence has predominantly informed the living standards of people in society throughout human history. The theory also suggests that human populations have been distributed variedly across the countries while institutional and cultural features have caused a differentiated transition from economic stagnation to protracted growth in countries across the world. However, this transition has created divergent per capita incomes across nations over the last 200 years. This theory has helped explain the historical disparities in economic growth and development between the traditional highly industrialized countries in western europe and the emerging ones in the rest of the world, based on the attributes of the diverse human populations and the influence of technological advancement on human capital development (Perrin 2011).

The Schumpeterian growth model has emerged to explain economic growth and development in modern economies. Aghion, Akcigit, and Howitt (2015) explain that this model is premised on creative destruction and emphasizes competition and technology as the pillars of economic growth and development for modern economies. The principal tenet in this model is that innovation drives long-run growth and entrepreneurial investments are critical for innovations. Consequently, economic growth and development results from replacing old technologies with new innovations.

2.2.2 Industrial Structure

In pursuing economic growth and development, nations adopt various industrial structures that define their economic activities. The theories that explain the different industrial structures and their transitions are pertinent in understanding the different paths that countries take in modernizing their economies. In this regard, Atikian (2013) viewed industrial structure as the configuration of the economic activities in a country. It is also the composition of the different types of industries in a nation describing the proportion of each industry type to the country’s GDP. Thakur (2011, p. 10) provided a regional development perspective of industrial structure by asserting that it was “the composition of various components of the macro aggregates, relative change in their sizes over time and its relationship with the circular flow of income.”

Various categorizations of industries or economic activities in a country, a region, or from a global perspective have been evidenced in literature. One classification divides industries into the agricultural sector industrial sector, and the service sector (Alshehhi & Oláh 2017). Another classification is the primary, secondary, and tertiary economic sectors (Alshehhi & Oláh 2017). This was later expanded to primary, secondary, tertiary and quaternary sectors based on the type of economic activity, after the splitting of the service sector into tertiary and quaternary segments (Alshehhi & Oláh 2017; Thakur 2011). Primary industries focus mainly on agriculture and extraction of natural resources to produce raw materials that can be converted into finished products. Secondary industries manufacture and assemble goods using the raw material obtained from the primary industries. Tertiary industries engage in the provision of services rather than produce and manufacture goods. Quaternary industries are involved in high technology and conduct research and development. Thakur (2011, p. 10) uses the term fundamental economic structure (FES) to describe the constitution of the economic activities in a country or region, which differ in size and intricacy at different times during the economic growth and development trajectory. However, at any one time, these activities are in equilibrium during any instance of different economic growth and performance rates.

Several theories of structural change have been advanced to explain the changes in industrial structures as economies progress in their growth and development trajectories. The dual-sector theory advanced by Willian Lewis in the 1950s captures the structural transition in growing economies (Wang & Piesse 2013). The theory posits that economies transition from the subsistence sector, usually the traditional agricultural sector, to the capitalist sector, which characterized by the manufacturing sector. Specifically, the excess and idle labor in the agricultural sector is absorbed by the manufacturing sector, and is accompanied by wage and productivity increases (Klimczuk 2017). Consequently, the capital surpluses realized by this transition and the continuous supply of excess labor cause economic growth due to increased productivity. However, labor-driven economic growth reaches a limit and even declines when industry absorption cannot match population growth and wages rise to minimize profits. Schlogi (2018) argues that although the dual-sector theory critiqued the neoclassical model of the unavailability of labor in imperfectly elastic supply, it remains relevant to date because it helps explain the modern patterns of structural transformation in modern economies and their impact on productivity, employment and inclusive economic growth. Notably, the rural-urban migration theory advances the dual-sector theory by explaining the economic forces behind the movement of rural population to urban centers. It posits that the stagnation of rural production motivates labor to move to urban areas in search of employment, higher wages, and opportunities (Papaelias 2013). Liao and Yip (2018) included education and the promise of better jobs using the learned skills as a force pushing people from rural to urban areas.

Comparative advantage theory is associated with David Ricardo developed the classical version to explain the inspiration between international trade between countries. According to Watson (2017), the theory posits that two countries should trade in cheaply produced goods from each other if they cannot be produced cheaply in the domestic market. In this regard, countries that had specialized in the production of certain goods due to their internal capabilities and lower opportunity cost have a comparative advantage over those with higher opportunity costs and lacking capabilities. Trading freely therefore, allowed different countries with different comparative advantages to acquire foreign good lacking in the local market while producing those it did advantageously, thus gaining from the trading transactions. Gupta (2015) outlined technological gap, economies of scale, highly-skilled human capital, resource endowment, and technological supremacy as the sources of competitive advantage for countries. Bustos, Castro-Vincenzi, Monras, and Ponticelli (2019) provided a traditional perspective by noting that advancements in agricultural technologies have induced structural transformation to traditional economies by shifting the labor force that had been freed by mechanized agriculture towards the manufacturing sector. Consequently, the high number of unskilled workers in the manufacturing sector became a country’s competitive advantage because they created an unmatched low-skill labor-intensive industry sector. However, Bustos, Castro-Vincenzi, Monras, and Ponticelli (2019) observed that such specialization in labor-intensive industries as a source of competitive advantage can undermine the long-run economic growth if the industries do not innovate over time, or resources are continually directed to non-innovative industries. Santacreu and Zhu (2018) explained how the Ricardian model of trade can explain the innovation-driven comparative advantage when countries leverage internal forces to foster productivity differences across industries and countries. Specifically, domestic innovation creates a comparative advantage in high-income economies, which technology diffusion benefits low-income countries’ comparative advantage more (Santacreu & Zhu 2018). However, the comparative advantage diminishes as industries and countries converge to the technology frontline in which all industrial sectors have adopted modern technologies. Therefore, sustained economic growth and development depends on the differentiation of technologies. In the same vein, Schumacher (2015) discusses the vent for surplus theory that was advanced by Adam Smith, and explains why countries engage in international trade by positing the nations produce beyond their consumption levels to generate a surplus that can be vented through trade. However, Schumacher (2015) suggests that the vent-for-surplus theory should be used alongside the theory of productivity to better understand the benefits of international trade.

