Definition of Middle Income Trap Essay

As the name implies, the inwardness income sn ar is an scotch learning line, where a unpolished which attains a certain income (due to given benefits) impart bulge show up stuck at that take aim. Part of this c oncept was firstly discussed in the 2006 mankind situate taradiddle Equity and development as the in stinkpotdor trap. plainly this piece does non affirm real distinctly on the definitions, assortments and measure out(a)s to vacate it, and so forth Then in the known 2007 reality blaspheme subject field An east Asiatic Renaissance, this stinting phenomenon was officially addressed. According to the a la mode(p) definition of The Intertheme m 1tary come forth-of-the-way(prenominal)m animal in 2013, the mediate-income trap is the phenomenon of thus outlying(prenominal) chop-chop maturement economies stagnating at eye-income aims and failing to graduate into the ranks of spicy-income countries (2013 The International mo ut most(prenomin al)ary Fund Working typography Growth Slowdowns and the middle(a) Income Trap).From the normalations and journal articles, it re come homems in that respect has non been universal and very concrete ensureing on the expatiate of this issue yet. For example, contrary researchers and regular up variant journalist may fill several(predicate) classifications on it base on various standards. However, the principles applied argon interchangeable. The most upstart field buzzword classification with data for 2010 is as following a republic is classified as low-income if its GNI (Gross interior(a) Income) per capita is US$1,005 or less, lour-middle-income if its GNI per capita lies among US$1,006 and US$3,975, upper-middle-income if its GNI per capita lies amongst US$3,976 and US$12,275, and spunky income if its GNI per capita is US$12,276 or game up. This classification was also used by The International monetary Fund in its working paper in 2013 Growth Slowdo wns and the Middle Income Trap. After the International Monetary Fund applies this classification to its sample of 138 countries in 2010, the governing body issue yields 24 low-income countries, 36 lower middleincome countries, 33 upper middle-income countries, and 45 high-income countries (2013 The International Monetary Fund Working Paper Growth Slowdowns and the Middle Income Trap).Its very clear that most of the countries ar unchanging in the fact of low income or middle income. In addition, middle incomecountries atomic number 18 much to a greater extent than than low income countries, which ensure us that it is make sense to hire to a greater extent attention to the countries in the middle income situation. In recent years the world turned to recognize the homosexualkind of a Middle Income Trap. The barrier Middle Income Trap is by flat also being widely used in scotch writings as head as seamoriented media. The Middle Income Trap occurs when the reaping of a n proposence slows and ultimately flattens after(prenominal) it r distributivelyes a middle income level. The difficulty usually arises when development countries nd themselves stuck in amidst high and low income levels. On the one hand, with rising wages, middle income countries atomic number 18 less competitive comp bed to lessdeveloped, low-wage countries in price of the cheap production of manufactured goods. On the some some separatewise hand, they argon ineffectual to compete with developed countries in terms of high-skill mental institutions. As the Asiatic festering Bank describes, these countries ordure non compete withlow-income, low-wage economies in manufacturing and similarly be disadvantaged against modern economies in high-skill innovations. In another(prenominal) word, these countries hindquartersnot continue to compete on address for cheap goods, and they cannot yet compete on lumber for more coach items.Let us see a deeper look at this scotch phenomenon. When low-income countries first begin to subject off, they often do take the advantage of a low-wage. This allows the countrys manufacturers to offer competitive prices on the international market, since they develop a lower cost base. However, as sparing proceeds rates and productivity rise quickly, rapid wage increases t break to follow. then the trap is prevalently characterized by the fact that rising wages eventually begin to eat into the competitiveness that low-base wages originally offered. Once economies consider closer to the development frontier, the suppuration model depart become more complex. It is increasingly determined by innovation, enthronization in more ripe technologies and done the raising of the level and quality of reading, notably triceary and high gentility of the dominance labor great proponent. Among these promoters, it must be renowned that statement dose matter. In addition, the second command is more p rimary feather(prenominal) than the habitual teaching method.Lower level of grooming in the majority of the labor force definitely tugs to insufficient pendantworkers. The fortunes of sticking into the Middle Income Trap bring in increasingly become a focus of discussions in terms of the long-run stintingal and loving development of developing economies. These risks, and how to minimize them, atomic number 18 being discussed at the highest levels of constitution making in some of the fast growing acclivitous economies, even bandage these countries may in time be sources of resent to the rest of the world, such as china, Russia and India. Countries in the trap and how to avoid the middle income trap As we mentioned above, due to a variety of factors, many countries risk packting stuck in this trap.According to the International Monetary Fund, most notably, some(prenominal) Latin the Statesn economies, at least until recently, would seem to belong in this category , having failed to achieve highincome levels despite attaining middle-income posture some(prenominal)(prenominal) decades ago (2013 The International Monetary Fund Working Paper Growth Slowdowns and the Middle-Income Trap). Actually it has been well reliable that countries across Latin America as well as the several Middle tocopherol economies saw catch-up growth in the 1960s and mid-seventies solely then they hit an invisible ceiling and support in the main stuck in the middle income trap ever since, with per capita incomes faraway behind the sublime break- bug out countries.Most of the evidence on the middle-income trap comes from these economies of Latin America and the Middle East. These argon regions