Middle-Income Trap:
Lessons from Emerging Asian
Economies
Professor Suthiphand Chirathivat
Chairman, Chula Global Network
Chulalongkorn University
April 2014
Messages
• Asia’s rise in global importance with new emerging
economies aiming at moving beyond the middle-income
trap (MIT)
• Asia has a wealth of experiences with
– Korea (ROK), recently, joining the club of developed countries
– Malaysia and Thailand, still in the high middle-income countries
– China and India, emerging economic powerhouses of Asia, also
in the middle-income categories
• Malaysia and Thailand, as interesting cases, on how to
graduating from the MIT.
• Challenges for policymakers can be achieved through
lessons learnt from building proper approaches to ensure
sustained and inclusive growth
1. Development Experiences of
Emerging Asian Economies
Context of Development’s Level
among Emerging Asian Economies
• Japan was the first to be a high income country
• Then Korea (ROK), Singapore, plus H.K., China and
Taipei were followed in the late 20th century
• A number of latecomers, almost all ASEAN ,
China, and India, have attained middle-income
status. The question remains, not all, but some,
rather than the others, will be able to moving
forward the high-income club, in coming years.
• If not, a developmental trap or a middle-income
trap could occur.
Figure 1: Development Stages of an Economy
A–B: Traditional society, underdevelopment, facing poverty trap.
B–C: Initial development stage, escape from poverty trap, initial development of markets. C: Middle-income level.
C–D: Continuing sustained growth to high-income level (D). C–E: Stagnation or low growth—the middle-income trap.
Note: GDP = Gross Domestic Product.
Source: Tran Van Tho (2013)
5
Figure 2: Pattern of International
Competitiveness of a Sustained Growth
Economy
Note: ICI = International Competitiveness Index.
Source: Tran Van Tho (2013)
6
Figure 3 : Comparison of GDP/Capita Growth in 8 Latin
American and 10 Asian Economies: 1900–2000
Source: Gill and Kharas (2008).
7
Emerging Asian Economies in
Transformation
• Emerging Asia, rapid change over decades, linked to outwardoriented development strategies (Kawai and Wignaraya (2013),
Athukorala (2011))
• Key shifts still occur since the latest global financial crisis:
– Further rise of East Asia by PRC, Korea and ASEAN
– Growing attempts to “Look East” by India
– Growing regional and domestic income/demand for capital and
consumption goods
– Widening and deepening of value chains and production networks
• Wealth by luck, like labor-abundant and natural resources, rather
than development, like skills, innovation, ,institutions, no longer
acceptance
• Requirement of policies to overcome the development trap or
middle-income trap.
Table 1: ASEAN in transformation
Source: Compiled from CIA World Factbook 2012
9
Table 2: ASEAN 2030
Source: ADBI (2012), ASEAN 2030 Toward a Borderless Economic Community-Draft Highlights, Tokyo: Asian
10
Development Bank Institute., p.35.
2. Tracking the Middle-Income
Economies: Determining Threshold
World Bank Income Classification
• GNI per capita as metric to measure economic progress
and thresholds for different income groups
• World Bank data for 2010: lower middle-income
(1,006-3,975 US$), upper middle-income (3,976-12,275
US$), and high income (12,276 US$ or above)
• Number of low-income countries has decreased over
time from 1950 up to 2010.
• Number of high-income countries, particularly, the late
1980s and 2010, also increased in Asia, namely, Korea,
Singapore, Chinese Hong Kong and Taipei.
Transition to Middle-Income Growth
• Number of years in lower middle-income level
before graduated to upper middle-income level
• China, PR, 17 years, from 1992 to 2009, 7.5%
• Malaysia, 27 years, from 1969 to 1998, 5.1%
• Korea, 19 years, from 1969 to 1988, 7.2%
• Taipei, China, 19 years, from 1967 to 1986, 7.0%
• Thailand, 28 years, from 1976 to 2004, 4.7%
• Rapid growth and export orientation, top
priorities of policymakers (Schuman (2009))
Figure 4 : Cross Country Comparison*
Source: IMF staff calculations.
* t=0 is defined as the year when the GDP per capita for a particular country reached 3000
U.S. dollars in PPP terms.
