Yong Wang: Structural Change, Industrial Upgrading
time: 2015/11/16 views 890

Structural Change, Industrial Upgrading and Middle Income Trap

In the context of the unsurprising but disappointing decline of GDP growth, the possibility of China ensnared in middle-income trap has once again seems to be appealing to economists. Thereby, it took merely about one year for Modern Economics Series Lecture to invite Dr. Yong Wong of HKUST to present his latest preliminary work on “structural change, industrial upgrading and middle income trap”. Professor Zhao Chen of CCES hosted the lecture. Professor Qi Zhang participated in the discussion with the attendance of some PhD students.

  

Production service sector which functions mostly in the upstream might play a crucial role in economies escaping various income traps. Reviewing the progresses of economic growth in different economies, Dr. Wang observed that 1) the production service as share of GDP was higher in those middle-income-trap escaper than those trapped one; 2) the production service as share of GDP was lower in those low-income-trap escaper than those trapped ones; 3) the positive correlation between GDP per capita and production service share in total service held; 4) the pro-growth effect of production service shares was stronger at a higher development stage. “These observations are convincingly consistent with the facts obtained in China. That is, upstream production service is dominated by monopolist SOEs whereas downstream sectors are more liberalized.” Dr. Wang said.

For the purpose of identifying the effects of production service sector on economic growth, Dr. Wang established a two-sector-model which depicted an autarky economic environment. “The first sector is a traditional sector producing b denoting basic manufacturing. And the second one is a modern sector whose upstream m produces s denoting production service. Its downstream produces h denoting high-quality manufacturing. Each of the sectors bears fairly distinct technologies of course.” Dr. Wang subsequently extended his model from an autarky to an open economy with free trade.

Based on the solution of the maximizing utility problem with respect to labor, production service and consumption, Dr. Wong concluded that 1) high entry barriers to production service sectors may not hamper growth at a low-income level but can be a key obstacle to structural change and industrial upgrading at a mid-income level; 2) efficient industrial upgrading and structural change require coordination in the production service sector; 3) market may induce “premature” industrial upgrading and structural change; 4) international trade may help a country to escape the mid-income trap by inducing structural change, but further liberalization in the production service sector or increases in domestic service productivity may enlarge GDP gap between the rich and the mid-income countries.

 

 

 

By SHI Shuo

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