Middle income kingdom
It is not too difficult for poor nations to become less poor. Becoming rich is much harder. This middle income trap might now be about to slam shut over China.
The middle income trap is when a developing nation experiences enough economic development to no longer be a poor nation but then hits obstacles which means that economic growth ceases trapping the nation in the middle income segment
The extent of the middle income trap is debatable but the fact is that very few countries around the world have been able to catch up with the rich nations of Western world. Many poor countries have been able to sustain rapid economic growth for a number of years only to stumble long before they are actually rich.
The capital rules
The capital city of any nation is usually significantly richer than the rest of the nation. This might be due to the fact that the capital is placed in the most economically dynamic city in the nation but most probably it is due to government bureaucracy sucking in economic resources from the entire country and dispersing it locally in the capital. Many companies also covet the opportunity to be close to the regulatory regime. Not to mention the network effect of well-educated employees wanting to be close to other well-educated government employees and fast-growing companies wanting to be close to other fast-growing companies with government contacts.
There actually seems to be a rough rule stating that in developed nations the capital city has a GDP per capita approximately 50% higher than the nation as a whole. I have not heard of any such rule anywhere else so until someone proves otherwise I guess I have the right to call it Anders' rule. (It would still only be Anders' rule number two, the first one being no hind paws on the kitchen table, applicable to cats and toddlers alike.)
The capital city Anders' rule works reasonably well for most developed nations. In France Paris (Île-de-France region) has a GDP per capita 67% higher than the rest of the country. The corresponding number in the UK is 74% higher, 37% higher in Spain, 41% higher in Sweden, 72% higher in Belgium, 32% higher in the Netherlands (North Holland region), 72% higher in Japan and 23% higher in the United States. (Note: Technically regional GDP should be called GRP, Gross Regional Product, but since I think that sounds unintuitive I simply use GDP throughout.)
Notable exceptions to the rule are Germany where Berlin's GDP per capita is only 1% higher than the whole of Germany (and significantly lower than Western Germany). And in Italy Rome's GDP per capita is a below average 15% higher than the country as a whole. Both of these nations have capital cities located in unusual places. Berlin happened to end up in impoverished East Germany and Rome was chosen as a historically important but economically unimportant compromise alternative when Italy selected a capital in the 19th century.
Then there is China. In China the capital region of Beijing has a GDP per capita a whopping 127% higher than the country as a whole. The Beijing region is no mere government quarter with inflated salaries. It is a fully-fledged region with 22 million inhabitants. What is more, it is not unique. Shanghai, China's other major city and also a region in itself, has a GDP per capita 114% higher than the national average.
First world in the third world
Beijing and Shanghai are big enough to be their own regions. They are also unusually rich but by no means unique. Most big cities in China show similar levels of affluence. In fact, China's biggest cities are more or less first world. Beijing's GDP per capita stands at US$28,517. In IMF's GDP league tables Beijing would place above first world nations like Portugal (US$26,012) and Greece (US$22,595) and only slightly below first world stalwarts like Spain (US$31,223) and Japan (US$35,385).
If China's big cities have GDP levels close to first world nations something else must be dragging down the rest of the country. This other is inland China or, more correctly, the vast Chinese rural hinterland. China's wealth and industrial production is concentrated to a string of provinces and cities along the eastern coast. The provinces in the western inland, as well as in the peripheral north-east and south-west, are much poorer.
Beijing illustrates the phenomenon well. While the city region of Beijing has a GDP per capita of US$28,517 the surrounding province of Hebei's GDP per capita is only US$8,397. This is a very visible difference between two bordering regions in the same country.
While Beijing has a good claim to belong to the developed world, Hebei is no such thing. In fact, Hebei's GDP per capita is more similar to developing nations. According to the IMF it is slightly richer than Thailand but places below several (admittedly oil-rich) African nations like Gabon and Equatorial Guinea.
Trapped in the middle
The phrase middle income trap was coined by the World Bank in 2007 to describe a much older phenomenon: developing nations that see quick economic growth while they are poor but that seem to hit a wall as soon as they become slightly richer. Unable to sustain continued quick growth they end up as perennial middle income countries.
There are numerous examples of countries seemingly stuck in the middle income bracket, most notably almost the entirety of Latin America. It is debatable whether these countries are really victims of the middle income trap or if they are just middle income countries. To be a real victim of the middle income trap one should ideally have had strong growth while a lower income nation. Growth that then peters out once the country reaches middle income status. The middle income trap was originally invented to describe the situation in much of Southeast Asia and countries like Thailand and Malaysia are still prime examples of it.
