Chinese economic growth has become so important for the global economy, and particularly for commodity-rich Africa, that when China sneezes, we all stand a chance of catching a cold. So it is with some foreboding that the world watches Chinese growth slowly subside, even though absolute growth remains very high by global standards.

For the past two quarters, Chinese growth has been 6.4% annualised, year-on-year. SA would hand over the hindquarters of the president’s prize buffalo to be anywhere near that. Yet these numbers are worrying not only China, but also its largest trading partner on the African continent.

China has not recorded growth this low in any quarter for the past 25 years, except one when the 2008 global financial crisis hit. Growth has steadily declined almost every quarter from 12% in 2010, to half that now.

There are a number of immediate reasons for this. The trade war with the US is obviously taking its toll. According to Neil Shearing, group chief economist for Capital Economics, policymakers in Beijing are more cognisant now than in the past of financial vulnerabilities stemming from rising debt levels. Accordingly, the scale of policy stimulus this time has been much smaller than in previous downturns.

Shearing says the Chinese economy has recently begun to find its feet. Trade data is looking better and the purchasing managers’ index has begun to rebound.

But, he says, “the key point for investors is to not lose sight of the fact that, while the near-term outlook for China appears to have improved a bit, the long-term challenges remain daunting”.

Shearing says his group has argued in the past that China has been facing two slowdowns: A cyclical one and a structural one.

“Policy stimulus can counter cyclical weakness. But China’s structural challenges require a different response, focused on addressing deeper-seated constraints that have built in its economy,” he wrote in a recent note to clients.

“As things stand, there is little evidence that policymakers have an appetite for the reforms needed to reverse China’s secular decline in productivity growth”.

Who does that sound like? South Africa too has been suffering a long, unexpected downturn, depressingly off a much lower base, that has left policy-makers at sixes and sevens.

Amazingly, this downturn was anticipated in the National Development Plan. Remember that? The National Development Plan — the same one that promised us 14% unemployment in 2020 — said “our analysis of the problem indicates that South Africa is in a low growth, middle-income trap”.

“There are four key features of this trap that serve to reinforce each other. These are: Low levels of competition for goods and services, large numbers of work seekers who cannot enter the labour market, low savings and a poor skills profile”.

These are some of the effects of the middle-income trap, but philosophically, it is based on a different idea.

The idea of the middle-income trap is simple. Countries develop first on the basis first of their low-wage competitiveness. That lifts them out of poverty, and if they play their cards right, they end up in the middle-income bracket. But from then on things start to get difficult, because wages rise and they are unable to compete with the next generation of low-wage economies. But they also struggle to compete with the cutting-edge technology of rich nations.

In 2004, an economist at the University of California Geoffrey Garrett quantified this problem with a simple, but powerful calculation. He ranked the world’s economies by GDP per person in 1980 and divided them into three groups. He then calculated the growth over the next two decades, and surprise, surprise, the middle group grew the slowest.

He seemed to have hit on something, and this rough finding was examined more extensively by a host of subsequent researchers, some of whom did confirm his thesis.

No prizes for guessing where China currently falls. No prizes either for guessing where South Africa falls. Extraordinarily, SA’s per capita GDP and China’s per capita GDP are currently about the same, $7,500 per annum. You might think Chinese people are richer on average, but in fact, this is not so. China has been growing much faster, but SA began from a higher base. Both are now running at about 14% of US GDP per capita. In other words, the average South African or Chinese person earns a bit more than a 10th of what the average American earns every year.

That is absolutely square dead in the middle of the middle-income group of countries. So could it be true that both counties have exhausted their current advantages and are struggling to find a different basis on which to compete?

If you read IMF documents, they are absolutely unequivocal that South Africa, in particular, needs “structural changes”. But what does that mean? Essentially, it means SA needs a more skilled workforce, from top to bottom, and the National Development Plan recognised that very specifically — but subsequent to the plan, the government did little about it.

In China, the idea has been around for some time. The Economist magazine recorded two years ago that Liu He, an influential economic adviser to Chinese President Xi Jinping, in 2012 published a report called “China 2030” by his Development Research Centre and the World Bank. The report showed that of 101 countries which counted as middle income in 1960, only 13 had achieved high-income status by 2008. The rest spent the intervening 50 years trapped in mediocrity or worse.

Yet, there is some doubt about whether the idea of the middle-income trap is valid at all. If you re-do Garrett’s calculations starting from a later date, then it turns out middle-income countries grew faster than the others. If you start in 1990 and cover two decades, or if you start from 1995, the middle-income countries did outperform those at the bottom and the top. What is more, several countries made it out of the middle-income group pretty comprehensively, including Malaysia, Taiwan and Singapore.

Yet, with Chinese growth declining, the idea is likely to rebound. The fact is that policymakers don’t really have a clear prognosis for middle-income countries: How exactly do you give up low-end manufacturing and embrace the “knowledge economy”, especially if it’s been your meal ticket in the past?

The fact is that moving out of the low-income group is hard, but moving out of the middle-income group is harder. DM