Core–periphery model of regional development was advanced by John Friedmann in 1963, following the formulation the core-periphery concept in the 1950 by Prebisch to explain why some areas enjoyed more prosperity than others despite being located in the same country or region. The model posits that regional development progresses through four stages; i) preindustrial stage, ii) transitional stage, iii) industrial stage, and iv) post-industrial stage (Klimczuk & Klimczuk-Kochańska 2019, p. 3). Similarly, Porter came up with five economic growth stages, comprising a) factor-driven stage, b) transition from factor to efficiency-driven stage, c) efficiency-driven stage, d) transition from efficiency to innovation driven stage, and e) innovation-driven state (Welsh, Kaciak, & Thongpapanl 2016). The factor, efficiency, and innovation-driven stages experience cycles of acceleration and deceleration in entrepreneurial activity and development rate before transiting from one stage to the next, with structural transformation characterizing each transition (Welsh, Kaciak, & Thongpapanl 2016).

2.3 Industrial structure upgrading strategies for economic growth and development

As countries grow and develop economically, they transform their industrial structures from the basic and traditional primary industries towards quaternary industries. Such transformation is enabled by the quality of human capital in an economy. Primary industries require minimal skills and knowledge while quaternary industries require highly skilled and knowledgeable labor. The transformation of an economy towards modernity is defined by reducing primary industries and increasing quaternary industries. Diao, McMillan, and Rodrik (2019) noted that structural change drives economic growth by allocating labor from low productivity to high productivity sectors. In turn, incomes of the workforce increase as individuals move from a primary to a quaternary industry. Similarly, Wen, Pan, and Liu (2018) revealed that industrial upgrading and optimization followed a universal path characterized by i) primary, secondary, tertiary composition, ii) secondary, tertiary, primary composition, and iii) tertiary, secondary, primary composition, to indicate the order importance of the industrial sectors.

Tian, Dietzenbacher, and Jong-A-Pin (2019) noted that industrial upgrading was a multidimensional phenomenon that could be categorized into four distinct types; i) process upgrading, ii) product upgrading, iii) functional upgrading, and iv) inter-sectoral upgrading, with multiple dimensions therein. They also observed that industrial upgrading could be categorized into three measurable dimensions, i) product upgrading, ii) process upgrading, and iii) skill upgrading. Furthermore, the multidimensionality of industrial upgrading was confirmed by the moderate correlation of the product, process, and skill upgrading at the country and country-industry levels. From a global value chain perspective, Tian, Dietzenbacher, and Jong-A-Pin (2019) explains that the process upgrading indicators include capital intensity growth, capital compensation growth, and labor productivity growth. These indicators reflect the production process efficiency increases in an economy. Export growth, export share growth, and export unit value are indicators of product upgrading, which reflect the introduction of new products or the enhancement of existing products at a faster rate compared to competing ones. Increase in skill intensity of employment in a given sector or export are indicators of functional upgrading, which typifies the conducting of more skill-intensive activities or sophisticated business functions in an economy. Typically, upgrading industries move transit from simple assembly of products to full-package production, and later to development of designs for their own products. Sectoral composition of exports and GDP are indicators for inter-sectoral upgrading, in which production moves towards employment of advanced technologies and the production mix changes towards higher value added products and services or the sectoral composition change from natural resource extraction and agricultural activities, towards service sectors and modern technology-intensive manufacturing.

However, Yaodong and Xiaomingm (2014) argued that market imperfections in the real world hindered the optimization and upgrading of the industrial structure of an economy that would lead to the flow of production factors flowing towards high and sustainable economic returns. These returns were guaranteed by low consumption, high efficiency, and high value addition. Nonetheless, Chen and Xie (2019) argued that industrial policies can help to address market imperfections to promote industrial productivity. In the same vein, Ketels (2017) argued that countries targeting specific industries or companies often ignored competiveness in their industrial upgrading, thus ending up sinking resources into uncompetitive sectors.

Countries used different strategies of realizing industrial structure optimization and upgrading. Zhu and Ding (2017) noted that going public by local lead companies helped access capital and external networks for learning, which could facilitate industrial structure upgrading provided the companies could leverage inter-firm relationship configuration and coordination, and extra-firm bargaining.

2.4 Middle-income trap

2.4.1 Nature of the Middle Income Trap

Tuğcu (2015) provided a definition of the middle-income trap by calling it a situation in which middle-income nations experience economic stagnation and are unable to transit into the high-income level. Glawe and Wagner (2016) view it as a country that has experienced accelerated growth that has propelled it swiftly into the middle-income level but has been unable to cross over to the high-income category. Im and Rosenblatt (2013) had argued that the middle-income trap can be viewed from an absolute or relative perspective. While the absolute view uses numerical thresholds to determine the income boundaries that designate the trap, relative terms focus of amount of catching up a country has to undergo to close the gap from the rich countries. In this regard, the united states of often used as reference by virtue of being the largest economy globally.

However, Bulman, Eden, and Nguyen (2014) believed that the existence of a middle-income trap was a myth by evidencing the nonexistence of unusual stagnation at the middle-income level, after comparing per capita GDP of countries with that of the United States. They noted that countries that had supposedly escaped the middle-income trap had grown fast and consistently, without stagnating at any point during their middle-income status. Similarly, Cai (2012) shared his skepticism about the existence of a middle-income trap by arguing that the slowed economic growths of the middle, high, and low-income countries had not been significantly different in the last four decades. Felipe, Kumar, and Galope (2017) extends this argument by noting that the term is associated with the absence of rapid economic growth, such as that experienced by east Asian countries. Therefore, slower growths compared to those of the Asian countries do not signify the entry into the middle-income trap considering that stagnation of a rare occurrence.

2.4.2 Causes of the Middle-Income Trap

Agénor and Canuto (2015) explained the process by which a middle-income trap developed by noting the large pool of underemployed rural workforce along with wage increases erodes a country’s competitive advantage once it attains the middle-income level. This workforce comes from the transition from low-productivity sectors like agriculture, to high productivity ones, such as modern services and manufacturing. However, the enormous, temporary one-off income from these changes, and the overreliance on imported technologies to make low-cost labor-intensive products slow down economic growth, causing the country to be trapped in the middle-income level.

