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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
Copyright:Attribution Non-commercial

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05/13/2014

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Expanding services

PRC services are underdeveloped compared with
its current stage of development. This is due to a
number of factors—including, among others, limited
market opening in certain services subsectors,
the slow pace of urbanization, and policy biases
that favor manufacturing (ADB 2009). Expanding
services will be a key part of the solution to reducing
imbalances in the sources of growth. In the coming
decades, services will provide a key source of
growth and job creation. Productive services will
help improve productivity in manufacturing and
support industrial upgrading, and social services
will help improve the quality of life.
Policy options to promote services include, among
others: (i) reducing or further reducing entry
restrictions in certain services subsectors such
as education, health care, finance, transport, and
telecommunications—and promoting market
competition from the private sector in these
subsectors; (ii) promoting the development of
high-value services, including finance, banking
and insurance; transport and logistics; marketing,
brokerage and advertising; management consulting;
computing and information technology (IT);
accounting and legal services; and design, and R&D;
among others; (iii) promoting good quality services
and strengthening market regulation of services
firms to protect consumer interests, including
establishing services quality codes and standards
and dedicated regulatory agencies (for key public
services such as water, electricity, and health care,
for example); (iv) reducing or eliminating policy
biases in favor of manufacturing, including making
the exchange rate more flexible and eliminating
discrimination against services for access to
credit and in taxation; (v) encouraging services
providers to invest more in services branding
and, at the same time, strengthening protection of

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| Growing beyond the Low-Cost Advantage

intellectual property rights; (vi) investing more in
services training and human capital development of
employees, including introducing job skill grading;
and (vii) promoting urbanization and services trade,
as noted elsewhere.

Scaling up urbanization

Urbanization helps improve productivity and
efficiency in resources utilization, promote
industrial upgrading, expand services, create
urban jobs, and increase household incomes and
consumption. Urbanization offers agglomeration
benefits. Urbanization is also a key part of the
solution to reducing or eliminating economic
imbalances and rural/urban income gaps, and is
an effective way to promote balanced development
of urban and rural sectors. Despite the rapid pace
of urbanization in recent years, the PRC’s rate of
urbanization, at 51% by the end of 2011, remains
low, especially in comparison with those of high-
income countries and many upper-middle-income
countries (Figure 5.4). Urbanization can be a major
driver of PRC growth in the coming decades.
Some of the broad policy issues in promoting
urbanization in the PRC are (i) reforming the
hukuo system, including gradually delinking social
welfare entitlements with hukuo in urban cities and
removing other restrictions on urban settlement by
rural migrant workers; (ii) improving the legal and
administrative system governing the acquisition of
rural land for urban development—to ensure both
social equity and economic efficiency; (iii) further
reforming/improving city administration, including
aligning expenditure and revenue responsibilities
of local governments at all levels, shifting the
focus of local governments toward provision of
public goods and services, and improving the
efficiency of services delivery; (iv) promoting
services by reducing entry restrictions on the
private sector in certain subsectors, to both
create more job opportunities and ensure better
quality of life; (v) promoting green urbanization to
conserve resources and protect the environment;
(vi) ensuring that urbanization is carried out in an
orderly manner, preventing and eliminating urban

poverty, and exploring and developing a low-cost
urban housing system suited for the PRC’s current
circumstances; and (vii) building capacity for
urban planning through education and training and
continuing to explore urbanization strategies suited
to the PRC.

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