China transitions to an Upper-Middle-Income-Country (UMIC)

Reply to John Young
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Reply to John Young
From 1978 to 2010, China’s economy has been gradually growing, which has enabled the country to transition from a poor to an Upper-Middle-Income-Country (UMIC). According to the World Bank, UMIC countries have a gross national income (GNI), starting from $3,956-$12,235 (The World Bank, 2019). Despite the high population in China, the country has overcome the odds and become one of the fastest-growing economies globally. However, as my colleague, John Young, asks, the transition to UMIC does not come without some challenges. Some of these problems are the increase in the aging population and the declining productivity growth, which significantly influence government policies.
Martin Raiser (2019) uses the economic model by Evsey Domar and Roy Harrod to show how the productivity of capital has been declining since 2010. Harrod and Domar argue that the economic growth rate depends on a country’s productivity of capital, together with the investment rate. In particular, domestic savings determine the investment rate (Raiser, 2019). In the early phases of development, there exists a high productivity of capital due to unfulfilled investment needs. During this period, the limiting factor is savings, which foster finance investment. In the case of China, it had high capital productivity and domestic savings. However, since 2010, the productivity of capital started to plummet. The chart below shows the China’s economic rate of growth from 1995 to 2015.


Figure 1: The Economic Growth Rate of China and the Productivity of Capital.
China’s plummeting productivity growth rate obliges the government to enact and implement new policies. As discussed in the Harrod and Domar model, it is clear that slow economic growth arises from the declining savings and low investment rates (Raiser, 2019). Without savings, the Chinese cannot invest in new businesses, and that is the reason why the country is experiencing a decrease in economic growth. For this reason, the government must come up with proper policies to encourage the behavior of saving. One way that the Chinese government can achieve the above mission is by lowering the rate of interest on loans. On that note, many individuals will borrow money from financial institutions, which will help in restoring the economy (Lu, 2013). When money gets into the hands of Chinese citizens, they will invest and ...