The usual explanation for the middle income trap is that every well-functioning poor country can grow out of its poverty simply by working hard. But actually growing rich takes some talent. While poor, a country can use its cheap labor reserve to compete globally and if it does not waste its income on corruption but instead invests it wisely it will, given a little time, no longer be poor.
The route out of poverty generally goes through basic industry. Basic industry is favorable since it requires nothing more than some law and order, rudimentary infrastructure and a lot of cheap labor. These are assets that many poor nations possess and hence many poor nations have also made the transition to middle income status.
To continue growing from middle income status demands a lot more. A high income nation has most of its economic activity not in industry but in services, especially high-end services. While most people with two arms and two legs can become a factory worker not everyone can become an automation engineer. To rise from middle income to high income status demands a lot: good governance, advanced infrastructure and, above all, a highly educated workforce.
Back to school again
China should be well placed to progress from its current middle income status to the high income bracket. It has good enough governance and mostly excellent infrastructure. Its education system also seems up to the task. China topped the PISA rankings in all three categories the last time the tests were administered (by a significant margin to boot).
But all is not what it seems in China's education system. The China that topped the PISA ranking was not the real China. It was China (B-S-J-Z), where the bracketed letters stand for Beijing, Shanghai, Jiangsu and Zhejiang. These four provinces were handpicked by China, incidentally they are also the best-performing provinces in China, hugely inflating the Chinese score.
Just as with its general economy China has one first world education system and one third world education system. China's big cities have excellent schools and very ambitious parents who steer their child (almost always in singular) onto a path of high academic achievement.
The situation in rural China is very different. For a start, many children do not even have parents. They are looked after by relatives while their parents toil away at jobs in the big cities. This is due to the Chinese hukou system where one's registered residency controls every type of community service. Rural adults can travel to the city to work, but if they bring their children these children will not be allowed schooling.
Instead the children stay in their rural villages where at least they are entitled to an education. But this education is usually not top-notch. The economic differences between rural and urban China equates to very different education systems. Urban schools simply have more resources. Which of course affects the outcome.
The state of rural China's education system is analyzed in depth by Scott Rozelle and Nathalie Hell in their 2020 book Invisible China (data and statistics in the next few paragraphs will all be from this book). The picture is not pretty. While the urban schools are similar to Western schools in terms of resources and results, numerous studies have shown that kids in rural schools are several years behind their urban peers.
If the problem was only one of low resources it should be easy to solve. China has resources and should be able to throw money at the problem. This is also what has happened. But it might be a case of too little, too late. The previous negligence is sometimes astonishing. Up until a decade ago secondary education was still not free of charge in rural China. Predictably, this meant that many rural youth made do with only primary education. As recently as 2005 only 43% of rural youths in China attended any form of high school.
This is a serious problem considering that the rural Chinese constitute more than two thirds of total Chinese (counted by hukou, the number of Chinese actually living in urban areas is higher). If only 43% of them attended high school less than 20 years ago it means that a significant portion of the Chinese population does not have a secondary education. This is precisely the situation. Of China's labor force only 30% have a high school education. This share is lower than in most other middle income countries (and vastly below the levels in Western Europe and North America where nearly everyone has a high school diploma).
A world apart...
It is not only educational attainment that differs between rural and urban Chinese. The problem seems to be much deeper. Urban Chinese children have significantly higher IQ than rural Chinese children. The difference can be up to 10 IQ points (source).
Rozelle and Hell are aware of the cognitive gap between rural and urban Chinese. Their explanation to it is differences in basic health care and pre-school education. According to their data rural children suffer a host of ailments that only rarely affect urban children, from anemia to intestinal worms.
The connection between health status and IQ seems a bit spurious. But there is an adjacent explanation. The Flynn effect states that IQ scores increase continuously as countries develop. The reasons for this rise in IQ scores is debated. James Flynn, who discovered the phenomenon, believes that the rise in most places after 1950 was not due to health factors, pointing out that IQ scores in different countries have increased independently of increases in body height. In several developed countries, IQ scores continued to rise also decades after people ceased getting taller. For example, Dutch military recruits in 1982 scored 8 points higher on a Raven's Matrices style test compared to recruits in 19721. Few people seriously believe that nutrition improved significantly among Dutch 18-year-olds between those years.
