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Symposium 2014

Escaping the Middle Income Trap

The Challenge

The middle-income trap is the situation in which a country’s growth slows after reaching middle income levels. The transition to high-income levels then seemingly becomes unattainable. According to World Bank estimates, only 13 of 101 middle-income economies in 1960 had become high-income economies by 2008. This is an increasingly relevant phenomenon. The share of world population living in middle-income countries has risen dramatically over the last decades resulting from the rapid growth in Asian economies – particularly China and India. Empirical work suggests that the growth rate of per capita GDP typically slows substantially at incomes of between US$10,000 and US$15,000. Growth slowdowns can often be attributed to the disappearance of factors that generate high growth during an initial phase of rapid development.

Growth slowdowns coincide with the point where the pool of transferrable unskilled labor is exhausted so that productivity growth due to shifting additional workers to industry from agriculture and from technology catch-up is diminishing. International competitiveness is eroded and output and growth slow. The first stage of growth from low to middle income is input driven based on abundant labor supply and high rates of investment. Sustained growth toward the high-income level must be increasingly characterized by a relative abundance of human capital and availability of technological and managerial resources. Middle-income countries are squeezed between the low-wage poor-country competitors that dominate in mature industries and the rich-country innovators that dominate in industries undergoing rapid technological change.

What are the conditions that allow a dynamic transformation of comparative advantage to avoid the middle-income trap? How to move from resource-driven growth to growth based on high productivity and innovation? Can building a high-quality education system be sufficient without more responsive and modern institutions to support competition and innovation? What can we learn from the experience of Asian economies that successfully managed the transition, such as Korea, Taiwan, Hong Kong or Singapore? What is the role of social capital (both amongst the population of a country and between population and government) in the transition process from middle to high income? Research suggests that ethnic heterogeneity and income inequality can cause a lack of social capital. Is strengthening democracy in the political system necessary to avoid the middle-income trap? As sustained high growth in today’s middle-income countries implies a massive increase in the ranks of the relatively wealthy, is there a fundamental multidimensional “adding up” problem in which what was possible for a “few” will not be possible for the “many”?

    Proposals

    Proposal
    Symposium 2014

    Escaping the Middle Income Trap

    1. We always hear people say ‘Middle income trap’. What is it actually? The middle income trap is a theorized economic development situation, where a country which attains a certain income will ge ...

    1. We always hear people say ‘Middle income trap’. What is it actually? The middle income trap is a theorized economic development situation, where a country which attains a certain income will get stuck at that level. A developing nation gets “trapped” when it reaches a certain, relatively comfortable level of income but can’t seem to take that next big jump into the a income nation. Escaping the “trap” requires an entire overhaul of the economic growth model most often used by emerging economies. The concept behind the “middle-income trap” is quite simple: It’s easier to rise from a low-income

    Polity, Academia, Business, Civil Society
    Proposal
    Symposium 2014

    Escaping the Middle Income Trap: Turkey’s Strategy

    Education and structural reforms provide the pathway for escaping the middle income trap. Many emerging market economies grew rapidly during the first decade of this century, advancing from low-income ...

    Education and structural reforms provide the pathway for escaping the middle income trap. Many emerging market economies grew rapidly during the first decade of this century, advancing from low-income to middle-income countries. The transition that is much harder to achieve is to move from middle-income to high-income status. According to the World Bank, since the 1960s just 13 out of 101 middle-income economies[1] managed to make this important transition, accounting for slightly over 4% of the world population. The challenge of escaping the middle-income trap seems greater post global financial crisis considering the slowdown in global economic growth and relatively

    Polity, Academia, Business, Civil Society

    Background Paper

    Background Paper
    Symposium 2014

    The Middle‐Income Trap

    The Middle‐Income Trap is the phenomenon of hitherto rapidly growing economies stagnating at middle‐income levels and failing to graduate into the ranks of high‐income countries. Only a small nu ...

    The Middle‐Income Trap is the phenomenon of hitherto rapidly growing economies stagnating at middle‐income levels and failing to graduate into the ranks of high‐income countries. Only a small number of countries (13, according to the definitions and calculations of the World Bank, see figure 1) have managed to move from middle‐income to high‐income status between 1960 and 2008.

    Polity, Academia, Business, Civil Society

    Virtual Library

    Virtual Library File
    Symposium 2014

    Growth Slowdowns Redux: New Evidence on the Middle-Income Trap

    We analyze the incidence and correlates of growth slowdowns in fast-growing middle-income countries, extending the analysis of an earlier paper (Eichengreen, Park and Shin 2012). We continue to find d ...

    We analyze the incidence and correlates of growth slowdowns in fast-growing middle-income countries, extending the analysis of an earlier paper (Eichengreen, Park and Shin 2012). We continue to find dispersion in the per capita income at which slowdowns occur. But in contrast to our earlier analysis which pointed to the existence of a single mode at which slowdowns occur in the neighborhood of $15,000-$16,000 2005 purchasing power parity dollars, new data point to two modes, one in the $10,000-$11,000 range and another at $15,000-$16,0000. A number of countries appear to have experienced two slowdowns, consistent with the existence of multiple modes. We conclude that high growth in middle-income countries may decelerate in steps rather than at a single point in time. This implies that a larger group of countries is at risk of a growth slowdown and that middle-income countries may find themselves slowing down at lower income levels than implied by our earlier estimates. We also find that slowdowns are less likely in countries where the population has a relatively high level of secondary and tertiary education and where high-technology products account for a relatively large share of exports, consistent with our earlier emphasis of the importance of moving up the technology ladder in order to avoid the middle-income trap.

    Virtual Library File
    Symposium 2014

    Growth Slowdowns and the Middle-Income Trap

    The “middle-income trap” is the phenomenon of hitherto rapidly growing economies stagnating at middle-income levels and failing to graduate into the ranks of high-income countries. In this study w ...

    The “middle-income trap” is the phenomenon of hitherto rapidly growing economies stagnating at middle-income levels and failing to graduate into the ranks of high-income countries. In this study we examine the middle-income trap as a special case of growth slowdowns, which are identified as large sudden and sustained deviations from the growth path predicted by a basic conditional convergence framework. We then examine their determinants by means of probit regressions, looking into the role of institutions, demography, infrastructure, the macroeconomic environment, output structure and trade structure. Two variants of Bayesian Model Averaging are used as robustness checks. The results—including some that indeed speak to the special status of middle-income countries— are then used to derive policy implications, with a particular focus on Asian economies.

    Virtual Library File
    Symposium 2014

    The Middle-Income Trap: Issues for Members of the Association of Southeast Asian Nations

    The paper compares the situation of four South East Asian middle-income countries with the experience of Korea which successfully transitioned from middle to high-income status using a unique analytic ...

    The paper compares the situation of four South East Asian middle-income countries with the experience of Korea which successfully transitioned from middle to high-income status using a unique analytical framework based on the factors that determine each development stage of an economy. It stresses the importance of policies to strengthen R&D capabilities and improve the quality of human resources but also the institutional environment, in order to achieve a change in the countries’ comparative advantage towards more skill-intensive production.