abundant in land and natural resources. They have had growth during commodity booms, often followed by growth crashes when commodity prices drop sharply.In Eva Pauss article about the Latin Americas middle-income trap, she points out that the accumulation of technological capabilities is at the heart of the development process. Technological capabilities confabulate to the resources and organizational abilities needed to generate and manage technological change. In a changing national and world(a) context, accumulation thosecapabilities is the key to checked productivity growth and high-end economic development. She also mentioned Policymakers should promote entrepreneurship and innovation to begin reaping the benefits of information networks and skilled labor earlier the gains from cheap labor and knowledgespilloers ar exhausted.Nowadays race be more studying on Asian countries with more two low income and middle income countries. Through the evidence from countries already stuck in middle income trap and the current research in Asia, flock could not and forecast the future in terms of economic development, but also make the policy maker to develop the adapted measures to avoid the trap. We could take a look at the middle-income Asian ec onomies for our come along investigation. There are eight countries that stand out in East and reciprocal ohm Asia the ASEAN-5 (Malaysia, Thailand, Indonesia, Philippines and Vietnam), mainland mainland china, India and Sri Lanka. scarce they are at very different levels of development. They could be divided into high middle-income and low middleincome groups. Malaysia is at the top of the high middle-income group. Indonesia, Philippines, Vietnam, India and Sri Lanka are in the low middle-income group. mainland chinaware and Thailand are roughly in the middle.As we lead discuss China in every detail later, let us take Indonesia as an example. According to the Asian instruction Bank, Indonesia could be the case of the country in the middle-income trap. It became a middle-income prudence in 2003. It in truthfulness attained middle-income status in 1993, but fell acantha after the 1997-98 Asian monetary crisis. It took six years to jump back to the middle income level. Now it needs to battle the middle-income trap. Indonesia is not unique to this problem. dis respecting the different external international economic environment, many middle-income countries are without a viable high-growth strategy. They are go about with new-fashioned challenges, including loving cohesion, a great(p) pool of young people in search of jobs, as well as gazillions who still live in misery and destitution.Typically, countries trapped at middle-income level have (1) low investment ratios (2) slow manufacturing growth (3) express mail industrial diversification and (4) poor labor market conditions. The Asian Development Bank in its 2011 report Asia 2050 Realizing the Asian Century raised the straits that considering that the region has to face up to the daunting prospect that lies before it, how many countries will meet this challenge? The answer is still unclear. Given this reality and uncertainties about the future the report postulates two quantitative scenarios with very different outcomes.Most of the discussion in the report is based on the optimistic Asian Century scenario. This scenario assumes that the 11 economies (Armenia Azerbaijan Cambodia P.R.China Georgia India Indonesia Kazakhstan Malaysia Thailand and Viet Nam) with a instituted disgrace of sustained convergence to best global practice over the then(prenominal) 30 years or so continue this trend over the next 40 years and that a number of modest-growth aspiring economies will become convergers by 2020. In this scenario, Asia will take its place among the ranks of the ladened onpar with those in Europe today some3 billion excess Asians will become affluent by 2050. This is the desired or apotheosis scenario for Asia as a whole.The Middle Income Trap scenario assumes that these fast-growing intersection economies fall into that trap in the next 5 10 years, without any of the slow- or modest-growth aspiring economies improving their record in other words, Asia follows the pattern of Latin America over the past 30 years. This is the pessimistic scenario and could be interpreted as a wake-up call to Asian leaders.According to this report by the Asian Development Bank, there will be a enormous difference in the outcomes of the two scenarios. The economic and well-disposed costs of absent the Asian Century are staggering. If todays fast-growing converging economies become mired in the Middle Income Trap, Asias gross interior(prenominal) product in 2050 would reach moreover $65 trillion, not $174 trillion (at market rally rates). GDP per capita would be scarce(prenominal) $20,600, not $40,800 (PPP). such(prenominal) an outcome would clean billions of Asians of a smelltime of affluence and well-being. The possibility of a perfect besiege cannot be ruled out in thinking about Asia by 2050. A combination of bad macro policies, finance sector enthusiasm with lax supervision, conflict, climate change, natural disasters, changing demography, and weak governance could scupper Asian growth.In this worst case scenario, Asia could stumble into afinancial meltdown, major conflict, or region wide chaos well before 2050. It is impossible to quantify this scenario, but Asias leaders must be aware of the potential for such a catastrophe and avoid it at all costs. By contrast, several East Asian economies have in recent decades provided a template for success to get out of the trap and continue to grow rapidly after attaining middle-income status, and thereby attaining per capita income levels comparable to move on countries (2013 the International Monetary Fund Working Paper Growth Slowdowns and the Middle-Income Trap). So far, five Asian countries or regions have successfully escaped the middle-income trap, which are Japan, South Korea, Taiwan, Hong Kong and Sin commotionore. What do we need to do to follow them? There is no uniform policy solution for avoiding the middle-income trap. South Korea, Taiwan, Hong Kong and Sin to-doore h ave do the journeyion to advanced economies.As noted by the Economist 2013, even still little is known about why so a couple of(prenominal) countries succeed in making the transition from middle-income to high-income status, however, its clear that their paths were different but they shared a willingness and ability to change occupation. To stop understand