Doner, and Schneider (2016) and Ozturk (2016) identified government policies, weak institutions, and income inequalities as the factors that played a role in generating the middle-income trap. Specifically, government policies needed to be coherent, proactive, and strategy to facilitate the upgrading of industrial structures and facilitate the transition from commodity-based production to innovative and knowledge-intensive economic activities. Similarly, lingering income gaps during middle-income stages despite high industrialization and mass education could stifle continued economic growth and precipitate the middle-income trap.

2.4.3 Ways of Avoiding the Middle Income Trap

Tuğcu (2015) noted that the ingredients of escaping the middle-income trap included i) high expenditure in research and development, education, and health sectors, ii) intensification of high technology exports, iii) a large, highly-educated workforce, and iv) high labor force participation. Agénor and Canuto (2015) isolated innovation as the most significant factor for avoiding the trap, which can be fostered through infrastructure investments in infrastructure and communication. Such infrastructural advancements accelerated the propagation of new ideas within and across national borders, spurring industrial upgrading and reconfiguration. Moloi and Marwala (2020) are of similar opinion when they observed that the fourth industrial revolution to the modernization and prosperity of economies in modern time.

2.5 Summary

The middle-income trap is a controversial concept but continues to be used by economists and policy makers. While its definition is still raising debate, the concept directs attention to the economic growth challenges experienced by nations as they transit from traditional production focused on subsistence and low value-added goods and services, to modern knowledge-driven and innovation-focused activities. The East Asian model of economic growth and development has overturned some well-established economic growth theories considering that they occurred under some form of authoritarian regime rather than in a democratic one that has characterized high-income western countries.

Chapter 3: Methodology

3.1 Introduction

This chapter explains the methodology employed in this study. This study sought to determine how China could avoid falling into the middle-income trap by devising practical approaches. A study regarding which strategies China could employ to avoid stagnating in the upper-middle-income level or regressing to the lower-middle-income level and not proceed into the high-income status was conducted using quantitative and qualitative methods. The mixed methods methodology enabled a comparative longitudinal study using the case study approach to be used to assess the possibility of China remaining in the middle-income trap and the lessons it could draw from other countries to avoid this predicament. The applicability and philosophical justification of the case study strategy and triangulation design are discussed in detail. In addition, the sampling procedures, data collection and analysis methods, and the limitations of the study methodology are primary sections in this chapter.

3.2 Research strategy and design

The case study research strategy was employed in this study because it helped in focusing on an individual country that was in a unique economic situation. Moreover, the study intended to obtain findings that can be used to recommend a specific set of actions for the country as a case. In this regard, China was the case attended by this study. Nonetheless, a secondary study rather than a primary one was conducted, with data being collected from secondary sources, rather than primary ones. This strategy not only enabled the circumnavigation around the challenges presented by collecting primary data during the ongoing Covid-19 pandemic, but it was cost-effective and time-saving because it involved the use of the internet to access the secondary data sources.

The triangulation design-convergence model was preferred for this study as illustrated in figure 1.

Figure 1. Conceptual model of the triangulation design

Source:

In addition, a comparative design was also used in this study to unearth and explain the similarities and differences between China and selected countries relating to their economic development trajectories and industrial structures. The comparative study was selected because can help establish the relationships between several aspects of two phenomena and deliver valid reasons. However, a choice had to be made between the four types of comparative studies, namely encompassing, variation-finding, universalizing, and individualizing (Adiyia & Ashton 2017, p. 2). Besides, comparative studies have four typologies; the prediction view, the theory-development view, the difference view, and the import-mirror view. For this study, the variation-finding alternative using the prediction view was selected because it facilitated it helped in examining the systematic differences within a single phenomenon, which in this case, is the economic growth of countries. The logical differences discovered by this design of analysis helped predict the possible outcome of the phenomenon. Specifically, the logical differences in the economic growth trajectories of the selected countries and their successes and failures in evading the middle-income trap enabled the prediction of the possibility of China being entrapped in the economic phenomenon, alongside facilitating the designing of strategies that would help the country from befalling in this predicament.

3.3 Philosophical approach

This study was founded on the pragmatism paradigm by advocating the use of mixed methods approach to deconstruct the possible contentions between truth and reality. This philosophical foundation enabled the focusing on the truth as being based on what works in answering the research question relating to how China would avoid falling into the middle-income trap. According to Morgan (2014), pragmatism is a problem-oriented philosophy. For this reason, it was preferred for addressing the problem of the middle-income-trap that was likely to engulf China if nothing was done to address the current decline in its gross national product growth rate in the next decade or two.

The mixed methods was preferred because it leveraged the advantages of qualitative and quantitative research approaches. Although longitudinal data was used to help explain the phenomenon of inter-income level transitions by countries during their economic development paths, this data comprised of figures relating to the rates of change in per capita GDP of different countries and qualitative information related to the factors that influenced their economic condition and transition. In this respect, the quantitative approach was used to compare longitudinal per capita GDP rates across different countries that transited across different income levels at different times during their economic development trajectory. Contrastingly, the qualitative approach was used to identify the factors of economic growth and industrial structure upgrading that had led to some countries moving from middle-income to high-income levels while other had become trapped in the middle-income levels. Although the qualitative and quantitative data were analyzed separately, the two datasets were merged during the discussion stage of the study.

