The “middle income trap” is a significant theoretical and practical issue closely related to the economic and social transition and sustainable development of a country. This paper explores the essence of the “middle income trap” and ways to avoid it. It reveals that the inner nature of the “middle income trap” lies in the institutional transition dilemma, which results essentially from a lack of reasonable and clear definitions of governance boundaries between government and market as well as government and society. This lack of boundaries causes coexistent and interrelated government inefficiency, market distortion/failure and social anomie, leading to a stagnant transition from a factor-driven to an efficiency-driven and further innovation-driven economy. Moreover, this paper proposes that the proper way to avoid the “trap” can be found in the reconstruction of the state governance mode, that is, to transition from a development-oriented and omnipotent government to a public service-oriented and limited government, from factor-driven to efficiency-driven and further innovation-driven development, and from a traditional society to a modern civil society through defining reasonable and clear boundaries between government and market as well as government and society. Thus, reconstruction can establish a state public governance mode featuring the interactive role of government, market and society, and achieve the modernization of state governance systems and capacity.

This paper discusses the possibility of China falling into the so-called middle income trap in terms of three checkpoints: innovation capability, world-class big businesses, and inequality. Based on these criteria, our conclusions are as follows: First, China has increasingly become innovative and thus differs from other middle income countries. Second, China has many successful big businesses, a number disproportionate to its size. Thus, China differs from other middle income countries with few world-class big businesses, and the only qualification is that those big businesses are mostly nonmanufacturing firms focused on such areas as finance, energy, and trading. Third, China faces great uncertainty in terms of inequality. Although several signs show that the Kuznets curve will come to represent China, as noted by the gradual reduction of surplus labor and rising wage rates starting in the coastal provinces, the Chinese are now facing new sources of inequality in China, such as wealth (including financial and real estate assets) and non-economic factors (including corruption).

China has departed from the East Asian development model by letting inequality rise to a high level, which is now contributing to China’s current problems of macroeconomic imbalance, declining efficiency of capital, and rising social tensions. If inequality persists, China may get caught in the “inequality-trap,” which may then lead to the middle income trap (MIT). Fortunately, China still has the levers to pull to reduce inequality and avoid the MIT. Measures along both the “wage route” and the “redistributive route” can be adopted for this purpose. In addition, China may pursue the “cooperative route” to more equitable distribution.

China’s prevailing hukou (household registration) system and land tenure system seem to be very different in their applications. In fact, they both function to deny the exit right of rural residents from a rural community. Under these systems, rural residents are not allowed to freely exit from collectives if they do not want to lose their entitlements, such as their rights to using collectively owned land and their land-based properties. Farmers are neither allowed to sell their houses to outsiders, nor allowed to sell to outsiders their rights to contracting a piece of land from the collective where their households are registered. For migrant workers from rural areas, it is extremely difficult for them to obtain an urban hukou with all its associated entitlements at an urban locality where they currently work and live. The combined effect of the two systems leads to serious distortions in labor and land markets, resulting in discrimination against migrant workers, sprawling yet exclusive urbanization, housing bubbles, and depressed domestic demand. These distortions further entrench the existing and much widened urban/rural divide. Unless these two systems are thoroughly reformed, the rural residents in Chinese mainland will be trapped in their comparatively much lower income and remain unable to share the gains from the agglomeration effects of urbanization.

This paper explores the middle income trap (MIT) concept from the perspective of productivity growth. Through the examination of cross-country historical statistics as well as China’s regional data, it sheds light on the debate about whether the Chinese economy can avoid the middle income trap. It should be one of the first papers proposing an analytical framework to address this controversial issue. The findings should have important implications for economic policies guiding China’s development in the coming decades.

China’s rise as a global economic power in recent decades has been achieved with tremendous environmental costs. Has China been an abnormally heavier polluter in its development path? How has pollution accounted for China’s hyper economic growth? This study answers these questions by evaluating the environmental effects of China’s growth using a data set of 61 countries over a period of four decades. The analysis is focused on two pollutant emissions: CO2 emissions, which carry global externalities, and particulate emissions, of which the environmental cost is more domestic. A fractional polynomial (FP) regression model is estimated to project emissions levels per worker based on lagged values of per capita GDP and other variables. It reveals that China’s CO2 emissions have been higher than the projection for most years with an average margin of over 5.3% while its particulate emissions have exceeded projection by an average margin of more than 7.5%. The excessive emissions levels of both pollutants confirm the severity of China’s environmental challenges and indicate great potential for the economy to work for a greener growth pattern. On the other hand, contributions of emissions to multi-factor productivity (MFP) growth are estimated by FP regressions based on a human-capital augmented growth model. The results show opposing trends of CO2 and particulates in their “contributions” to GDP growth, which imply asymmetric incentives to abate the two types of pollution. These findings have important implications for China’s environmental policy making.

Data from WDI show that developing countries are easily caught in the “middle income trap.” To interpret the mechanism of the “middle income trap,” this paper focuses on: (1) Based on the empirical framework of economic growth, we perform an empirical research on the determinants of economic growth at different income levels and discover that fixed capital investment, FDI and human capital accumulation are the main factors influencing less developed economies while for the upper middle income level and high-income level countries, the engines of economic growth change to institutions and R&D. (2) We discuss the possible reasons why developing countries can have rapid economic growth before reaching the middleincome level, but cannot transform growth mechanisms in the middle income level. (3) We classify the factors that have influenced China’s economic growth since the reform and analyze the potential ones for China’s future development.