this question How did these east Asian countries escape the middle income trap and start out the answer, it will be very useful for us to go back to the World Banks landmark report The East Asian Miracle, which was published in 1993. It has analyzed the catch-up growth of the several East Asian Tigers, and some of its conclusions are relevant to the middleincome trap. Its foremost conclusion was that it is vital to get the primarys proper(a) macroeconomic stability, comparatively low distortions to domestic competition, nudeness to external trade, flexible labor markets, and investment in hard al-Qaeda as well as educati on. On the other hand, we could analyze both low-income Asian countries and high-income Asian countries to further evaluate the situation in middle-income Asian economies which imply China.For low income Asian countries like Cambodia, Nepal, etc., to get the basics right must still be the top we may even include the less developed states in China and India. These countries and regions should be in the business of catch-up growth, which comes from maximum mobilization of capital and labor inputs, and larger-than-life productivity gains from streamlined resource re parceling. This is what Prof. capital of Minnesota Krugman calls growth through perspiration. At theother extreme, for high income Asian economies, from Japan down to Singapore, has to rely on output-led, productivity- and innovation-based growth. This is what Prof. Paul Krugman calls growth through inspiration. To get the basics right is still fundamental note that Japan is hurtling in the opposite direction with wil dly profligate monetary and monetary policies.But this has to be complemented with more forward-looking structural and institutional reforms. These second generation reforms (sophisticated structural and institutional reforms) have to go beyond liberalization of product markets to encompass deregulation of factor markets (for land, labor and capital). They must also include liberaling up of function sectors, upgrading soft radix, and improving the quality of habitual administration, regulatory agencies and legal transcriptions. Among them, being part of soft fundament, higher education and skills are of the most important factors.So what about middle income countries in between? They need a mix of getting the basics right and second generation reforms. But the balance should differ as between high middle income and low middle income countries. For example, high middle-income countries need to crack on with structural and institutional reforms for productivity-based growth. T his also applies to China (especially its coastal provinces).Moreover, in a recent report of International Monetary Fund, economists suggest four ways to avoid that1. Invest in infrastructure. The International Monetary Fund analytic thinking suggests that subpar infrastructure is a key factor that can check an emerging economys growth. India, the Philippines and Thailand are particularly exposed in this arena and should focus on building new and upgrading existing public transit constitutions, freight channels, ports and energy infrastructure.2. Guard against excessive capital inflows. Money flows from a bowl can energize an economy and give domestic consumption a boost, but can send an economy south if investors retreat in a hurry. Policy makers should have macro-prudential controls in place to mitigate potential rapid outflows, consort to the International Monetary Fund.3. Boost spend on research and development and post- standby education. Both are needed to foster the in novation thats a hallmark of advanced economies. According to the International Monetary Fund data, Malaysia and Thailand have the highest college enrollment rates among emerging Asian countries. However, China is rapidly catching up. China far outstrips other developing Asian countries on R&D, with 2009 spending at more than 1.5% of GDP.4. Get more women into the workforce and raise the retirement age. Aging community is a problem in a lot of Asian countries. Governments should take actions to tighten dependence ratios by raising the age when workers are eligible for pensions and encouraging girls to acquiesce university and vocational training.Anyway, avoiding the Middle Income Trap entails identifying strategies to introduce new processes and discern new markets to maintain export growth. Ramping up domestic demand is also importantan expanding middle class can use its increasing purchasing place to buy highquality, innovative products and help drive growth. The biggest cha llenge is moving from resource-driven growth that is dependent on cheap labor and capital to growth based on high productivity and innovation. This requires investments in infrastructure and education. As the several East Asian countries has proven, building a high-quality education trunk which encourages creativeness and supports breakthroughs in science and engineering is the key.As Asian countries have approached or are approaching the technological frontier, the persona of education does matter a lot. Many Asian countries have noted for their commitment to improve the quality of their education, and already have some of the highest educational attainments in the world. Yet the fiscal and institutional challenges to lifting educational performance in the way that is needed to sustain economic growth is another thing altogether. The success or ill luck in that will be a major determinant of whether Asia fulfils the expectations of its long economic growth. Looking at ChinaMan y retrievers believe Chinas amazing growth is nearing its limits. A joint report by the World Bank and Chinas Development Research meat has warned that the low-hanging fruit of statedriven industrialization is largely exhausted. According to this joint report, If countries cannot increaseproductivity through innovation, they find themselves trapped. China does not have to endure this exigency.This report emphasized that China has reached another turning point in its development path when a second strategic, and no less fundamental, pause is called for. For China, it can no longer rely on imported technology to keep up robust growth of averaging 9.9 percent since the economy was open in 1978.The report said Chinas growth of economy will slow to 7 percent later this decade and even 5 percent by the late 2020s even if China does not perform deep reform. However, this report also point out, if everything goes smoothly, China will be a high-income economy by 2030 and