As countries progress toward higher income levels, their success or failure depends on their economies' ability to move up the production ladder from low-value-added manufacturing based on imported technology to high-value-added products less reliant on technology imports.
Numerous middle-income countries that were initially high economic performers struggled to make this transition. As their wages and other production costs increased, they could no longer compete with low-income countries, and with limited technological capacity and innovation, they could not compete with high-income countries either. In economists' jargon, they were caught in the "middle-income trap".
China is not considered to be in the middle-income trap, but its economy shows many similar symptoms. Wages have risen sharply, exports and growth are under threat, and many parts of the economy will need to move quickly to increase their value-added products and stay competitive.
The experience of countries that avoided the middle-income trap is highly relevant to China. What have others learned? Two crucial elements: education and innovation.
Avoiding the middle-income trap requires high levels of investment in human capital, research and development (R&D), information and communication technology (ICT), and flexible economic policies. It also requires a vibrant and innovative private sector.
The success of upper middle-income and advanced economies is without exception founded on strong and well-funded education systems. Basic education lays the foundation for other levels of human development. It needs to be equitably accessible to all regions and social groups. Its content provides the basis for creative thinking.
This year China is expected to spend about 2.2 trillion yuan ($347 billion) on education. Though it is expected to achieve the target of spending 4 percent of GDP on education for the first time, the percentage is still less than that of many other middle-income countries. Developed economies generally spend 5-7 percent of their GDP on education. China has made great progress on the education front and has pockets of educational excellence, as shown by the recent international ranking of its students' performance in Shanghai.
However, to ensure that high-quality basic education is accessible to all, expenditure on education has to be increased further. Studies suggest China can enhance students' problem-solving skills and creativity by moving from rote and exam-based learning to student-centered learning.
With production becoming more sophisticated, workers' technical and vocational skills are acquiring increasing importance. Skill development must be aligned with labor market needs and help enterprises respond flexibly to changing circumstances. China suffers from skill shortage in several sectors, and its aging population is likely to reduce rather than increase labor market flexibility. Hence, it has to pay more attention to skills and labor markets.
An independent, well-financed and high-quality tertiary education system is a hallmark of successful economies. Many European countries provide strong public financial support to universities, while in the United States leading universities have large private endowments. China's higher education system has expanded rapidly in recent years, but quality improvements have not kept pace. In relation to its size, China still has relatively few top-tier universities.
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