Consumption versus investment

As China enters a new phase of economic development, doubts are being raised over its ability to maintain a reasonable enough growth to join the ranks of advanced economies. To do so, it is often said, China should replace investment with consumption and learn lessons from other countries how to avoid the so-called "middle-income trap".

Both contentions are somewhat misleading. Investment should slow down, but not much or at least not precipitously. More importantly, its efficiency has to increase to support consumption. Regarding international experiences, there are no ready-made lessons that China can learn from. Instead, it will have to rely on homegrown solutions to achieve advanced economy-level living standards. Here is why.

The so-called "middle-income trap" is a misnomer unless "middle income" is defined against some norm. If we take the per capita GDP of the United States as a benchmark and track other countries' convergence toward it over the past 60 years, four different groups emerge.