Whatever the reasons for the Flynn effect it is clear that urban and rural China are on very different developmental levels. If economic development increases IQ scores it should not be surprising that IQ differs across China. Even a 10 point difference between rural and urban China can easily be explained with the Flynn effect. The Flynn effect is not very well studied in China. The one source I found states that the Chinese Flynn effect is real but not enough to explain the difference between rural and urban areas. On the other hand it also states that more studies are needed.
...but still in the Middle Kingdom
There is another potential explanation for the gap in IQ score between rural and urban China: evolutionary biology. Chinese urban elites have historically been selected through rigorous academic exams, exams that put a premium on cognitive abilities. This is in contrast to Europe where elites were to a much greater extent and for much longer, selected for martial prowess.
It is possible that the Chinese mandarin system has enabled cognitively gifted people to support more offspring. Something that over a thousand years would definitely have an effect on the population level. This effect would not have been evenly distributed across the country. The scholars who succeeded on the imperial exams were almost never peasant boys. They were the sons of former scholars or maybe merchants whose parents could afford a costly education. And they were predominantly urban.
This theory of different evolutionary tracks for rural and urban China rests on the assumption that there was only limited genetic exchange between the Chinese cities and the Chinese countryside. I have no idea if this was the case (it seems far-fetched). Nevertheless, it is a convenient explanation to the gigantic developmental difference we are currently seeing between rural China and urban China.
Today's China could be described as two separate countries (with a free-trade agreement). In fact, today's China is very similar to the American continent, had it been one single nation. Both China and the Americas have a bit over one billion inhabitants. Latin America is twice as populous as North America (USA and Canada), just as rural China is twice as populous as urban China. Latin America and rural China have very similar GDP per capita and while North America is more than twice as rich as urban China there is at least a significant difference to their poorer counterparts, Latin America and rural China respectively.
Urban China will no doubt sail right through the middle income bracket. By some definitions it is already a high income country. Unfortunately for urban China, it is forever attached to rural China which is very much stuck in the middle income trap. Not only is it middle income, it compares badly to other middle income countries, especially in the education sector. Urban China has become rich in no small part due to cheap labor and other support from rural China. Now it is payback time. The only way that China can become a proper rich country is if urban China can pull rural China out of the middle income trap.
James Flynn, What is Intelligence, 2007, pages 103-106
> This theory of different evolutionary tracks for rural and urban China rests on the assumption that there was only limited genetic exchange between the Chinese cities and the Chinese countryside. I have no idea if this was the case (it seems far-fetched).
I don't find it far-fetched. Given the vertical norms of classical Asian societies, it would be easy to maintain even within a homogeneous society. But moreover, China isn't homogeneous. There is an ethnic component to the economic divide within China; wealthy regions are overwhelmingly Han, and rural areas are non-Han. See https://link.springer.com/article/10.1007/s12076-020-00260-3
As a final note, I suspect that a missing ingredient to go from middle to high income is trust. The Chinese government handles things in a clumsy and authoritarian way, especially lately. For an example of where I'm getting my perceptions, see https://quillette.com/2023/01/28/beijing-in-retreat/
I suspect the sharp difference between urban and rural is fairly common. Looking at the United States, industrial urbanization could be said to have started in the late 1800s but really only was completed during the "move to the Sunbelt" of the 1970s. I've read that in 1960 around 1/3 of housing units in the US still didn't have indoor plumbing.
I have some doubts about the "middle income trap" phenomenon being a real thing, or at least, a surprising thing. Wikipedia states the middle income zone is $1k to $12 GDP/capita in 2011 dollars. In order to cross that zone in 50 years, the economy has to grow at 23%/yr! Also, there are difficulties measuring the GDP of any country other than the US, given currency fluctuations and varying prices of various commodities. So one would have to take measurements decade-by-decade to average those out. You might make a useful (publishable?) project by accumulating the data needed to make a good test of it.
I've also wondered if the fundamental limitation on development is capital accumulation. The idea being that given the current world GDP only a certain amount of capital will be accumulated per year and thus the amount of "development" that can happen per year. Depending on their policies, countries can compete to see which country undergoes that development, but it is a fixed-positive-sum game. I have read that during critical phases of industrialization, both Japan and South Korea implemented policies both to increase capital accumulation by suppressing consumption and to prevent locally accumulated capital from being exported.