Morningstar Magazine - February/March 2018 - 38

Strategies

China and the Middle-Income Trap
The odds of avoiding it aren't great...and
may be getting worse.

42

Tax Wise

China
Other Countries
RESEARCH

Tackling the New Tax Law in 2018

Dan Rohr

Quant U

2026
2000
This article is the third in a series on China's
next 10 years.

44

Investing Over the Lifecycle, Part III

47

Mutual Funds: Analyzing the
Analyst Rating

2016

Investment Research

Best Ideas

51

52

53

Manager: Solid Gold
Passive: A Compelling Alternative to Cash
Equity: Cracking High Costs

Support Ratio

Hard Climb

China is far from the first country to endure
slowing economic growth after its ascent
from agrarian poverty to middle-income status.
In fact, middle-income countries are
disproportionately likely to experience large
0 slowdowns. As10,000
20,000 ascend to
30,000
a result, few ultimately
GDP
Per Capita,status.
PPP (Current
International,
high-income
Economists
coined this$)
phenomenon the "middle income trap." This article
continues our series on China's next 10 years with
a look at the country's odds of avoiding the trap.

The climb from middle-income status to high 3.0
income has never been easy. Among the 96
countries categorized as low or middle income in
1960, only 12 non-OPEC countries graduated 2.5
to high-income status ( EXHIB IT 1 ). This is the leap
China aims to make, which would involve more
2.0
than doubling GDP per capita from today's level.
Worryingly for China, history suggests that
1.5
this climb may be getting harder. Of the 12 nonoil
Bubble size represents population.
graduations since 1960, only four have
1.0
40,000
50,000Ireland, Spain, and
occurred
since 1990: Taiwan,
South Korea.
Meanwhile, low-income countries are finding it
easier to ascend to middle income. Of the

EXHIBIT 1

Trapped Middle-income countries tend to have low graduation rates to
high-income status.
2014

GDP Per Capita (Based on Purchasing Power Parity) as % United States, 1960 versus 2014
LOW

Ireland MIDDLE

100%

HIGH
U.S.

HIGH

Taiwan

S. Korea

Of the 12 transitions to high income
only four have occured since 1990.

China

0%
1960

20

40

60

80

LOW

Bubble size represents population

80
60

since 1960,
MIDDLE

6.4
24.0

Spain

U.S.

40
20
0

100

Source: Penn World Table, Morningstar.
Low income is defined as GDP per capita (PPP) of less than 20% that of the United States, middle income as 20% to 55%, and high income as greater than 55%.

38

Morningstar February/March 2018

Table of Contents for the Digital Edition of Morningstar Magazine - February/March 2018

Contents
Morningstar Magazine - February/March 2018 - Cover1
Morningstar Magazine - February/March 2018 - Cover2
Morningstar Magazine - February/March 2018 - 1
Morningstar Magazine - February/March 2018 - 2
Morningstar Magazine - February/March 2018 - Contents
Morningstar Magazine - February/March 2018 - 4
Morningstar Magazine - February/March 2018 - 5
Morningstar Magazine - February/March 2018 - 6
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Morningstar Magazine - February/March 2018 - Cover3
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