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Growing Beyond the Low-Cost Advantage: How the People’s Republic of China can Avoid the Middle-Income Trap

Growing Beyond the Low-Cost Advantage: How the People’s Republic of China can Avoid the Middle-Income Trap

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This report analyzes the challenges the PRC faces and examines policy options that could help its transformation from a low-cost to a high-value economy, bypassing the "middle-income trap".
This report analyzes the challenges the PRC faces and examines policy options that could help its transformation from a low-cost to a high-value economy, bypassing the "middle-income trap".

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Published by: Asian Development Bank on Nov 02, 2012
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05/13/2014

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Figure B4.1-1 shows the level of export sophistication (EXPY) and import sophistication (IMPY) in the People’s Republic
of China (PRC) during 1998–2009. EXPY is constructed as a weighted average of the level of sophistication of the
products exported—a higher EXPY implies the country exports products more similar to those exported by advanced
countries. Analogously, IMPY is constructed as a weighted average of the level of sophistication of products imported.
Therefore, a higher IMPY implies the country imports products more similar to those exported by advanced countries.
The PRC’s IMPY is significantly higher than its EXPY. This means the import basket is more technologically sophisticated
than its export basket. However, the gap is narrowing. EXPY showed a 1.6% average annual growth rate during
1998–2009, while IMPY stagnated, indicating that PRC exports are becoming more sophisticated.

Figure B4.1-1 PRC: Export and import sophistication, 1998–2009

EXPY is calculated as the weighted average of the sophistication of the products (PRODY) a country exports:

where xvalci is the value of country c’s export of commodity i, and PRODYc is the weighted average of the GDP per capita
of the exporting countries:

PRODYc is measured in 2005 purchasing power parity (PPP) $. The average PRODYs are calculated for 5,111 products.
GDPPCc is country c’s per capita gross domestic product. Similarly, the sophistication level of the import basket (IMPYc)
of a country is calculated as the weighted average of the sophistication of the products (PRODYi) a country imports:

where mvalci is the value of country c’s import of commodity i.

The calculations are based on the Base pour l’Analyse du Commerce International (BACI) trade database, classified
under the Harmonized System 1996 and the gross domestic product per capita (measured in 2005 PPP $) from the
World Bank’s World Development Indicators Online database.

EXPY = xval

c

PRODYc

i
i

ci
xvalci

PRODY =

c

GDPPCc

c

c

i

xvalci

xvalci

i

xvalci

xvalci

IMPY = mval

c

PRODYi

i
i

ci
mvalci

PPP = purchasing power parity, PRC = People’s Republic of China.
Source: ADB staff estimates.

1998 1989 2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

9,000

10,000

11,000

12,000

13,000

14,000

15,000

2005 PPP $

export sophistication

import sophistication

20

registrations is low, at 101 per one million population,
ranking 28th worldwide. Residents registered 59%
of PRC patents, much lower than Japan, the Republic
of Korea, and the Russian Federation. The distinction
between resident and nonresident registrations is
important—as the latter may be less likely to result in
commercially viable products being produced within
that country.

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