5 Asian Economies Graduated to HighIncome Level
• Japan, 9 years, from 1968 to 1977, 4.7%
• Hong Kong, China, 7 years, from 1976 to 1983,
5.9 %
• Singapore, 10 years, from 1978 to 1988, 5.1 %
• Taipei, China, 7 years, from 1986 to 1993, 6.9%
• Korea, Rep. of, 7 years, from 1988 to 1995, 6.5%
• They all put 10 years or less to graduate from
high middle-income level
Emerging Asian Economies in the
Middle-Income Experiences
• Threshold of 28 and 14 years for the lower
middle-income and upper middle-income traps
• Malaysia is borderline case, already 15 years in
UM until 2010
• China, PR, and Thailand, avoiding the upper
middle-income trap? China has 12 years,
Thailand, 7 years, from 2010
• India, Indonesia, Viet Nam, still has more years,
as they are in lower middle-income group
3. Lessons Learnt for Policy Concerns
from Empirical Justification
From Conceptual Framework to
Empirical Evidence
• Solow (1987) debated difficulties in detecting the
benefits of innovation in GDP statistics while we
are all talking about economic progress
• Garret (2004), effects of globalization on middleincome economies demand skills and institutions
to improve cutting-edge technological innovation
• Gil and Kharas (2007) argued MIEs are squeezed
between low-wage competitors that dominate in
mature industries and rich country innovators
that dominate in industries undergoing rapid
technological change
Table 3: Research and Development
Expenditure (% of GDP)
Malaysia
Thailand
Indonesia
Philippines
Korea
1996
0.22
0.12
…
…
2.42
1997
…
0.10
…
…
2.48
1998
0.40
…
…
2.34
1999
…
0.26
…
…
2.25
2000
0.47
0.25
0.07
…
2.30
2001
…
0.26
0.05
…
2.47
2002
0.65
0.24
…
0.15
2.40
2003
…
0.26
…
0.14
2.49
2004
0.60
0.26
…
2005
…
0.23
2006
0.64
0.25
2007
…
…
…
…
0.05
…
…
2.68
0.12
…
2.79
3.01
…
3.21
Source: World Bank 2011.
19
Table 4: Number of Patents Granted as
Distributed by Year of Patent Grant
Pre 2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
1,612,362
33,223
34,858
35,515
35,348
30,341
36,807
33,354
33,682
35,501
44,814
Taipei,China
171,046
5,371
5,431
5,298
5,938
5,118
6,361
6,128
6,339
6,642
8,238
Korea
156,800
3,538
3,786
3,944
4,428
4,352
5,908
6,295
7,548
8,762
11,671
PRC
18,946
195
289
297
403
402
661
772
1,225
1,655
2,657
Singapore
10,272
296
410
427
449
346
412
393
399
436
603
Hong Kong,
China
9,080
237
233
276
312
283
308
338
311
305
429
Malaysia
2,614
39
55
50
80
88
113
158
152
158
202
Philippines
830
12
14
22
21
18
35
20
16
23
37
Thailand
744
24
44
25
18
16
31
11
22
23
46
Indonesia
374
4
7
9
4
10
3
5
5
3
6
Viet Nam
36
0
0
0
1
2
0
0
0
2
2
Japan
Source: US Patent and Trademark Office 2011.
20
From Conceptual Framework to
Empirical Evidence (Continued)
• Kharas and Kohli (2011) defines MIT as how
countries stagnate and fail to grow to advancedcountry levels
• Ohno (2009) refers to the stage the countries fail
to upgrade human capital
• Other studies refers to growth during transition,
like; Spence (2011), difficult phase with 5,00010,000 $ income per capita; Filipe (2012), why
some countries grow faster than others?;
Eichengreen and al (2011), why fast growing
economies slowdown?
Table 5: Share of Tertiary Graduates in Engineering,
Manufacturing, and Construction (in parentheses are
shares of graduates in social sciences)
（%）
Korea
Malaysia
1999
35(21)
…
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
32(21)
32(20)
30(19)
28(19)
28(19)
29(20)
28(20)
26(20)
25(20)
24(20)
Thailand
…
…
…
…
23(22)
…
24(25)
28(31)
25(33)
…
…
…
…
…
…
…
…
…
…
…
9(42)
Philippines
Indonesia
…
…
…
…
…
10(34)
14(33)
…
…
…
…
…
…
…
…
…
…
…
…
…
…
16(38)
Note: Figures are shares in total tertiary graduates.
Source: United Nations Educational, Scientific and Cultural Organization 2011.
22
Why Countries Falling into the MIT?
• Different approaches lead to different views
• In general, broad approach focusing on overall
development strategies
• Meanwhile, framed approach looking at
analyses around symptoms of an economy
facing the MIT
• Either way, each has the merit in properly
addressing the issue
Why Countries Falling into the MIT?
(Continued)
• Kharas and Kohli (2011), most countries fall into the
MIT because they fail to adopt new growth strategies
once they reach middle-income status. MIE need to
focus more on demand-side strategies rather than
supply-side strategies. With escalating wages, MIEs
lose cost competitiveness in exports. New strategies
are then needed to develop new products, processes
and markets. The connection between income
distribution and macroeconomic growth is another
possible source of MIT, “ domestic demand may grow
slowly than potential GDP, and this either results in
stagnation, or….a growing debt burden of the middle
and lower classes.”
Why Countries Falling into the MIT?
(Continued)
• One of the major symptoms of a MIT economy is
overall slowdown in growth and productivity
• Eichengreen, et al (2011) suggest that growth
slowdowns are essentially productivity growth
slowdowns (mostly explained by a slowdown in the
rate of TFP growth, much more than by any slowdown
in physical capital accumulation)
• Agenor and Canuto (2012) characterize MIT as talent is
misallocated and innovation stagnates. Public policies
to improve access to advanced infrastructure, enhance
the protection of property rights and reform labor
markets are essential to escape or avoid the MIT.
