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Challenges are Unavoidable

Feb 16 , 2011

It is essential for China to improve its production efficiency in order to transform its mode of development

The Fifth Plenary Session of the 17th Communist Party of China (CPC) Central Committee, held in mid-October, put forward a proposal for the 12th Five-Year Plan for national economic and social development over the next five years, once again highlighting the importance of transforming the country's economic development mode. It also called for governments at various levels to shift their economic focus to this task.

The transformation of a country's development mode becomes unavoidable when the previous development mode is no longer suitable to changing conditions. As a result, market participants are motivated to directly respond to the new market signals and strive to promote economic restructuring.

With the coming of the Lewis Turning Point, when surplus labor disappears and wages and inflation rise, the shortages in China's production resources are expected to become increasingly obvious, which will inevitably cause domestic enterprises, investors and employers to change their established production and development models in order to accommodate the changing market and price conditions.

China is likely to encounter a series of new challenges in its bid to transform its economic development mode, which, if not properly handled, will undermine sustainable growth and plunge the country into the "middle income trap".

Latin America gave us a strong lesson on this issue. Many countries in Latin America, by capitalizing on their advantages of cheap labor and raw materials, managed to absorb a large volume of foreign capital during the 20th century, greatly boosting their economic development.

However, after becoming middle-income countries, these economies quickly came to a standstill or regressed. The huge gap between the rich and poor triggered the outbreak of a large number of social problems, and even social turmoil in some countries.

Cai Fang is  director with the Institute of Population and Labor Economics under the Chinese Academy of Social Sciences. The article was first carried in the Comparative Studies magazine.

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