Escaping a Middle Income Trap

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Escaping the Middle-Income Trap
Barry Eichengreen

An eminent economist once observed that “(t)he dramatic modernization of the Asian economies ranks alongside the Renaissance and the Industrial Revolution as one of the most important developments in economic history.” The economist in question was—members of this audience will have guessed—Larry Summers. He was referring to the rapid economic growth of the late 20th and early 21st centuries and to Asian economies other than Japan. In these remarks I want to reflect not on the familiar if still contested issue of what explains this “Asian Miracle” but on whether it can continue at anything approaching the same pace (although the two issues are obviously connected). The question is whether the fast-growing economies of East Asia are now poised to slow down. It is whether they will fall prey to what is referred to as the “middle-income trap.” History helps to shed light on this question. In joint work with Donghyun Park of the Asian Development Bank and Kwanho Shin of Korea University, I have attempted to identify previous experiences with growth slowdowns in fast-growing economies since World War II.1 By fast-growing we mean economies in which GDP per capita was growing by at least 3.5 percent per annum, on a per capita basis, for an extended period (in practice we consider a seven-year

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Barry Eichengreen

window).2 Recall that the average per capita GDP growth rate in the advanced economies is approximately 1.5 percent. We therefore define growth slowdowns as a decline in the growth rate of per capita GDP between successive (nonoverlapping seven-year) periods by at least 2 percentage points (that being the difference between the fastgrowing and advanced country averages). Finally, we limit the historical sample to cases where per capita GDP is at least $10,000 in 2005 constant prices, ruling out observations that are more accurately characterized as further collapses in not yet successfully developing, still poor economies. (The reason why everything is measured in 2005 international prices is that this is the convention in the most recent incarnation of the Penn World Tables.) One can of course define growth slowdowns in different ways, requiring a faster initial growth rate, a larger deceleration, or a lower per capita income cutoff, for example. In practice the results are robust to such changes.3 We find that growth slowdowns typically occur at per capita incomes of $16,700.4 At that point, the per capita growth rate slows from 5.6 percent to 2.1 percent, or by an average of 3.5 percentage points. For purposes of comparison, note that China’s per capita GDP, in constant 2005 international (purchasing power parity) prices, was $8,500 in 2007. Extrapolating its growth rate between then and now, China will reach the threshold value of $15,100 around 2016—that is to say, five years from now. There are multiple reasons to doubt that high growth in a relatively poor developing country will continue forever. Growth in latedeveloping countries is associated with a demographic transition that yields a dividend in its early stages but a penalty later. In the late stages of the demographic transition, the fertility rate falls (the mortality rate having fallen earlier), causing the youth dependency ratio to decline. This translates into a rising share of the population in the labor force, causing per capita output to grow more rapidly than otherwise. Savings rates are higher, as suggested by the life-cycle model, financing additional investment. Upward pressure on wages and downward pressure on profits are less. This demographic dividend has been especially important in East Asia because the demographic transition

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there began earlier than in Southeast and South Asia and because it was compressed in time. David Bloom and Jeffrey Williamson argue that the demographic dividend explains up to half of the East Asian...
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