For a long time, developed economies have enjoyed high levels of income, consumption and welfare while many developing economies have lagged behind in this respect. However, there’s increasing evidence that economic stagnation has become the norm for the West, and developed economies may be falling into a “high-income trap.” 

The high-income trap refers to a phenomenon in which a country enters a stage characterized by high incomes, and its economy stops growing. As a result, the nation will become uncompetitive in terms of wages compared to low- and middle-income countries and unable to make breakthroughs in technological progress, making it difficult to sustain high incomes.

The high-income trap is directly related to economic stagnation. At present, stagnation is quite common among developed economies in the West and tends to be normalized, which is manifested in the following aspects.
 

First, the manufacturing industry has seriously shrunk, and there is little or no investment opportunity in the field. Second, service and financial sectors account for an extremely high proportion, providing little support for economic growth. Third, population aging becomes more problematic. Fourth, economic disparities become increasingly pronounced, posing an obstacle to further development. Fifth, the government is heavily indebted. Sixth, all regulatory measures have failed.
 

There are political and economic reasons for stagnation in developed economies.
 

First, Western economic system is based on private ownership and hired labor. A basic contradiction of such a system is the contradiction between private ownership of the means of production and the socialization of production. Inevitably, the tiny minority of capitalists will possess more and more wealth while the great majority is deprived of interests. As a result, the majority will descend into low- and middle-income class from the high-income class.
 

Second, Western political systems are multiparty and conform to the principle of checks and balances. In the legislative branch, different political parties argue fiercely for the interests of the groups they represent, resulting in obstructionism and political attacks. This makes it hard to reach consensus on major economic and social problems, leading to inefficiency in decision making.
 

As a result, as the executive branch, the government lacks the capacity to rapidly respond to major economic and social problems. Under the circumstances, the economy continues to stagnate. With no social wealth being created, incomes will continue to decrease.
 

Last, those developed economies believe in neoliberalism, which holds the view that the best government is the one that governs least and exaggerates the role of market. This ideology regards markets as the only way for poor nations to achieve prosperity while neglecting the reality of highly socialized production and global problems.
 

Influenced by neoliberal thought, Western economies have weakened the functions of the government while advocating privatization and marketization, bringing into being a market economy model of “large market, small government.”
 

However, such a model lacks control over the behavior of private capital. It is therefore not able to regulate macroeconomic fluctuation and imbalance, nor can it resolve conflicts between private and social interests. Consequently, economic and social contradictions have been intensified with frequent outbreak of financial and debt crisis. Stagnation has become normalized in the process.
 

With developed economies, material prosperity, high incomes and mature welfare states, Western nations have been boasting a sense of superiority in terms of their values and economic and political systems and promoting their systems to other countries. However, their pride is undercut by the fact that they may fall into the high-income trap.
 

For China, it is of practical significance to further research the reason and effect of the high-income trap, which can help build confidence in the path, theory and system of socialism with Chinese characteristics and enhance the global influence of the Chinese road of modernization.

 

He Zili is a professor from the School of Economics at Nankai University.