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China Can Skip Middle-income Trap by Reducing Labor Costs

By not following in the path of other countries that incur increasing labor transaction costs, China could avoid the middle-income gap, said an expert.

By Xu Mouquan Updated Jul.18

China can skip the “middle-income trap” – where a middle-income country can neither compete with low-income countries in terms of low-end products, nor rival richer countries in terms of advanced technologies, and its growth stalls – provided the country endeavors to bring down transaction costs, the part of labor costs resulting from ill-conceived government policies, said an expert.  
That the trap exists at all is because after countries become moderately developed, governments start implementing welfare policies to win over votes, according to Associate Professor Zhou Yan at the School of Government, Sun Yat-Sen University, in an interview with the Southern Metropolitan Daily. The phenomenon makes the whole society focus on carving up existing wealth, thereby leading to economic stagnation, Zhou said.  
A notable example is that labor unions in some countries are staunch advocates of labor contract law, Zhou said, because by defending the law, they will be kept in work, even though it costs job opportunities for low-income workers. China has also adopted the practice, which hikes the labor cost artificially, she added.  
Labor costs are, according to Zhou, composed of two parts – one being a result of the quality improvement brought about by knowledge improvement, with the other being transaction costs – whose increase might result in an economic stagnation or even recession. The minimum wage system, that labor unions fight vehemently for, is in effect one category of transaction cost.  
While the country’s high-tech companies like Huawei and Tencent prosper, its low-end manufacturing sector is diminishing rapidly, owing principally to the large increases in the second category of costs, Zhou said. China can skip the middle-income trap by annulling the government policies that increase transaction costs, because on the basis of a low-end manufacturing sector that is allowed freedom in signing contracts and bargaining over wages, the high-tech sector will develop better and more quickly.