Analysis
Global growth has benefited greatly over the last 20 years from the opening of world trade and related surge in development across populous but poor countries, particularly China, India and other parts of Asia, such as Indonesia, but also in countries such as Turkey.
Developing countries typically can enjoy a period of very rapid economic development once they begin to sustain catch-up gains in productivity versus more advanced economies. The first step rests on a country's ability to invest in building a capital base from which to raise the workforce's growth potential. Catch-up growth is then the process by which newly industrialising countries can achieve a decade or more of extremely high growth simply by copying businesses and techniques that are already well known in other countries -- for example, food processing, textiles, chemicals, electronics, auto parts, information and communication technologies (ICT) and/or call centres:
- Catch-up success is not guaranteed -- it still requires financial and business acumen, market development and a workforce that will adapt to change and upskill quickly.
- Yet given these abilities, modern industries can be built up very quickly, especially in low-skilled manufacturing and services.
Burgeoning foreign direct investment (FDI) flows over the last 20-30 years have also helped speed up the catch-up process and linkages across the international economy.
Asian experience
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Asia has seen the most obvious examples of rapid catch-up success
The most obvious examples of rapid catch-up success have been in Asia, where countries have quickly transformed firstly into hubs for low-skilled export-oriented industries such as textiles and light manufacturing and then, by leveraging this international experience, into economic powerhouses close to the leading edge of technological advancement. The Japanese and then South Korean economies in the 1950-90 period provided examples of how catch-up worked, through (see INTERNATIONAL: Emerging markets reshape global economy - May 6, 2010):
- high savings and investment rates;
- efforts to raise workforce productivity and skills;
- development of a world-class industrial base focused on new growth products; and
- export access in international markets.
Taiwan also followed this path. Later, Malaysia and Thailand moved into more advanced industries, while the Philippines and Indonesia developed manufacturing interests -- though these countries have typically struggled to emulate the success of North-east Asia. These transitions have faced setbacks, such as the Asian crisis of 1997-98, which was followed by a slow growth period until around 2003.
In contrast, China did not suffer a serious slowdown during the Asian crisis and its growth rate actually picked up (to an average of about 10%) over the last decade. Nevertheless, the middle-income trap is a widely quoted reason for a possible slowing in China's trend growth. The argument is that the most accessible parts of the country have exhausted the ready opportunities for growth from infrastructure investment, export development and catch-up gains in labour productivity, while the still poor, less accessible areas will be hard to develop.
Forecasting tool?
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Examples of middle-income trap in the past can be a poor guide to forecasting future developments
The middle-income trap theory is largely based on historic observations over the last century:
- Many developing economies appear to have suffered a growth slowdown on reaching middle-income status. Some assessments suggest this occurs at levels of GDP per capita around 7,000 dollars -- in constant 2000 dollars, and purchasing power parity (PPP) terms.
- It has been suggested that the trap is due to rising wages and prices causing loss of competitiveness in basic industries -- developing countries need to make a transition to other sectors and business models to maintain growth.
However, economic history may not be a reliable guide given the now rapid spread of technology, skills and communications. Moreover, there is evidence of countries that have made a swift and full transition to advanced-economy status, and those that spent many years in the middle-income range.
There are varying, rather than systematic, reasons why some countries become ' trapped'. The most obvious observation is that the most successful countries seem to have few natural resources and are open, manufacturing exporters rather than commodity producers:
- The most internationally connected economies -- Hong Kong, Singapore, Taiwan and South Korea -- have made rapid transitions to advanced country levels of GDP per capita, though they have all seen bouts of volatility, especially during periods of regional or global downturns.
- The countries that have appeared most 'trapped' in middle-income status are largely in Latin American, particularly Argentina (where GDP per capita in current market prices has stagnated in the 5,000-10,000 dollars range for some 30 years), though Brazil, Mexico and Chile have also seen long periods of slow growth between bursts of rapid development.
- Yet the 'trap' has also caught some East Europeans (such as Romania) and Asian economies (such as Malaysia). In the Middle East, many countries have struggled to take the first step out of poverty towards middle-income status.
Outlook
Two major factors will boost the overall contribution of developing countries to global growth:
- There are a number of populous, newly emerging economies that have picked up momentum and weight in world GDP, for example, Nigeria (see INTERNATIONAL: Mid-sized powers drive risky growth - March 23, 2011)
- Even if China's growth slows to around 6-7%, its contribution to world growth will rise because its economy has about doubled its weight in world GDP from 2007. The same dynamics are also true for other large emerging-market economies.
Therefore, the developing world will probably continue to generate high rates of global GDP growth (in the 4-5% range) for the next 10-20 years at least -- unless it is faces serious resource constraints and escalating commodity inflation, with the middle-income trap probably a much less important risk (see INTERNATIONAL: Long-term growth hinges on resources - August 12, 2011).
