PRC Challenge Is to Avoid the Middle Income Trap, Says ADB President

News Release | 22 March 2011

BEIJING, PEOPLE'S REPUBLIC OF CHINA - Thirty years of successful reform have turned the People's Republic of China (PRC) into the world's second largest economy but the challenge now is to sustain growth while avoiding the middle income trap, Asian Development Bank (ADB) President Haruhiko Kuroda said today.

"A more determined stance towards inclusive growth and environmental sustainability is needed to secure long-term growth and to overcome the imbalances generated by three decades of rapid growth," Mr. Kuroda told a forum in Beijing, PRC marking 25 years of ADB-PRC partnership.

The PRC's Minister of Finance Xie Xuren also gave a keynote speech at the "Opportunities and Challenges of Middle Income Transition" forum. The PRC joined ADB in March 1986 and ADB established a resident mission in the country in June 2000.

Many other fast growing economies such as Brazil, Morocco, South Africa, and Syria have found themselves trapped at the middle income level, unable to overcome the key structural constraints of high production costs combined with limited innovation and technological capacity. This has prevented them from competing with both low- and high-income countries and left many sectors of the population mired in poverty.

Mr. Kuroda said the key challenge for countries seeking to move up the income ladder is finding ways to upgrade production processes from low-value added manufacturing to high-value products. This requires policy-making flexibility, as well as large investments in human capital and research and development. He noted that the PRC has already laid out most of the required reforms in its recently approved 12th Five-Year Plan but stressed that carrying out a successful transition and rebalancing the economy will be a long and complex process.

"The task ahead is indeed daunting and requires substantial economic restructuring and major reforms to transform the current capital-intensive model into one that is more labor-intensive and less dependent on external demand. Efforts will be needed to further strengthen the financial sector, foster personal consumption, improve income redistribution mechanisms, and develop comprehensive safety nets," said Mr. Kuroda.

However given the government's pragmatic policies and strong fiscal position, he was confident the economy - now the world's second largest - will be able to make the transition.

In recent years, ADB support for the PRC has shifted to clean energy, urban infrastructure, sustainable transport and projects in less affluent parts of the country. It is also providing more support for the soft sectors - knowledge, advisory assistance, and capacity building - in view of the PRC's rapid development and strong capacity to internalize and replicate best practices and advice.