perhaps as supe rior as Britain in 1870 or the United States in 1945, or indeed as flourishing as the Qing Empire itself in 1820 before the onrush of catastrophic decline. As Economists 2013 points out, for all problems of China, in the coming 10-15 years it is still likely to reach several symbolic milestones.The International Monetary Fund predicts that in 2016 it will become the worlds largest economy on a purchasing-power-parity basis. The Economist Intelligence Unit reckons that on the basis of market exchange rates China will attain that glory in 2020. By the end of this decade, check to Daiwa Securities, GDP per person in Shanghai, Chinas fecundest city, could be almost the same as the medium for America in 2009. Now, officials and experts discuss endlessly whether China is slowly heading towards a middleincome trap. According to Economists 2011, China was already a lower-middle-income country in 2010, with a GDP per person of around $4,400. The fear is that it might have the same stagna tion and turbulence as Latin American economies in the 1980s and 1990s.Nevertheless, with trend GDP growth in China retard to around 8% a year from as high as 11% previously, its no wonder economists are asking whether it and other fast-growing Asian economies will fall victim to the middle-income trap.Income distinctionThe family between blondness and development was thoroughly illustrated inthe World Banks World Development Report 2006 Equity and development. According to this famous report, equity means that individuals should have equal opportunities to pursue a life of their choosing and be spared from extreme deprivation in outcomes. The main message is that equity is completing, in some fundamental respects, to the pursuit of long-term prosperity. Institutions and policies that promote a level vie correction where all members of society have similar chances to become kindly active, semi policy-makingly influential, and economically productive consecrate to sustainab le growth and development. great equity is thus doubly good for want reduction through potential beneficial effects on conflate long-run development and through greater opportunities for poorer groups within any society. The complementarities between equity and prosperity arise for two broad pay backs of reasons. First, there are many market failures in developing countries, notably in the markets for credit, indemnity, land, and human capital. As a result, resources may not flow where returns are highest. The in compare of education is taken as an example in this report. Some highly capable children from poor family may fail to complete basic education even primary schooling, bandage others, who are less able, may subtlety university.When markets are bunking or imperfect, the distributions of wealthiness and power sham the storage allocation of investment opportunities. Correcting the market failures is the ideal response where this is not feasible, or far too costly, som e forms of redistribution of access to services, assets, or political influencecan increase economic efficiency. From the World Banks perspective, the second set of reasons why equity and long-term prosperity can be complementary arises from the fact that high levels of economic and political inequation tend to lead to economic institutions and social arrangements that systematically favor the interests of those with more influence. Such inequitable judicatures can generate economic costs.When personal and property rights are obligate only selectively, when budgetary allocations benefit mainly the politically influential, and when the distribution of public services favors the wealthy, both middle and poorer groups end up with unexploited talent. Society, as a whole, is then likelyto be more inefficient and to miss out on opportunities for innovation and investment, which will accordingly have oppose blow on the economic development. At the global level, when developing countr ies have little or no voice in global governance, the rules can be inappropriate and costly for poorer countries.These adverse effects of uneven opportunities and political power on development are all the more electronegative because economic, political, and social inequalities tend to reproduce themselves over time and across generations.Such phenomena was named by the economists of the World Bank as contrariety traps, as we mentioned in the very beginning. Disadvantaged children from families at the bottom of the wealth distribution do not have the same opportunities as children from wealthier families to receive quality education, which truly does matter for a qualified labor force in the future. So these disadvantaged children can expect to earn less as adults. At the same time, because the poor have less voice in the political process, theylike their parentswill be less able to influence spending decisions to improve public schools for their children. And the cycle of unde rachievement continues.This report documents the persistence of these divergence traps by highlighting the interaction between different forms of inequality. It presents evidence that the inequality of opportunity that arises is wasteful and inimical to sustainable development and exiguity reduction. It also derives policy implications that center on the broad concept of leveling the playacting field both politically and economically and in the domestic and the global arenas. If the opportunities faced by children from the poor families are so much more curb than those faced by children from wealthier families, and if this hurts development progress in the aggregate, then public action has a legitimate aim in seeking to carry the opportunities of those who face the most trammel choices.Furthermore, this World Bank report addresses iii considerations which areimportant at the outset.First, while more even playing fields are likely to lead to lower observed inequalities in educ ational attainment, health status, and incomes, the policy aim is not equality in outcomes. Indeed, even with genuine equality of opportunities, one would always expect to observe some differences in outcomes owing to differences in preferences, talents, effort, and luck. This is consistent with the important role of income differences in providing incentives to invest in education and physical capital, to work, and to take risks. Of course outcomes matter, but we are concerned with them mainly for their influence on supreme deprivation and their role in shaping opportunities.Second, a concern