Is Asia getting caught in the ?middle income? trap? Unnoticed by many, some countries of Asia, which began their economic march with great promise, have reached points from where they are showing little signs of moving ahead. These economies include several from Southeast Asia. Malaysia, the Philippines, Thailand and Indonesia are four economies, which, in the not-too-distant past, had been labelled as vibrant Asian cubs ready to join the ranks of regional tigers like Japan, Hong Kong, South Korea, Taiwan and Singapore. The hopes, however, have remained unfulfilled.
Among the countries that were middle income in the 1960s, except for those in Western Europe and the Asian tigers mentioned above, the rest have not been able to rise to the high-income category. Around 75% of the middle-income countries of the 1960s continue to remain so. The World Bank classifies lower middle-income and upper middle-income economies at income brackets of $976-3,855 and $3,856-11,905, respectively. Movement among developing countries from the lower to the upper brackets has been noticeably low in the last few decades.
The ?middle income? trap is a situation where countries having progressed from low to middle income levels get stuck at that level. Despite having made good progress on several fronts, the problem that the trapped countries face is raising and maintaining their growth rates at levels that remain well above the growth rates of their populations. It is not enough to place the growth rate of the economy in a trajectory well above that of the population; economic growth must continue to remain in the high trajectory for a good number of years to ensure that per capita incomes continue to rise. This is what the current high-income countries have been able to do and what the middle-income countries are unable to do.
But why do countries get stuck at middle income? It is argued that it is much easier to rise from low income to middle income than from middle income to high income. In the early stages, there are several drivers that lead to high growth. Cheap labour is surely one of these. The Southeast Asian economic saga is an excellent example of how low wages coupled with aggressive policies make nations competitive in labour-intensive manufacturing. The flying geese had fanned out from Japan to Korea, Hong Kong, Taiwan and Singapore, and then further to Indonesia, Malaysia, Thailand and the Philippines for taking advantage of low wages. But unfortunately wages do not remain sticky for decades altogether. Once they begin rising, production methods need to change. Manufacturers need to climb up the value chain to higher-end operations. But that requires indigenous R&D and innovation more than anything else. This is where several economies falter. This is where South Korea and Taiwan have scored, while Malaysia and Thailand have not been able to.
Several middle-income countries, particularly those in Asia, have not paid as much importance to innovations and technological leaps as they should have. One of the major factors separating high-income economies from the rest is their technological capacity. Technological capacity includes technology infrastructure, innovative capabilities and availability of technically skilled manpower. These attributes are unevenly distributed among middle-income countries. For Southeast Asian economies like Thailand and Malaysia, who are used to assembling products designed elsewhere with abundant help of imported technology, innovation has been a relatively neglected aspect. As a result, they have been stuck in assembling operations. While their overall technological infrastructures may not be poor in terms of mobile and computer penetrations, they have lagged behind in R&D and innovation. At the same time, slow growth in technological maturity has stunted skills of the domestic workforce, whose technical capacities have remained limited.
What are the drivers of innovation? R&D most certainly, but by whom? Multinationals invest significantly in R&D and are drivers of some of the most important research in global industrial development. But this does not mean that the state does not have a role. Middle-income countries appear to miss out on the virtuous nexus between government, industry, technical institutions and universities that has been a highly successful driver of innovations in high-income countries. Indeed, Korea, Taiwan, Singapore and Japan are clear examples of this virtuous interface. Unfortunately, the other promising Asian economies have not been able to work out the network to their advantage.
As middle-income-trap experts argue, it is easier to climb from low to middle, rather than racing from middle to high. The second involves extracting much greater productivity gains from an already structured economy. Structuring from scratch is simpler than restructuring an existing framework. The latter requires being creative and constructive. That certainly is not everybody?s cup of tea, as the Asian experience shows.
The author is a visiting senior research fellow at the Institute of South Asian Studies in the National University of Singapore. These are his personal views
