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Thursday, September 19, 2013

Business 360 11: Avoiding Middle Income Trap

* This article was published twice. First in Business 360 magazine in Kathmandu, Nepal, September 2013 issue; then in the Economic Freedom Network (EFN) Asia website today.
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Many Asian economies are now among the “engine of growth” for some countries within and outside the continent due to their huge contribution to international trade as big exporters/producers  and big importers/consumers, as well as big recipients of foreign remittances.

Such opportunity has allowed many Asian economies to move from low income to middle-income levels, and for the lucky and more technologically advance ones like the four “tiger economies” of Hong Kong, Singapore, Taiwan and S. Korea, to move from middle- to high-income countries.


“Middle income” is defined as having a per capita GDP income based on purchasing power parity (PPP) of $3,000 to $20,000, or $16,000 for other definitions.

“Middle-income trap” (MIT) is the phenomenon of some rapidly growing economies stagnating at middle-income levels and failing to graduate into high-income countries. This is brought about by growth slowdown after sometime.

Avoiding the MIT is an important topic for many Asian emerging economies. This subject will be tackled during the annual Economic Freedom Network (EFN) Asia conference to be held in Bangkok this coming October 21-22, 2013. This writer will be among the participants of that big and important annual international conference.

Here is a chart showing countries in the MIT and those that were able to escape it.


Source: Aiyar, Duval, Puy, Wu and Zhang, Growth Slowdowns and the Middle Income Trap, IMF Working Paper WP/13/71, March 2013.

The Asian tiger economiesHong Kong, Singapore, Taiwan and S. Korea, plus oil-rich country Brunei, are able to escape the MIT by growing very fast for two to four decades, before they experienced growth slowdown. By that time, they have already attained the high income country (HIC) status. Below is a list of the major HICs.

Table 1. High Income Countries, GDP based on PPP per capita income, in current international dollar

Rank 
Country
2000
2012
2013
1
Qatar
54,473
102,211
105,091
2
Luxembourg
55,413
79,785
79,594
3
Singapore
32,262
60,410
61,567
4
Norway
39,092
55,009
56,663
5
Brunei Darussalam
43,320
54,389
55,111
6
Hong Kong
26,737
51,494
53,432
7
United States
35,252
49,922
51,248
8
United Arab Emirates
39,315
49,012
49,884
9
Switzerland
32,096
45,418
46,475
10
Canada
29,735
42,734
43,594
11
Australia
27,263
42,640
44,074
18
Germany
26,090
39,028
39,993
19
Taiwan
20,290
38,749
40,393
22
United Kingdom
25,241
36,941
37,502
24
Japan
25,669
36,266
37,525
25
France
26,036
35,548
35,942
27
Korea
16,503
32,272
33,580


Source: IMF, World Economic Outlook, April 2013 Database.

And here are the Asian middle-income countries (MICs) which might be pulled in the trap. In the lower batch are some low-income Asian countries aspiring to reach middle income level.

Table 2. Asian Middle and Low Income Countries, GDP based on PPP per capita income, in current international dollar

 Rank
Country
2000
2012
2013
56
Malaysia
9,088
16,922
17,776
87
Thailand
5,007
10,126
10,849
89
Timor-Leste
2,714
9,873
10,784
93
China
2,379
9,162
10,011
113
Sri Lanka
2,771
6,107
6,550
119
Mongolia
2,039
5,372
6,134
123
Indonesia
2,429
4,977
5,302
129
Philippines
2,442
4,430
4,691
131
India
1,534
3,830
4,060
133
Vietnam
1,424
3,548
3,750
138
Lao P.D.R.
1,199
3,011
3,261





139
Pakistan
1,780
2,881
2,970
144
Cambodia
908
2,402
2,579
152
Bangladesh
918
2,039
2,174
163
Myanmar
459
1,405
1,491
166
Nepal
791
1,308
1,348







Source: IMF, World Economic Outlook, April 2013 Database.

In a paper by Aiyar, Duval, et al mentioned above, they identified what are the factors that can limit or counter growth slowdown. Among the factors they tested are observance of rule of law and limited government. The study showed that

The level of Rule of Law is significant at the 1 percent level: good legal systems, contract enforcement and property rights are strongly associated with a reduced probability of a growth slowdown episode. The Size of Government and Regulation indices are also highly significant but in differences: a country that reduces government involvement in the economy and deregulates its labor, product and credit markets is less likely to slow down in the subsequent period….  
Government Size replaces the Rule of Law as the most significant institution variable in levels. It may be that at very low levels of income, the development of a basic framework of property rights and contract enforcement has a large impact in staving off slowdowns, but once this condition is more or less satisfied the capacity of the private sector to grow and innovate becomes relatively more important. The capacity of the private sector to expand may be hampered by the extent of government involvement in the economy, which therefore shows up as significant for MICs (middle income countries). Related to this, the coefficient on Regulation in differences is twice as large for MICs than for the full sample of countries, suggesting again that deregulation is a particularly important channel for guarding against slowdowns in MICs.

The paper also discussed other factors like demography, infrastructure, trade, and macroeconomic environment, as possible explanations to limit growth slowdown.

It is important therefore, for the Asian MICs, those in the upper range already like Malaysia and Thailand, to sustain growth, by limiting their government role and function to promulgating the rule of law, to protect private property rights, and stay away from heavy economic intervention and populism that can restrict business dynamism.

The same lesson can be applied by the low-income countries in Asia to allow them to move to MIC status soon. Attaining an MIC, and later a HIC status, is the single most important achievement that Asian economies must strive, and save their people from poverty and misery.
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See also:
Business 360 8: TPP, RCEP, SAARC and Free Trade, June 17, 2013 

Business 360 9: Free Trade and Economic Prosperity, July 03, 2013 

Business 360 10: Foreign Aid as Band Aid Solution, August 11, 2013

EFN Asia 25: The ASEAN Economic Community in 2015, July 23, 2013 
EFN Asia 26: Past Conferences and Avoiding the Middle Income Trap, August 03, 2013

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