with equality of opportunity implies that public action should focus on the distributions of assets, economic opportunities, and political voice, rather than directly on inequality in incomes. Policies can contribute to the move from an inequality trap to a virtuous circle of equity and growth by leveling the playing fieldthrough greater investment in the human resources of the poorest greate r and more equal access to public services and information guarantees on property rights for all and greater fairness in markets. But policies to level the economic playing field face big challenges. There is unequal capacity to influence the policy agenda the interests of the disenfranchised may never be voiced or represented. And when policies challenge privileges, powerful groups may seek to block reforms. Thus, equitable policies are more likely to be successful when leveling the economic playing field is accompanied by similar efforts to level the domestic political playing field and introduce greater fairness in global governance.Third, there may be various short-run, policy-level tradeoffs between equity and efficiency. These are well recognized and extensively documented. The point is that the (often implicit) cost-benefit calculus that policymakers use to respect the merits of various policies too often ignores the long-term, hard-to-measure but real benefits of greater eq uity. Greater equity implies more efficient economic functioning, reduced conflict, greater trust, and better institutions, with dynamic benefits for investmentand growth. To the extent that such benefits are ignored, policymakers may end up choosing too little equity.As emphasized by the World Bank, income inequality is not all. However, as a lot of people believe, the superior challenge ahead is still income inequality. All attempts will fail if this superlative challenge is not tackled. As state redistributive mechanisms have been weakened in the transition toward a market-oriented economy, China has turned into one of the most unequal countries in the world. Inequality, if not reduced, will be a huge bar of future growth as it undermines consumption, constrains development in poorer regions, and generates social tensions. Income redistribution policies and social safety nets need to be corroborateed to close the inequality gap, through increased budget support and improved g overnments transferences to poorer provinces and households.In China, the gap between the thick and the poor and between cities and countryside has continued to draw out. Since 2003, unassailable poverty has dropped remarkably. But at the same time, the number of people in relative poverty (with 50% or less of the median income) grew from 12.2% of the population to 14.6% between 2002 and 2007, according to research by Terry Sicular of the University of Western Ontario and Li Shi and Luo Chuliang of Beijing Normal University.In addition, in 1981, at least 77 per cent of Chinese were in absolute poverty (that is, with family incomes at a lower place $1.25 a day). By 2008 this imagine had fallen to 13 per cent. But, the bank notes, a far, far smaller group of people have been able to rise above $2 a day, and hundreds of millions appear stuck in this awkward space between the end of starvation and the beginning of actual comfort and hope.Wang Xiaolu, the economist of national eco nomic institution of China reform foundation, thoroughly elaborated the inequality and economic development in China in his 2006 report. Wang mentioned in his report that before Chinas economic reforms, the income gap between urban residents was preferably small due to the unified wage policy. On the other hand, in country-style areas, the incomegap within one region was relatively small. But there was a very large urban pastoral income gap, as well as significant differences between different regions. To demonstrate the income gap, let us take a look at Chinas Gini coefficient. This index is a measurement of the income distribution of a countrys residents. The number, which ranges between 0 and 1 and is based on residents net income, helps define the gap between the rich and the poor, with 0 representing perfect equality and 1 representing perfect inequality. According to the National Bureau of Statistics, in 1980 when was the very early stage of the economic reforms, Chinas Gin i coefficient stood at 0.320, which is quite low and indicates a more equal distribution of wealth. After the verdant reforms in the early 1980s, farmers income importantlyincreased which led to the reduction of the urban- countrified income gap. The Gini coefficient once dropped to 0.257 in 1984, which meant China had been into the more equal income countries ranks of the world. However, in the subsequent end of China economic reforms, the income gap between urban and rural areas, different regions, and different social strata is rapidly expanding regardless the acceleration of economic growth, the rapidly increasing of per capita income. Until 2001, the Gini coefficient reached 0.447, ranking 88 in the worlds great hundred countries and regions in the order from low to high. Most of the countries behind China are those in Latin America and Africa with intense social conflicts, of which a vast part is in a long-term economic stagnation (data from the World Bank, 2004 World Ins titute for Development stintings, 2004). In recent yearly the situation might be worse. This index has been retreating gradually since hitting a percentage point of 0.491 in 2008, slightly dropping to 0.49 in 2009, 0.481 in 2010 and 0.477 in 2011, according to the National Bureau of Statistics. Most recently, the Gini index reflecting the gap between rich and poor reached 0.474 in China in 2012, which is still higher than the warn level of 0.4 set by the United Nations.According to the data from the National Bureau of Statistics, in terms of the urban rural income gap in China, the urban per capita disposable income is 2.5 generation of the rural per capita net income in 1980, 1.9 times in 1985 and3.2 times in 2004.With the data mentioned above, if we use the average urban per capita income of each province to measure regional income gaps, we could find out that the figure of eastern regions is 1.3 times of that of western regions in 1980 and 1.5 times in 2004.The statistics are incomplete in terms of the income gap among different social strata, but the huge inequality is an indisputable fact. If we look at urban per capita income in 1985, the highest 10% of households in the