3.4 Sampling procedures

While China was the focus of this study, the countries that were compared to it were selected using purposive sampling. Eight countries were selected based on their economic history obtained from media reports, economic studies by governmental and nongovernmental organizations, and journal articles. Four countries that featured recently as having avoided the middle-income trap were selected alongside four others that had been entrapped in this income level, despite exhibiting much promise in economic growth. In this respect, the countries that had successfully evaded the middle-income trap included Poland, Chile, Singapore, and South Korea in recent history. Likewise, Brazil, Iran, Malaysia, and Russia were selected because they have been struggling to exit the upper middle-income status and are threatened by the middle-income trap. However, since each country was selected for its uniqueness, the selected group of nations was expected to provide valuable insights that would inform the strategies that China should take to avoid the middle-income trap. For instance, Singapore, South Korea, and Malaysia were selected because they were not only at the same level of economic development as China, when it decided to open up and reform its economy in the 80s, but they are located close to China and therefore share several regional geopolitical and economic environmental characteristics associated to the southeast Asia and the far east regions. Moreover, China has adopted several economic transformation strategies from these countries. In addition, they presented examples of countries in the same region experiencing different economic outcomes based in the income level classifications, despite being trade partners. The Russian Federation was selected for its large size, which rivaled that of China, along with profound similarities in their political systems and economic structures. Both countries are communism adherents which exposes them to similar economic environment in the global stage, although they are not close neighbors. Moreover, they both have entrenched economic interests in the region and would be termed as rivals in various aspects. Brazil and Iran were selected for their large landmass, which is comparable to that of China, their large populations that provide them with valuable human capital and the abundance of natural resources. They also provide sharply contrasting cultures and geographical locations, which exposes them to diverse and different economic forces that influence economic growth. Poland and Chile were selected for their noticeable recent upgrading into the high-income levels despite being far-flung from earth other. Their strategies for economic development are particularly interesting because they have yielded results within a brief duration, which would be insightful for the Chinese economy. Altogether, this diversity of countries should facilitate and the insights they provided, were considered critical for answering the research question.

After that, the secondary sources containing economic data and factors influencing or limiting economic growth that are related to the industrial structure were sourced from the internet. Secondary sources published in the last 10 years were selected based on their relevance to the research question, reference to the countries in the study, credibility of the authors and publications.

3.5 Data Collection Methods

Data was collected from secondary sources that can be accessed over the internet. The secondary sources were searched online using keywords, such as middle-class trap, countries in the middle-income trap, avoiding the middle-income trap.

For the quantitative component, secondary data was obtained from datasets collected and held by renowned organizations, like The World Bank, Worldometers, and Statista. Specific search words included percentage change in per capita GDP for China between from 2008 to date. The same search strategy was replicated for Poland, Chile, Singapore, South Korea, Brazil, Iran, Malaysia, and Russia.

For the qualitative component, the factors related to the industrial structure that had facilitated the countries to exit or become entrapped in the upper-middle-income level for an extended period were obtained from secondary sources.

3.6 Data Analysis

For the quantitative analysis, regression analysis was conducted on the per capita GDP data of China, Poland, Chile, Singapore, South Korea, Brazil, Iran, Malaysia, and Russia. After that, a comparison of the data sets was conducted using t-tests and correlation coefficients analysis. Moreover, the United States was included as a country that the sampled nations have to catch up with in their economic growth and development (Glawe & Wagner 2016). The comparative analysis was performed using a computer program (MS Excel and SPSS). In turn, for the qualitative analysis, a thematic analysis was conducted to unearth the overarching themes of the factors that facilitated the exit or existence of the countries from the middle-income trap. These approaches not only enabled the concurrent use of qualitative and quantitative analysis to address the single research question, but also enabled the simultaneous utilization of empirical and normative analysis. While the empirical analysis employed evidence-based data to provide an explanation of the different aspects of a phenomenon, normative analysis enabled the making of value judgment from the qualitative data obtained from the secondary sources. In this regard, the evidential data on economic indicators was subjected to empirical analysis, while the qualitative data relating to rationalization and upgrading of industrial structure was analyzed normatively to help predict when counties were likely to fall into the middle-income trap and how they would exit or avoid it.

3.7 Ethical Considerations

No primary data was collected and all the secondary sources were freely available online. Therefore, there were no ethical concerns in this study that needed to be addressed, considering that primary data was not collected.

3.8 Limitations

While the study employed a case study approach that focused on China, the comparison with other countries was limited by the few countries that were selected for this purpose. Moreover, the study was constrained by time and movement restraints from the ongoing coronavirus pandemic.

3.9 Summary

This chapter aimed at outlining detailing and justifying the research methodology used to answer the research question. A discussion of the research strategy and design, and their philosophical foundation, alongside the sampling procedure for the comparison countries, secondary sources, data collection and analysis procedures outlined how the study was conducted. A case study strategy using the triangulation design was used to compare the per capita GDP growth rates of china with those of Poland, Chile, Singapore, South Korea, Brazil, Iran, Malaysia, and Russia. Also, secondary sources provided the variables and factors that enabled countries to escape the middle-income trap while other remained entrapped for a protracted period. The aim of Chapter 4 is to present the study findings and demonstrate that the methodology defined in Chapter 3 was followed.

Chapter 4: Results

4.1 Introduction

This chapter presents the findings of the quantitative analysis and the qualitative themes related to industrial structure influencing entrapment in the middle-class status. The findings are arranged according to the economic growth and industrial structure indicators. It begins with providing a basis for the classification of economies into low, lower-middle, upper-middle, and high-income levels. After that, the general growth trajectory of china is compared to that of the selected countries. Then, findings related to analysis of the industrial structure of the countries are presented. Specifically, the share and growth of the primary, secondary, and tertiary industrial sectors of China are compared to that of selected countries. In addition, a comparison of the employment levels and proportions of exports from the service sector are also presented.

4.2 Economic characteristic of the selected countries in the study

The thresholds classifying countries as low, middle or high income are revised every year by the World Bank to reflect the global economic realities after accounting for special drawing rights (SDR) inflation. These thresholds demarcate the gross national income (GNI) per capita for the different country income classifications, which are determined using the Atlas method. The revised thresholds used to classify the selected countries at the time of this study came into effect in July 2019, and are summarized in table 1.

