In an address to an international event at the Stock Exchange of Thailand in Bangkok yesterday, UNCTAD Secretary-General Supachai Panitchpakdi pointed to the dangers faced by over 50 middle income countries as they attempt to move up the development trajectory.
Although there is no generally accepted definition yet of what “middle-income trap” is, despite the attention that the phenomenon is getting, Dr. Supachai pointed to the broad body of research and analysis, especially by the Asian Development Bank (ADB), that warns of the dangers of a country becoming stuck in a "middle-income trap" in which it can no longer compete against lower cost locations in the more unskilled parts of value chains but still lacks the entrepreneurial capacity, technological know-how and human capital to move into higher value added activities further up these chains.
Recent analytical research by the ADB indicates that in 2010, there were 52 middle-income countries (38 lower middle-income and 14 upper middle-income), based on the criteria of between $2,000 and $7,250 per capita GDP for lower middle-income countries and between $7,250 and $11,750 for upper middle-income countries.
By analyzing historical income transitions, the threshold number of years for a country to be in the middle-income trap is calculated. This cut-off is the median number of years that countries spent in the lower middle-income and in the upper middle-income groups, before graduating to the next income group. These two thresholds are 28 and 14 years, respectively.
They imply that a country that becomes lower middle-income (i.e., that reaches $2,000 per capita income) has to attain an average growth rate of per capita income of at least 4.7% per annum to avoid falling into the lower middle-income trap (i.e., to reach $7,250, the upper middle-income level threshold); and that a country that becomes upper middle income (i.e., that reaches $7,250 per capita income) has to attain an average growth rate of per capita income of at least 3.5% per annum to avoid falling into the upper middle-income trap (i.e., to reach $11,750, the high-income level threshold).
The ADB analysis indicates that in 2010, 35 out of the 52 middle-income countries were in the middle-income trap -- 30 in the lower middle-income trap, i.e., they have been in this income group over 28 years; and five in the upper middle-income trap, i.e., they have been in this income group over 14 years.
Eight out of the remaining 17 middle-income countries (i.e., not in the trap in 2010) are at the risk of falling into the trap (three into the lower middle-income and five into the upper middle-income).
Of the 35 countries in the middle-income trap in 2010, 13 are in Latin America (11 in the lower middle-income trap and two in the upper middle-income trap), 11 are in the Middle East and North Africa (nine in the lower middle-income trap and two in the upper middle-income trap), 6 in Sub-Saharan Africa (all of them in the lower middle-income trap), 3 in Asia (two in the lower middle-income trap and one in the upper middle-income trap), and two in Europe (both in the lower middle-income trap).
Unable to compete with low-income, low-wage economies in manufactured exports and with advanced economies in high-skill innovations, these countries may not be able to make a timely transition from resource-driven growth, with low-cost labour and capital, to productivity-driven growth.
In this address, Dr. Supachai advised that a range of policy measures can be implemented to reverse the situation, the mix depending on the circumstances of each country. Such measures include improving infrastructure, developing human capital by encouraging technological skills and learning, building productive capacity in higher value-added activities, managing the environment and natural resources, diversification of goods and export products, strengthening of the services sector, development of domestic value chains, reorientation of corporate activity towards the local market, ensuring that foreign TNCs expand into local value chains and encouraging them to reinvest in and upgrade their operations in the country, forging greater business linkages between TNCs and local suppliers, use of outward FDI to build global brands and access markets and resources, and strengthening regional cooperation and integration, Dr. Supachai said.
__________________________________________________________________________________
Quick Links:
Tracking the Middle-Income Trap: What is It, Who is in It, and Why? (Part 1)