income is 2.9 times of the lowest 10% of households in while in 2004 the highest is 8.7 times of the lowest. If we look at rural per capita income in 1980, the highest 10% is about 7 times of the lowest 10% (rough estimate number), up to approximately 11 times in 2004 (rough estimate number). We should also take into account that household income and expenditure survey for the highest and the lowest income residents are more likely to be missed, as well as high income underreporting of cases. As a result, the actual income gap will be larger than the income gap based on surveys. More than likely the increasingly widen of income disparities between different classes has become the primary factor of income inequality. Growing gap in income distribution is seriously challenging the socia l justice, which easily leads to social asymmetry and economic stagnation.In addition, we must pay great attention to the rich caused by degeneracy and other non- normal channels and the poor caused by unfair distribution of wealth (such as landless farmers and laid-off workers are not properly compensated, etc. ), which are the important reasons of the widening income gap and induction of social conflict. As we mentioned above, a lot of researchers and economists further noted that the distribution of income reversely has a very important impact to economic growth and severe income inequality will hinder economic growth (e.g. Galor and Zeira 1993and Bourguignon 2003). In a situation of economic stagnation, poverty and income inequality become more difficult to resolve, which turns to be an important reason of push many economies into Middle-Income Trap. In several studies of the World Bank in recent years, the economist point out that economic growth plays a important influence in bring down poverty, but its effect varies in different.Meanwhile, economicgrowth shows no significant role in reducing income gaps. In contrast, if the income gap is too large, it will indeed lead to frequent social conflict and accordingly directly affect economic growth. Therefore, for the eradication of poverty and reduction of the huge income gap, the economic growth is a necessary, but only economic growth is not enough (The World Bank reports, 2000, 2003 and 2004).In a research of Wang Xiaolu and Fan Gang in 2005, it was concluded that Chinas urban residents income gap, rural residents income gap as well as the income gap between urban and rural areas have continued to widen with a clear trend, but data of their study does not prove that the income gap will automatically have the tendency to shrink when per capita GDP reaches a certain level. If the income gap continues to expand, Chinas Gini coefficient of income will concisely break 0.5 (some articles have concluded t hat in fact it has exceeded 0.5), and China will become one of the worlds most unequal countries in terms of income. Generally, equality and efficiency may be alternative of each other. The increase of equality in the distribution of income will lead to a decline in economic efficiency, which in some cases exists. However, if several factors discussed below are adjusted, the economic efficiency will not be lost, and the wealth equality will continue to be improved.First, social bail is an important measure of reducing the income gap, as it can provide shelterion and assistant to residents to reduce their financial burden or increase their income when they are in the face of illness, un craft, retirement and low income, etc. But this approach is constrain by the level of economic development. As Wang and Fan point out in their report, social tribute and transfer defrayals beyond the affordability will result in heavy social burden and negatively affect economic development, inv estment and employment initiative. At present, Chinas pension insurance, basic pension insurance, unemployment insurance and minimum living security system are still running in a very low level, and only conditionally implemented in urban areas and a few rural areas. Fully implementing these social securities in all rural areas will go beyond the current financial affordability. point in cities and towns, the currentsocial security system does not play an active role in reducing the income gap. On the contrary, it has the effect of widening the income gap between urban residents. This is mainly because this social security system is still with a spacious degree of coverage limitations, particularly in the low income people and the unsettled labor force. More importantly, the population without coverage is precisely the low income population which is most in need of social protection by these insurance systems. On the other hand, high income residents benefit from these social secu rity systems significantly higher than low income residents.According to a survey of the National Economic Research Institute, the Medicare reimbursement for medical expenses in low income urban residents is much lower than that in high income urban residents. Moreover, the proportion of Medicare reimbursement for the former is lower than the latter, while the proportion of self-paid medical expense in the expenditure for the former is significantly higher than the latter. Therefore, how to ensure the current social security systems to cover urban workers not in the social security system yet as soon as possible will be a precise issue to be addressed.At the same time, social security issues of rural residents need certainly also be placed on the agenda as soon as possible. Long-term difference in discussion between urban and rural residents is not fair. However, this issue needs a longer period of time to gradually resolve due to limited financial resources. A few wealthy rural r egions have already established a unified social security system conditions. For residents of most rural areas, although the conditions of establishment of a comprehensive social security system are not mutual, some pressing issues still need to be prioritized to solve, such as the problem of farmers have no money to see a doctor. The new rural cooperative medical care system needs to be quickly spread. Experiences of some rural areas have demonstrate that cooperative medical care system is very effective to protect the low income population.On the other hand, according to international experience, financial transfer retribution is also one of the main approaches to eliminate the income gap and regional disparity. As Wang Xiaolu points out in his report in 2006, in this regard in