It's sometimes said that the challenge China faces in the coming decade is avoiding the "middle-income trap" -- a stagnation in per capita income growth that many countries have hit after reaching China's level of development. But the problem is more complex. China must avoid two pitfalls: the "Brazil trap" of excessive reliance on state-led investment, and the "Japan trap" of an aging population and excessive reliance on debt.
Analogies from history are never perfect, but parallels are often illuminating. From 1950 to 1979, Brazil enjoyed a long economic boom during which gross domestic product growth averaged 8% a year, and per capita income grew at 5% a year. Much of the growth came from investments in infrastructure and heavy industry by state-owned companies. During the second half of that period, Brazil was ruled by a military government that relied heavily on economic growth for legitimacy. Does this sound familiar?