China may soon become a high-income country

CHINA IS HAUNTED by the spectre of the “middle-income trap”, the notion that emerging economies grow quickly out of poverty only to get stuck before they get rich. “During the next five years, we must take particular care to avoid falling into the middle-income trap,” said Li Keqiang, China’s prime minister, in 2016. Lou Jiwei, then China’s finance minister, once put the odds of China becoming ensnared at 50%.

The trap was named by Homi Kharas and Indermit Gill, two economists, in 2006, when they were both at the World Bank. It raises an obvious question: what counts as middle income and what would qualify as surpassing it? Mr Kharas and Mr Gill adopted the bank’s own income classifications. These were established in 1989 when the bank drew a line separating high-income countries from the rest. The line had to accommodate all of the countries that were then considered “industrial market economies”. It was drawn at a national income per person of $6,000 in the prices prevailing in 1987, just low enough to include Ireland and Spain. That line is now $12,695. It rises in step with a weighted average of prices and exchange rates in five big economies: America, Britain, China, the euro area and Japan. Eighty countries met that threshold in 2020, three fewer than the year before. The pandemic relegated Mauritius, Panama and Romania to the middle division.