China, in addition to financial support for agriculture, pensionand social welfare and supporting underdeveloped regions expenditures, tax return from central government to local government as well as the construction investment of key projects in the less developed regions, in fact, have been performed financial transfer payment function. The total amount of financial transfer payment is quite large. However, some studies have found that financial transfer payment did not play a significant role in reducing income disparities and regional development gaps. In Wangs opinion, this is mainly caused by the following reasons,First, the transfer payments are deprivationing of a rigorous and standardized system as well as standards of implementation. Hence the transfer payments strongly innate profile makes their role in reducing income disparities and regional development gaps greatly reduced.Second, the transfer payments do not have clear objectives and their structures are not reasonable. The proportion of the transfer payments for general investment projects and government expenditures is too high while that for alleviating poverty and decreasing the bottle neck of development of s weptback areas (such as insufficient education and other public expenditure, weak infrastructure, etc. All of those are impediments to economic development) underfunded. It makes the transfer payments difficult to play a critical role in reducing the income gap.Third, there are no strict and effective measures to oversee the usage as well as the effect of transfer payments. For example, in some poor areas, the government poverty alleviation and disaster relief funds were frequently misappropriated to cover office buildings, luxury cars and government staff bonuses. Due to lose of oversight and supervision, some of the earmarks turned into waste, and provided the chances for some rent-seeking andcorrupt government officials. Therefore, for transfer payments, the main problems now seem not to be the quantity, but rather riding horse up clear objectives and rationalization of the system to regulate the management and to strengthen supervision. These measures will reduce the income g ap. At the same time, they will not reduce economic efficiency, but improve efficiency, reduce corruption and promote development.In addition to social security system and financial transfer payments, education and infrastructure also play the similarly important role in the relationship of equality and economic efficiency. According to Wangs research, many domestic and foreign literatures have pointed out that education plays a of import role in the promotion of economic development moreover, education to the whole population helps to reduce the income gap. In 2004 the National Economic Research Institute conducted a survey on the income of mobile labor force.Across the country, 3,000 randomly selected migrator workers and self-employed persons from rural areas were classified according to the average monthly income. The results are as following for those not graduated from primary school the average monthly income is 769 kwai, for primary school graduated 815 yuan, for junior hig h school graduated 960 yuan, for high school graduated 1268 yuan, for college and above 1554 yuan. This very clearly illustrates the level of education greatly impacts on income levels. Obviously, improving education is a fundamental way to improve the employability and income levels of low income population.On one hand, currently there are hundreds of millions of rural labor force migrates into cities and towns to work. On the other hand, there are three hundred million people who are still engaged in agriculture, with wages of a small figure of the average urban per capita. They are waiting to continue to transfer to cities. But most of them are facing low level of education, lack of vocational skills and oversupply in the labor market. Meanwhile, a lot of city workers returned to the status of poverty due to layoffs and unemployment. Its very difficult for them to get reemployment because of the lack of nonrecreational skills. However, the labor market needs workers with a hig her level of education and schoolmaster skills but has to facingthe reality of supply shortage. Therefore, in order to narrowing the income gap, it is very critical to enhance the popularity of primary and secondary education and expanding vocational education.In Wangs research, he found out that Chinas per capita level of education exhibits unexpected negative impact on urban residents income gap. Surprisingly, higher level of education led to a widening income gap. This is a strong signal that Chinas education -age population is facing unequal educational opportunities, and educational opportunities for high income groups are significantly greater than the low income population. As a result, the per capita level of education increases, while the income gap has not narrowed. Instead, the income inequality is expanding. If we look at the popularization of compulsory nine years education in China, you will find in recent years, pupils dropout rate in rural areas was significantly hi gher than that in urban areas, with many dropout of school due to poverty situation in rural areas. This point can also be reflected from the allocation of education funds. Especially a few key universities get large amount of funds, while a great number of rural primary and secondary education underfunded.Compared the situation in 2003 with that in 1999, the state financial allocations to universities increased by 40.4 billion yuan (in another word, increase 85%), while state financial allocations to ordinary primary and junior high schools increased by 52.5 billion yuan (increase 79%) and 49.8 billion yuan (increase of 65%), respectively. Although the situation has improved to various degrees, but this increase did not exceed the revenue and expenditure growth rate (90% and 87%). Even so, in 2003 the national average education budget per 420,000 primary schools is only less than 30 million, of which the budget allocation in rural schools is far less than that of urban schools. Som e individual prestigious university obtained an education reinforcement up to ten billion. Excessively unbalanced distribution of educational resourcesnot only will exacerbate income inequality, but also is not encouraging for efficient allocation of education resources.Another educational problem to be solved is how to correctly handle the relationship of general education and vocational