As China hits the World Bank's definition of middle income (e.g., when GDP is greater than $4 000/capita), it has attracted attention in recently years that whether China is headed toward the Middle Income Trap and if so, how it can be avoided.

Prof. ZHANG Linxiu, Dr. YI Hongmei, LUO Renfu, LIU Chengfang from Institute of Geographic Sciences and Natural Resources Research (IGSNRR), Chinese Academy of Sciences, and Scott Rozelle conjectured that one of the key factors causing China to get into the Middle Income Trap might be the low level of human capital of its labor force, especially the labor force coming out of poor rural areas.

According to their study, China's work force is not ready to meet the challenges of becoming a high-wage, high-skill work force while the wage rate is rising rapidly in recent years. The international experiences suggest that individuals will need to have the skills that are taught in high school in order for most of the labor force to be employable at the high wages. Unfortunately, less than half of individuals of high school age in poor rural China matriculated to high school. Furthermore, 25% of junior high students dropped out of school in poor rural areas. Besides liquidity constraints, rising opportunity costs, and the lack of competitiveness, poor health and lack of nutrition that begin far before the junior high school years may be the real problems of high dropout rate and low matriculation. For example, the prevalence of iron deficiency anemia is as high as 34% among rural school children in western China; 21% of preschool-aged children and 23% of school-aged children were infected with intestinal worms in south western China.

Based on these findings, ZHANG Linxiu and her team conclude that the underinvestment of human capital in poor rural China may threaten the future of China’s growth and stability.

Related research results have been published in the journal of Agricultural Economics (Linxiu Zhang, Hongmei Yi*, RenfuLuo, Changfang Liu and Scott Rozelle. 2013. The Human Capital Roots of the Middle Income Trap: The Case of China. Agricultural Economics. DOI: 10.1111/agec.12059).