Table 1. Revised thresholds for classifying the income of countries for 2019

Income Classification	Threshold bracket (GNI per capita $)
High income	Above 12,375
Upper-middle income	3,996 – 12,375
Lower-middle income	1,026 – 3,995
Low income	Below 1,026

Source: World Bank Data Team (2019)

Table 2 presents the current economic data for China, Poland, Chile, Singapore, South Korea, Brazil, Iran, Malaysia, and Russia. China was classified in the upper-middle-income level in 2019 by the World Bank, alongside Brazil, Malaysia, Iran and the Russian Federation. However, China exhibited a GDP growth rate of 6.1%, which was the highest among the upper-middle income nations included in the study. Also, China surpassed only Brazil and Iran in per capita GDP. In contrast, while Chile, Poland, Singapore, and South Korea were placed in the high income category, their GDP growth rate was much lower than that of China, indicating that their economies had grown at a much slower rate than that of China in 2019, as illustrated in figure 1.

Table 2. Economic data of countries in 2019

Country	Income level	GDP per capita ($)	GDP growth rate (%)
China	Upper-middle	10,261.7	6.1
Poland	High	15,595.2	2.2
Chile	High	14,896.7	1.1
Singapore	High	65,233.3	0.7
South Korea	High	31,762.0	2.0
Brazil	Upper-middle	8,717.2	1.1
Malaysia	Upper-middle	11,414.8	4.3
Iran	Upper-middle	5,520.3	3.8
Russia	Upper-middle	11,585.0	1.3

Source: The World Bank (2020)

4.3 GDP per capita

The growth of GDP per capita for the countries in the study was compared for the period between 2000 and 2019. Although all countries had registered an upward trend in the 21 millennium, only Singapore and Korea has surpassed the upper middle income threshold for more than 14 years to cement their position in the high-income bracket. The rest of the countries, with the exception of Iran, were lingering very close to the threshold of $12,375 needed to cross over from the upper-middle income to the high-income level, as illustrated in figure 1.

Figure 1. GDP per capita 2000-2019

Source: The World Bank (2020)

Contrastingly, China, along with Singapore, Malaysia, and Poland had maintained an average growth rate in their GDP per capita at above 3.5 %, which was the threshold for crossing from the upper-middle to high-income levels, when sustained for 14 or more years. China exhibted the largest average growth rate in GDP (9.0 %) among the countries considered between 2005 and 2019 as shown in figure 2. Meanwhile, Chile and South Korea, which were in the high-income bracket, managed to grow their GDPs at an average of 3.5% in the same time span, which was the rate needed to escape the middle-imcome trap.

Figure 2. Average GDP growth rate 2005-2019

Source: The World Bank (2020)

4.4 Industrial structure upgrade elements

4.4.1 Current share of the primary, secondary, and tertiary structure

China and the selected countries have experienced diverse changes in the contribution of the primary, secondary, and tertiary sectors to their industrial structure mix, and subsequently their GDP. The primary, secondary, and tertiary industries are represented by the agricultural, manufacturing, and services sectors, respectively, as summarized in table 3.

Table 3. Proportion of primary, secondary, and tertiary sectors

Country	Income level	GDP ($ billion)	Agriculture (% of GDP)	Manufacturing (% of GDP)	Services (% of GDP)
		2010	2019	2010	2019	2010	2019	2010	2019
China	Upper-middle	6,087.2	14,342.9	9	7	32	27	44.2	53.9
Poland	High	237.9	237.7	2	2	12	12	66.1	65.5
Chile	218.5	282.3	4	4	11	10	52.8	58.7
Singapore	239.8	372.1	0	0	21	20	67.8	70.4
S. Korea	1,144.1	1,642.4	2	2	27	25	54.7	56.8
Brazil	Upper-middle	2,208.9	1,839.8	4	4	13	9	57.6	63.3
Malaysia	255.0	364.7	10	7	23	21	48.5	54.2
Iran	486.8	445.3	6	9	13	12	51.1	54.4
Russia	1,524.9	1,699.9	3	3	13	13	53.1	54.0

Source: The World Bank (2020)

The countries considered in this study had the proportions of their industries increasing from primary, through secondary, to tertiary sectors. This is summarized as, agricultural sector < manufacturing sector < services sector. Notably, Singapore has a miniscule agricultural industry that contributed about 0.03% to the GDP, which rounds off to 0% in table 3. Contrastingly, Iran had the largest proportion of the agricultural sector (9%) in 2019, followed by China and Malaysia, at 7 % each. The rest of the countries had their agricultural sectors contributing 4% or less to their GDP, as illustrated in figure 3. Only Iran’s agricultural sector contribution to GDP grew between 2010 and 2019, with the rest of the countries registering a stagnation or decline.

Figure 3. Contribution of the agricultural sector to GDP and its changes 2010-2019

Manufacturing industry

Source: The World Bank (2020)

In the manufacturing sector, all the countries, except Poland and Russia whose proportion was stagnant, declined in the contribution of the industry to GDP between 2010 and 2019, as illustrated in figure 4. China’s, South Korea’s, Malaysia’s, and Singapore’s manufacturing sectors contributed at least 20 % to the GDP of their economies, with China having the highest proportion of 27 %, while Brazil had the least at 9 %.

Figure 4. Contribution of the manufacturing sector to GDP and its changes 2010-2019

Source: The World Bank (2020)

The service sector contributed the most to GDP of all the countries included in the study. In 2019, this sector contributed over 50 % to GDP of all the countries, with Singapore’s accounting for the highest (70.4 %), while China’s has the smallest proportion (53.9 %), as illustrated in figure 5.

Figure 5. Contribution of the services sector to GDP and its changes 2010-2019

Source: The World Bank (2020)

The annual growth rate of GDP was compared with that of the primary, secondary, and tertiary industrial sectors, represented by the agricultural, manufacturing and services sectors. The period between 2000 and 2019 was considered to provide a view of the long-run sectoral growth in the countries. China’s agricultural, manufacturing, and services sectors registered the highest growth among the countries in the study, by posting 4.1 %, 7.6 %, and 10.0 %, respectively, as detailed in table 4. Notably, China demonstrated a growth in its agricultural sector that was akin to that of Chile, a high-income country, Brazil and Malaysia, which were enmeshed in the middle-income trap. Similarly, China’s services sector growth was closely replicated by Malaysia, also in the middle-income trap.

