The Evidence of the Middle-Income Trap
January 27, 2015
Akira Kondo
Over the past few years, more and more articles from academic journals to business periodicals about the middle-income trap were published with more extensive empirical evidence. The problem of middle-income trap study was used to be a lack of empirical evidence but this problem has started to diminish. Before the financial crisis in 2008, not many economists believed about this trap and they intended to conclude the Asian miracle was over after the Asian financial crisis in 1998, rather saying they were trapped in the middle-income society. However, the word, “middle-income trap” began to widespread within the past year or even today thanks to China’s economic slowdown.
A research question, “Can China Escape the Middle-Income Trap?” has become very popular and this became the title of the Business section of TIME magazine in the March 2013 issue. The Economist magazine responded the World Bank’s “China 2030[1]” and commented not many countries had escaped from the middle-income trap. In fact, most countries that were in the middle-income level in 1960 remained so in 2008.
The causes of the middle-income trap were diverse but the main cause probably lies within the efficiency. In order for the middle-income countries to get out of the middle-income trap, they need to increase the efficiency, which includes technological advance, education, and social stability. Solow growth model clearly depicts how an increase in the efficiency leads to a much higher steady-state equilibrium rather than injecting more capitals into the production function. Eichengreen (2013) states that economic slowdowns are less likely in countries with high level of secondary and tertiary education and where high-tech products account for a large share of exports. Hence, higher education can eliminate the risk of slowdowns by creating labor efficiency, LE. Malaysia, the Philippines, Indonesia, and Thailand have experienced the decent slowdowns after the Asian crisis while China now starts to show some weakness in its economy. All these countries have not reached the level of Korea or Japan, where their exports contain a large portion of high-tech products backed up with labor efficiency. Therefore education is an important portion in the efficiency. He also notes that the more university attendants and graduates, on average, the less the likelihood of a slowdown. While already-developed high per capita economies, like Japan, Korea, and Singapore, continue to deliver their universities in higher ranks in the top world universities, universities in middle-income countries still face lower rankings. For instance, Malaysia, which would probably be the first one to get out of the middle-income trap among neighboring countries, have been extending its educational level by accepting more English-taught programs in primary schools. Woo (2009) argues that the Malaysian government must implement root-and-branch reform in many areas in educational and research institutions, the state procurement system, the judiciary branch, and the police force to escape the middle-income trap. These reforms are all within the improvement of efficiency, which can shift the production curve upward to reach the higher steady-state equilibrium.
Other than technological advance and education, Woo and Sachs (2013) added one more issue, which might possibly cause the middle-income trap, but again this was the case of China. The environmental issues are becoming extremely controversial in China today and what they argue that its hardware failure, meaning keeping creating pollution throughout the nation, may limit its economic growth. A high old-age dependency ratio also similarly increases the likelihood of an economic slowdown as Japan currently experiences. From the social point of view according to Eichengreen, more open economies tend to diminish the risk of slowdown as well. Therefore, the causes of the middle-income trap are diverse; however, they all lie in the level of efficiency. Solutions to the middle-income trap also should lie within the efficiency, which is embedded with technological development, education, social stability, and so on. Without an increase in the efficiency, a county would less likely to be able to get out of the middle-income trap.
[1] The World Bank originally issued “China 2030” report in 2012 but reissued the updated “China 2030” report in 2013. The updated issue is listed in the reference.
A research question, “Can China Escape the Middle-Income Trap?” has become very popular and this became the title of the Business section of TIME magazine in the March 2013 issue. The Economist magazine responded the World Bank’s “China 2030[1]” and commented not many countries had escaped from the middle-income trap. In fact, most countries that were in the middle-income level in 1960 remained so in 2008.