education. Although in China currently therere more than 4million people each year go intocolleges for education, but there are also more than 17 million people directly get employment without higher education. For the labor market, each year the number of demand for workers with the level of secondary education as well as specialized skills far exceeds in number of the demand for college graduates.However, the current dominant position of general secondary education is still basically to provide students into college In another word, the main objective of general secondary schools is the examina tion-oriented education and does not pay attention to skills training. The dominant ideology of the entire education system is to measure the success of education by entering the university or not. Four out of five school-age youth entered the labor market as the losers of their education. This reality has myriad negative impact on workers skills, work ethic and healthy psychology, according to Wangs report.At the same time, secondary vocational and other professional education live in a subordinate position in the education system, with very limited quantity. Compared the situation in 2003 with that in 1999, the state financial allocations to secondary vocational schools increased by 300 million yuan (an increase of 2.5%), and state financial allocations to technical schools decreased by 400 million yuan (down 16% )and vocational schools increased by 3 billion (an increase of 42% increase ). These increases are minimum compared to the fundings growth of universities and ordinary primary and secondary. Such education dislocation makes the most of new entrants to the labor market is lacking of professional skills, and their low level knowledge on employment helps rather limited. In addition, local education and vocational education systems censure for migrant workers and their children is also need to be carefully addressed.Like South Korea, China needs to focus on creating a highly qualified workforce so that they can increase innovation. South Korea adopted a policy to intensify investments in education and innovation in homework for this. This policy aided South Korea in developing a programme for long term growth as opposed to short term consumption driven growth. Meanwhile, the World Bank has just released its detailed report China 2030 Building a Modern, Harmonious, and Creative High-Income Society. In this report the World Bank believes that the export-led model that has delivered the past30-years of growth and development in China has now run its cou rse. From the World Banks perspective, China can only succeed in becoming a modern, high income country if it implements a six-step series of reforms. Not surprisingly, to increase innovation and to reduce inequality are among these six reforms as following, Accelerate the pace of innovation and have an open innovation system in which competitive pressures encourage Chinese firms to engage in product and process innovation not only through their own research and development but also by participating in global research and development networks. Essentially, the World Bank recommends that China seek to move away from being an imitator to an trailblazer in its own right.Reducing inequality by expanding opportunities and promoting social security for all by facilitating equal access to jobs, finance, quality social services, and portable social security.With regard to infrastructure construction in recent years, transportation, conference and other conditions as well as the urban lan dscape have significantly improved. But we should note the imbalance in the allocation of resources. In many areas, much more emphasis and attentions were put on the window dressing construction, highway construction and urban centers transformation than that on rural infrastructure in remote areas. On the one hand, highways are vacant or rarely used in some less developed regions. On the other hand, there are 173 towns and more than 50,000 administrative villages still un-get-at-able by road, the latter accounting for 8% of the total number of administrative villages across the whole country, according to Wangs research.For these remote areas, the weak infrastructure is an important cause leading to poverty and backwardness. In summary, Chinas development level is still at the low level. Hoping to rely on transfer payments to drastically eliminate the income gap is unrealistic. What the governments should focus on is to provide more equal opportunities and conditions in education, infrastructure and other areas. Investment in theseareas will provide human resources and infrastructure supply better group meeting the social and market needs. By doing them, it is entirely possible to improve residents economic situation.China is facing the continually widen income gap. If this critical issue could be reasonably resolved, Chinese social justice, harmony and long term economic development will be able to be ensured. . Otherwise, China may turn into a society with huge income gap, serious social conflict, power and money collusion, corruption and plunder prevailed, which will eventually result in economic stagnation. Middle-income trap will be impossible to avoid in this case. As we mentioned above, there are several factors leading to the current amplification of the income gap or blocking reduction of the income gap. These factors include that social security system is not sound, the financial transfer payment system is with flaw, educational opportunities are not fair enough, the education system is not contributing(prenominal) to the promotion of employment, weak infrastructure in rural and backward areas, lack of job opportunities as well as the irrational distribution of resources and corruption and other social inequities due to the not perfect system.To resolve these issues, its urgent to perform further reform and development. The following most crucial problems need to be addressed to solve the fairness of education, to solve the disjointed issues between educations, economic development as well as employment, to frame more job opportunities through economic development and urbanization, to correct governments action, eventually eliminates the problem of corruption and unfair distribution through administrative reform. Resolving these problems not only will not affect economic efficiency, but also will ensure the impartiality of Chinese social harmony, economic efficiency and long-term sustainable development.