Table 4. Average annual % growth of GDP and agriculture, manufacturing, service sectors 2000-2019

Country	Income level	GDP (%)	Agriculture (%)	Manufacturing (%)	Services (%)
China	Upper-middle	8.4	4.1	7.6	10.0
Poland	High	3.9	0.2	0.4	3.5
Chile	3.9	3.5	2.0	4.9
Singapore	5.5	0.6	5.1	5.6
South Korea	3.8	1.4	4.7	3.8
Brazil	Upper-middle	2.6	3.3	0.7	2.8
Malaysia	5.0	2.6	4.2	7.1
Iran	3.0	3.1	4.8	3.9
Russia	3.2	1.7	2.3	4.0

Source: Statista (2020) and The World Bank (2020)

4.4.3 Service sector labor force

Proportion of labor force in service sector as a percentage of the total workforce in the countries was compared for the countries between 2005 and 2019. The means of the proportions of the workforce in the service sector and the correlations between these means are presented in table 5 and table 6, respectively. China has the lowest proportion of its workforce (38.1 %) engaged in the service sector among the countries considered. This proportion was lower than that of countries in the middle-class trap. However, the paired t-test revealed that China’s proportion of its service sector labor force was positively and significantly correlated to that of the other countries, regardless whether they were trapped in the middle-income or had evaded it, as summarized in table 5. Nonetheless, the correlation coefficient of China’s workforce with that of Korea and the United States was the lowest among the countries, when measured at 0.05 confidence level, as illustrated in table 6. Being significant means that the correlations were very close to each other such that their proportions to the total was force were not different enough between 2005 and 2019 to cause any noticeable impact on the differences in the economies of the countries being compared.

Table 5. Mean of workforce in the service sector (% of total workforce) 2005-2019

One-Sample Statistics
	N	Mean	Std. Deviation	Std. Error Mean
BRAZIL	15	66.030	3.1010	0.8010
CHINA	15	38.100	5.3417	1.3792
CHILE	15	66.353	1.5941	0.4116
IRAN	15	48.220	2.1075	0.5442
KOREA	15	68.607	1.5908	0.4107
MALAYSIA	15	59.087	2.2611	0.5838
RUSSIA	15	64.627	2.2780	0.5882
POLAND	15	56.580	1.8001	0.4648
SINGAPORE	15	79.380	3.0751	0.7940
USA	15	78.200	1.0212	0.2637

Table 6. T-test for the service sector workforce (% of total workforce) 2005-2019

Paired Samples Correlations
		N	Correlation	Sig.*
Pair 1	CHINA & USA	15	0.684	0.005*
Pair 2	CHINA & CHILE	15	0.950	0.000*
Pair 3	CHINA & KOREA	15	0.853	0.000*
Pair 4	CHINA & POLAND	15	0.920	0.000*
Pair 5	CHINA & BRAZIL	15	0.984	0.000*
Pair 6	CHINA & IRAN	15	0.927	0.000*
Pair 7	CHINA & SINGAPORE	15	0.982	0.000*
Pair 8	CHINA & MALAYSIA	15	0.924	0.000*
Pair 9	CHINA & RUSSIA	15	0.920	0.000*

Key: * = significant at 0.05 confidence level

4.4.4 Services Industrial Sector

The services sector in the analysis was represented by the exports in high technology products, which make up the knowledge-based or the quaternary industrial sector. The analysis considered the proportion of manufactured exports that was taken up by high-technology products. The means of the proportions of high-technology exports and their correlations across the sampled countries are presented in table 7 and table 8, respectively. China exported high-technology products that made up 30.8% of its manufactured product exports, which was comparable to that by South Korea (31.2%). Although this proportion was higher than that of the United States, it was far below that of Singapore, as illustrated in table 7.

Table 7. Mean of high-technology export (% of manufactured exports) 2005-2019

One-Sample Statistics
	N	Mean	Std. Deviation	Std. Error Mean
BRAZIL	11	12.355	1.3441	0.4053
CHINA	12	30.775	.8677	0.2505
CHILE	13	6.623	.8584	0.2381
IRAN	5	2.080	1.3590	0.6078
KOREA	13	31.192	2.1356	0.5923
MALAYSIA	10	49.280	1.7035	0.5387
RUSSIA	12	10.867	3.0413	0.8780
POLAND	13	8.531	2.3761	0.6590
SINGAPORE	12	50.933	1.8627	0.5377
USA	13	22.592	3.6103	1.0013

However, the knowledge-based segment of the service industrial sector of China did not correlate significantly with that of the other countries in the study. The proportion of the high-technology exports by China correlated weakly with that of Malaysia, Korea, and Brazil. Notably, China’s exports correlated negatively with those of the United States and Chile, as summarised in table 8.

Table 8. T-test for the high-technology exports (% of manufacturing exports) 2005-2019

Paired Samples Correlations
		N	Correlation	Sig.
Pair 1	CHINA & USA	12	-0.350	0.265
Pair 2	CHINA & CHILE	12	-0.349	0.267
Pair 3	CHINA & KOREA	12	0.337	0.284
Pair 4	CHINA & POLAND	12	0.111	0.732
Pair 5	CHINA & BRAZIL	11	0.086	0.802
Pair 6	CHINA & IRAN	5	-0.064	0.918
Pair 7	CHINA & RUSSIA	12	-0.060	0.852
Pair 8	CHINA & SINGAPORE	12	0.024	0.941
Pair 9	CHINA & MALAYSIA	10	0.394	0.259

Chapter 5: Discussion

5.1 Introduction

This chapter discusses the findings presented in Chapter 4. It explains the findings of China’s industrial structure and upgrading, in light of that of the other countries in the study.

5.2 State of China’s Industrial Structure

The findings revealed that China presented mixed findings that were atypical to middle-income and high-income economies. Notably, China had maintained a high economic growth rate of an average of 8.4 % for the last 19 years, which was much higher than that registered by the high-income and upper-middle-income countries included in the study. Therefore, from the gross national incomes alone, China is expected to have transited from the upper-middle to the high-income bracket by the turn of 2019, considering that it had maintained this growth rate for more than 14 years. These findings contradict the assertions of Felipe, Abdon, and Kumar (2012), which indicate that countries were in danger of being stuck in the upper middle-income level or even regression to the lower-middle income category if they did not sustain a GDP growth rate of 3.5 % and above for more than 14 years.