The causes of the middle-income trap were diverse but the main cause probably lies within the efficiency. In order for the middle-income countries to get out of the middle-income trap, they need to increase the efficiency, which includes technological advance, education, and social stability. Solow growth model clearly depicts how an increase in the efficiency leads to a much higher steady-state equilibrium rather than injecting more capitals into the production function. Eichengreen (2013) states that economic slowdowns are less likely in countries with high level of secondary and tertiary education and where high-tech products account for a large share of exports. Hence, higher education can eliminate the risk of slowdowns by creating labor efficiency, LE. Malaysia, the Philippines, Indonesia, and Thailand have experienced the decent slowdowns after the Asian crisis while China now starts to show some weakness in its economy. All these countries have not reached the level of Korea or Japan, where their exports contain a large portion of high-tech products backed up with labor efficiency. Therefore education is an important portion in the efficiency. He also notes that the more university attendants and graduates, on average, the less the likelihood of a slowdown. While already-developed high per capita economies, like Japan, Korea, and Singapore, continue to deliver their universities in higher ranks in the top world universities, universities in middle-income countries still face lower rankings. For instance, Malaysia, which would probably be the first one to get out of the middle-income trap among neighboring countries, have been extending its educational level by accepting more English-taught programs in primary schools. Woo (2009) argues that the Malaysian government must implement root-and-branch reform in many areas in educational and research institutions, the state procurement system, the judiciary branch, and the police force to escape the middle-income trap. These reforms are all within the improvement of efficiency, which can shift the production curve upward to reach the higher steady-state equilibrium.
Other than technological advance and education, Woo and Sachs (2013) added one more issue, which might possibly cause the middle-income trap, but again this was the case of China. The environmental issues are becoming extremely controversial in China today and what they argue that its hardware failure, meaning keeping creating pollution throughout the nation, may limit its economic growth. A high old-age dependency ratio also similarly increases the likelihood of an economic slowdown as Japan currently experiences. From the social point of view according to Eichengreen, more open economies tend to diminish the risk of slowdown as well. Therefore, the causes of the middle-income trap are diverse; however, they all lie in the level of efficiency. Solutions to the middle-income trap also should lie within the efficiency, which is embedded with technological development, education, social stability, and so on. Without an increase in the efficiency, a county would less likely to be able to get out of the middle-income trap.
[1] The World Bank originally issued “China 2030” report in 2012 but reissued the updated “China 2030” report in 2013. The updated issue is listed in the reference.
The evidence of the middle-income trap is intact while many economists start to back up with the empirical evidence to find out the causes of the trap. Main elements of the middle-income trap all lie within the efficiency, which includes technological advance, higher education, and social stability. Many middle-income countries fail to promote these efficiencies, rather depending on higher capital investment. China, for instance, has gone through its rapid economic growth by promoting high capital investment, exports, and one-child policy. A high investment ratio may increase the likelihood of a slowdown of its economy while its export contains less high-tech products. One-child policy has created a high-old dependency, which may increase the likelihood of the economic slowdown as well. If these factors begin to erode its economic growth, China’s possible middle-income trap may come sooner than reaching a higher per capita status. This article just describes the general ideas about the middle-income trap and more literature reviews are required to set up meaningful research questions. The middle-income trap universe is still narrow and there are more evidences to show up as China's economy slows.
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References
Asian Development Bank (2011), “Asia 2050: Realizing the Asian Century,” pp. 1-145.
DeLong, Bradford (1988), “Have Productivity Levels Converged? Productivity Growth, Convergence, and Welfare in the Very Long Run,” the University of California at Berkeley, pp. 1-39.
Eichengreen, Barry, Donghyun Park, and Kwanho Shin (2013), “Growth Slowdowns Redux: New Evidence on the Middle-Income Trap,” NBER Working Paper Series, Working Paper 18673, pp. 1-54.
Mankiw, Gregory, David Romer, and David Weil (1992), “A Contribution to the Empirics of Economic Growth,” the Quarterly Journal of Economics, Vol. 107, No. 2, pp. 407-437.
Sachs, Jeffrey, and John Williamson (1985), “External Debt and Macroeconomic Performance in Latin America and East Asia,” Brookings Papers on Economic Activity, Vol. 1985, No. 2, pp. 523-573.
Woo, Wing (2009), “Getting Malaysia Out of the Middle-Income Trap,” the University of California, Davis, pp. 1-14.
Woo, Wing, Ming Lu, Jeffrey Sachs, and Zhao Chen (2013), “A New Economic Growth Engine for China: Escaping the Middle-Income Trap by Not Doing More of the Same,” Imperial College Press.
The World Bank (2013), “China 2030: Building a Modern, Harmonious, and Creative Society,” pp. 1-473.
