Financial crisis and middle-income trap

YAO Zhizhong1

(1.Institute of World Economics and Politics, Chinese Academy of Social Sciences.)

【Abstract】The middle-income trap is caused by mid-income economies’ economic instability, which results from frequent financial crises in those countries triggered by structural problems as a result of the economic and social transformation in the countries. The key to avoiding the middle-income trap is to prevent financial crises, and to that end, those countries need to establish a strong political framework to support reform and prudential regulation. They should devise policies to push fiscal and financial reform in a timely and prudential manner. Technically, they should resort to prudential macroeconomic regulation to maintain financial stability and establish mechanism to effectively handle financial crises and accelerate post-crisis recovery. As a middle-income economy, China is also facing the risk of financial crisis and the key to guarding against future financial crisis is to prevent unsound financial liberalization and mismanagement of corporate debts.

【Keywords】 financial crisis; middle-income trap ; middle-income economy; macro-prudential regulation; financial liberalization;


Download this article


    [1]. [1] Yao, Z. International Economic Review (国际经济评论), (6): 75–88 (2014). [^Back]

    [2]. [1] Yao, Z. International Economic Review (国际经济评论), (6): 75–88 (2014). [^Back]

    [3]. [1] Macro stability can also improve the long-term growth rate through reducing unemployment and increasing human capital accumulation, etc., but this mechanism is temporarily left out here. [^Back]

    [4]. [1] Please refer to Bernanke, Ben S., “Nonmonetary Effect of the Financial Crisis in the Propagation of the Great Depression”, The American Economic Review, Vol. 73 (June.), 1983, pp. 257–276. [^Back]

    [5]. [2] Please refer to Cerra, Valerie & Sweta Chaman Saxena, “Growth Dynamics: The Myth of Economic Recovery”, The American Economic Review, Vol. 98, No. 1 (Mar.), 2008, pp. 439–457. [^Back]

    [6]. [3] Please refer to Carmen M. Reinhart & Kenneth S. Rogoff, “Recovery from Financial Crises: Evidence from 100Episodes”, American Economic Review, American Economic Association, vol. 104 (5), 2014, pages 50–55, May. [^Back]

    [7]. [1] Reinhart & Rogoff. This Time is Different: Eight Centuries of Financial Folly, Qi, X., Liu, X. & Liu, L. (trans) China Machine Press, (2012). [^Back]

    [8]. [2] Reinhart, Carmen M., “This Time Is Different Chartbook: Country Histories on Debt, Default, and financial Crises”, No. w15815. National Bureau of Economic Research, 2010. [^Back]

    [9]. [1] Please refer to Kaminsky, Graciela L., and Carmen M. Reinhart, “The Twin Crisis: The Causes of Banking and Balance-of-Payments Problems”, The American Economic Review, Vol. 89(3), 1999, pp. 473–500. [^Back]

    [10]. [1] Niall Ferguson. The Ascent of Money, Liu, C. (trans.) China Citic Press, (2012). [^Back]

This Article


CN: 11-3799/F

Vol , No. 06, Pages 33-42+5

November 2015


Article Outline


  • The source of the middle-income trap is economic instability
  • The major source of economic instability of middle-income economies is financial crisis
  • Why financial crisis frequently breaks out in middle-income economies
  • Preventing financial crisis is the key to avoiding the middle-income trap
  • Whether financial crisis will emerge in China recently
  • Footnote