The proportions of the industrial structure of China resembled those of high-income economies and countries that were in the middle-income trap. The size of the agricultural, manufacturing, and services sectors resembled that of Malaysia, which was considered to be in the middle income trap. Specifically, China had the largest percentage of the agricultural and manufacturing sectors, and the smallest proportion of the services sector among the countries included in the study. From these aspects alone, China resembled more the countries in the middle-income trap that those that has escaped it in the sampled economics. This indicates China’s heavy reliance on primary and secondary sectors to drive its economic growth, and therefore, may explain why it had not transited into the high-income bracket. From Gupta (2015) assertions, China was still leveraging its competitive advantage from a large landmass to propel its agricultural industry and a huge low-waged workforce for its manufacturing sector, which explains the significantly larger contribution of these sectors to its economy. Moreover, China’s prominent agricultural and manufacturing sectors can be explained by the Ricardian economics that suggest that countries will continue to produce and trade in products provided they have production cost advantage over other countries (Watson 2017). Naudé, Szirmai, & Haraguchi 2015) noted that China’s industrial upgrading had not change the industry structure and configuration, as state-owned corporations were set up alongside village communes to advance the agricultural and manufacturing sectors simultaneously.

China’s relatively small service sector compared to that of high-income countries was indicative of the lack of highly skilled human capital, which was characteristic of thriving tertiary and quaternary industrial sectors. Eichengreen, B, Park, D & Shin, K 2013) attributed this to the shortage of appropriate, highly-skilled workforce that was needed to transit from the traditional low-value-added activities to high value-added ones. Morrison (2020) explained that the manufacturing sector continued to play a significant role in China’s economic growth, reason why it is regarded as the world’s factory. Similarly, Cyrill (2019) termed China as the global supply chain hub for the manufacturing sector, which had been spurred by industrialization and urbanization.

However, the study revealed that the growth of China’s agricultural and manufacturing sectors had reduced since 2000. According to Papaelias (2013) the reduction of the agricultural sector’s growth can be attributed to rural-urban migration, in which people move away from the rural areas to urban centers, thus exiting agricultural production. Hernández, S.G. and Hernandez, P.G., 2018) explains that such movement can lead to the “Lewis turning point” in which the supply low-cost labor from rural areas declines and wages rise to increase the cost of production.

Contrastingly, the study revealed that China’s services sector registered the highest growth rate among the countries studied. Part of the explanation is given by Chang (2011) who argues that countries enjoy cost advantages when they use acquired technologies without having through the ravaged of developing them, in what is termed as the late-comer effect.

According to the findings, China’s was undergoing an industrial structure upgrading as evidenced by the slowing growth of the agricultural and manufacturing sectors and the accelerated growth of the services sector. This indicates that China was modernizing its economy by allocating resources more to the tertiary and quaternary sector rather than to the primary sector. According to Cheng (2019), this phenomenon may also indicate that the manufacturing industry was undergoing upgrading as the country sought to use its indigenous technologies to product goods and services, in what has been termed as the “made in China” initiative

China has the lowest proportion of its workforce allocated to the services industry among the countries considered in the study. Moreover, its high-technology exports were not growing at the same pace as those of the high-income countries in the study, such as the United States, but rather like Malaysia’s and South Korea’s. This was evidenced by the larger and positive correlation coefficients comparing the means of high-technology exports between China and Malaysia and South Korea, as opposed to the negative correlation with the United States. In other words, the services sector of China was more like that of Malaysia and South Korea, but not close to that of the United States. This indicates that although China may be enjoying a regional comparative advantage, it lacked an absolute one like the one propelling the United States’ economy. Therefore, China’s services sector had more catching up to do to attain the level in the United States, although it was comparable to that of Malaysia and South Korea. Moreover, although the correlations with Brazil and Singapore were positive, which means that they shared similar trends, these values were low because of the large differences in high-tech exports. Specifically, Singapore’s exports were much higher than those from China, while Brazils were much lower. Chen, LeGates, Zhao, and Fang (2018) argue that China was still pursuing the dual economy model in which rural agriculture and urban manufacturing sectors coexisted to tame the rural-urban migration phenomenon. This may explain why China was allocating its resources to primary and secondary industrial sectors at the expense of the tertiary sector, which was the driver of modern, high-income economies.

5.3 Lessons from countries that fell into the middle-income trap

5.3.1 Brazil, Iran, Malaysia, and Russia.

China can learn from Brazil, which crossed the upper-middle-income to high-income briefly between 2011 and 2015 before receding back to the middle-income level. According to Canuto (2014), Brazil was trapped in the middle class for over three decades because it did not equip its huge low-skilled workforce that had been transferred to services and modern manufacturing from labor-intensive activities with the requisite knowledge and skills. Moreover, the country has a significant proportion of its population languishing in poverty despite having a GDP close to the high-income threshold and a growth rate that should propel it to high-income level. Agénor, P.R., 2017) notes that Brazil was unable to develop an innovation based economy as it relied heavily on imported technologies. Moreover, Magnus (2016) notes that Brazil has continued to rely heavily in the primary sector, such as growing soybeans and exporting iron ore amidst capital wastages due to corruption, which have stifled investments. Consequently, the manufacturing sector share plunged from 55 % to 40 % between 2001 and 2014.

Arezki, Fan, & Nguyen (2019) argued that countries in the MENA region, like Iran, had not unleashed the potential of the highly-educated youth by stifling internet connectivity and online-financial transactions. Similarly, Mirjalili and Saadat (2020) argued that Malaysia had transited from lower-middle-income to upper-middle income because it had diversified its exports to reduce its overreliance on tin mining, which was a primary sector activity. Moreover, its exports of modern services have stagnated against the global trend. In the same vein, Adila (2020) argued that Malaysia was no longer attracting the foreign direct investments like it used to a decade ago, which has caused a stagnation of its manufacturing sector. Like Brazil, it was heavily reliant on its agricultural sector that produced rubber and palm oil. In the same vein, Tiftikçigil and Burak (2018) revealed that Russia has been elevated into the high-income bracket between 2012 and 2014 before being demoted to the upper-middle income level. According to Gill and Kharas (2015), Russia economic stagnation was due to it overreliance on the primary sector activities especially, mining, oil extraction and agriculture, which accounted for almost half of the country revenues. Moreover, its exports were stifled by international sanctions alongside stunted quaternary industrial sector.

