Peter Drysdale — The problems for Asia’s growth

The middle income trap.

… there’s a whole literature out there that warns that middle income countries like China and a number of other emerging Asian economies, such as Malaysia and Thailand, face a number of major hurdles in the transition from middle to higher incomes, and others, like India and Indonesia, have still to break through to upper middle income. Over the past half century or so, many countries have committed to promoting economic development and catching up to the income and productivity levels achieved in advanced industrial economies. These emerging economies were the great hope for global growth. But the remarkable fact is that only 13 of 101 countries across the world which have made it to middle income status have been able to complete the transition from lower or middle income levels to high income levels since 1960, and catch up to the technological frontier. This is the so-called ‘middle income trap’.

David Dollar points to the strong empirical relationship between the quality of institutions (as measured by the World Governance Indicators’ Rule of Law index) and economic growth. Yet institutional quality does not change very much from year to year or sometimes even from decade to decade, so it is hard to explain why countries have periods of high growth followed by low growth (or vice versa).

The resolution of the puzzle, says Dollar, maybe that institutions which are well-suited to one phase of economic development may be ill-suited to another.…

East Asia Forum
The problems for Asia’s growth
Peter Drysdale