5.4 Lessons from countries that avoided the middle-income trap

5.4.1 Poland, Chile, Singapore, and South Korea

Aldaz-Carroll, Brink, and Skrok (2018) and Dowell (2018) revealed that Poland had transited into a high-income country in less than a decade and a half because it had integrated its domestic market and economy into the global market by reducing trade barriers, undergoing structural transformation that allowed inefficient firms to collapse and the innovative ones to thrive on their comparative advantage. Moreover, it invested in education and technological skill acquisition to guarantee a continuous supply of highly-skilled human resource to drive its secondary and tertiary sectors. However, Matsuura (2016) warned that Poland’s high dependence on foreign capital endangered its high-income states.

Hernández and Hernandez (2018) noted that Chile was one of the two South American countries in the high-income bracket. This transition has been bolstered by its upgrading its industrial structure to grow it industrial and services sectors, which accounted for about 95 % of the economies output. Similarly, Lebdioui, A., Lee, K. and Pietrobelli, C., 2020) revealed that the Chilean government had invested heavily in higher education and intensified its exports through regional trading pacts.

Singapore was special due to its city-state status that had not only enabled it to focus on skill development but disincentivise the primary sector due to land and resource scarcity (Saner, Yiu, & Gopinathan 2014). Singapore realized that human capital was its most valuable and only resources; hence it directed huge investments towards skill upgrading. In turn, the country has a thriving quaternary industry and an agricultural sector that is almost nonexistent. However, Mirjalili and Saadat (2020) revealed that South Korea has accelerated its growth and transition into a high-income country by undergoing an industrial upgrading, which shifted labor-intensive industries to high-technology ones, while encouraging domestic firms to compete globally. Cherif and Hasanov (2015) argued that foreign investments promotion, export upgrading, technology transfer, and increasing the share of exports to GDP has spurred South Korea’s ascension into the high-income countries. The country has used Japan’s model of industrialization that commenced with electronic assembly using imported components, then electronic component manufacture, then production of industrial electronics.

Chapter 6: Conclusions and Recommendations

6.1 Conclusions

This study set out to find out ways with which China could avoid falling in the middle-income trap. The focus was on the industrial structure upgrading approaches that china could employ to avoid such a pitfall. Several economic development indicators were analyzed to unearth any signs of industrial structure challenges. Despite the mixed signals that China’s industrial structure was exhibiting, some areas on concern were noted. Specifically, China still had a significant proportion of the primary sector driving its economy. However, although the country had a competitive advantage of a large population and land that it could dedicated to agricultural-based labor intensive activities, many rural Chinese had migrated to the cities located especially in the eastern and southern ends of the country, leaving another huge population of under-skilled people in the rural areas. Moreover, the comparative advantage from a large-low-waged workforce was lost when it came to its utilization in the more productive services sector. Consequently, the exports of high-technology products were relatively small compared to those of high-income countries and even other countries in the middle-income trap. Altogether the country was experiencing continued growth of the services sector its agricultural and manufacturing sectors were experiencing stunted growth. This indicates that China was investing in the right industrial sector needed to help the country cross over to the high-income bracket and escape the middle income trap. Moreover, it was still growing at a faster rate than many high-income and upper-middle income countries, sustaining the expectations that the country would avoid falling into the trap.

6.2 Recommendations

Firstly, it is recommended that China invests heavily in higher education and upskilling its labor force. This would provide the high-quality human resource needed to drive the services, knowledge-based, and innovative-centered sectors of the economy that make up the quaternary industrial structure. Teixeira and Queirós (2016) argued that structural changes in knowledge centered productivity could lead to significant economic growth when supported by high-quality human capital.

Secondly, it is recommended that the country pursues total-factor productivity to reduce the production inefficiencies that were underutilizing labor and capital to generate accelerated and long-run economic growth. In this respect, the country should spread out its secondary and tertiary industrial structures across the country prevent reduce the rural-urban migration and the economic growth disparities within the country, considering that the tertiary and quaternary sectors were concentrated in East and South China (Yu 2012). Wang, et al. (2019) reckoned that the western region has been excluded in the industrial upgrading efforts, which had mostly benefited the central eastern southern, and more recently the northern sides of the country. Considering that the western region was close to European and West Asian markets, directing resources there was produce, and the road and bridge initiative provided a timely opportunity that could upgrade the infrastructure for economic investments. Zhang (2019) argued that the outward foreign direct investments that the “one road, one belt” would attract would contribute to China’s export trade structure upgrading.

Thirdly, China should invest more resources into the quaternary industrial sector by using new high-technologies such as artificial intelligence, 3D printing, software development, cloud computing, and energy-saving technologies to build a robust producer services sector. This strategy would reconfigure its industrial structure by upgrading it towards production efficiency and innovation (Cheng & Li 2018). The manufacturing sector, which was experiencing a slowed growth rate, would be revamped and return to accelerated growth that would propel China’s economy into a high-income level. Xie, Zang, and Wu (2019) argued that manufacturing sector upgrading can be bolstered by product, technical, and institutional innovation, which would reduce the reliance on foreign technologies and the locking up the industry in the lower end of the value chain.

The Chinese government has a critical role to play in ensuring that these recommendations are facilitated, considering that the country is governed through central planning. Specifically, the government can open up the domestic markets to competition by reducing its protectionist approaches and allowing the market competitive forces to intervene. Moreover, it should continue with the strategy of opening its markets internationally, by integrating its economy with the global one. This would help absorb the overcapacity in the Chinese economy that is already delivering diminishing returns and stifling growth.

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