Figure 5: Labor Productivity and Wages
in 2000
Note: In both labor productivity and wages, figures of each country are calculated as percentages of the
US levels which are shown by the 45° line.
Source: United Nations Conference on Trade and Development (UNCTAD) 2002.
26
Figure 6: Change in Korea’s
International Competitiveness Index
Source: Calculated from United Nations, various years.
27
Figure 7: Labor Productivity and Wages
in 2006
Note: In both labor productivity and wages, figures of each country are calculated as percentages of the US
levels, which are shown by the 45° line.
28
Source: United Nations Conference on Trade and Development (UNCTAD).
Figure 8: International Competiveness Index of
Two Groups of Industries in Malaysia
Source: Calculated from United Nations, Comtrad Database, various years.
29
Figure 9: International Competiveness Index of
Two Groups of Industries in Thailand
Source: Calculated from United Nations, various years.
30
4. Policy Challenges for Emerging
Asian Economies
Some Stylized Facts of Emerging Asian
Economies
• IMF working paper (2013) draw attention about
recent performance of middle-income countries
in Asia lies somewhere between the extremes of
East Asia and Latin America.
• Malaysia has clearly been more successful than
the Latin American comparators
• Thailand’s trajectory is comparable to the initial
growth path of countries like Brazil and Mexico
• China’s trajectory has so far outstripped even that
of the earlier East Asian success stories
“Growth Slowdown Risk” Map for
Seven Emerging Asian Economies
• Malaysia, the Philippines, and China would face a larger risk of
growth slowdown stemming from institutions
• Vietnam, India and Indonesia are most at risk of a slowdown arising
from a lack of transport and communication infrastructure
• On trade, India could do more to pursue regional integration, while
Thailand and the Philippines are relatively well integrated.
• Some Asian economies are less well-positioned than others and
have therefore greater room for reducing risks of a growth
slowdown further down the road
• Room for improvement on institutions, with some of them also in
need of more and better infrastructure
• On macroeconomic factors, while Asia’s recent growth has typically
benefitted from its comparatively strong capital inflows and
increased investment rates, these also come with risks
Table 6 “Growth Slowdown Risk” Map for
Asian Middle-Income Countries
Source: Shekhar Aiyar, Romain Duval, Damien Puy, Yiqun Wu, and
Longmei Zhang (2013), “Growth Slowdowns and the Middle-Income Trap” IMF Working Paper.
Recent Experiences of Malaysia and
Thailand
• Obviously, both represent well the MIEs, moving from lowto middle-income level by leveraging cheap labor and
competing on costs
• However, they differ from Korea (ROK) in the 1990s when it
became a developed country, as for now, they are much
more emerging economies under the globalization era with
a more volatile and uncertain world, while, economic
growth unevenly shared, so they face pressure from
domestic income distribution, resource allocations and
environmental degradation.
• Both face difficult choices in a competitive global market to
increase investment and productivity, move forward highvalue exports, and boost internal consumption
Recent Experiences of Malaysia and
Thailand (Continued)
• As outlined earlier, economic downturns for Malaysia and
Thailand can also be related to labor shortages, low-quality
education provision, inability to productivity improvement,
low levels of technological research and innovation, poor
environment for enabling SMEs and more.
• Rapid economic development has not matched up with
political institutions’ set-up, thus allowing politicians in
Malaysia and Thailand to use public funds to gain or
maintain political office, and enduring patronage networks
to hold back democratic development
• World Bank (2010) outlines economic incentive and
institutional regime in both countries as follows:
Figure 10: Relative Position of Association of South East Asian Nations
(ASEAN) on Economic Incentive and Institutional Regime in Malaysia and
Thailand
Source: World Bank 2010.
37
Contrasting Malaysian and Thai Case
Studies
• Malaysian colonial history and political system established after
independence, including Bumiputra and the ruling Barisan National
coalition. Thailand’s proud independence, but more tumultuous
politics, including recent democratic unrest and crises.
• Malaysia’s natural resource revenue affords a level of state
involvement in industry and investment that is not seen in Thailand,
while level of authority vested interests in Malaysia’s state
government is not matched by Thailand’s concentrated bureaucracy
and economy.
• Absolute poverty has been reduced in both cases, but not relative
poverty in certain geographical areas. Thailand, as more widespread
and more populated country, has perhaps more difficulties to deal
with this kind of problem, while its fiscal policies also suffer a more
appropriate change when needed as compared to Malaysia.
Contrasting Malaysian and Thai Case
Studies (Continued)
• Inequality in Thailand has remained high by regional and global
standards, as compared to Malaysia which is more targeted on the
bottom of 40 per cent of the income distribution by the NEP.
• Quality of education and inequalities in access to education is more
problematic in Thailand than in Malaysia. Thai education system
fails to produce enough graduates with skills needed by industry,
thus leading to skilled labor shortages and limit economic growth.
• Enduring inequalities in both Malaysia and Thailand can be related
to wider political and social context of each country, contributing to
unequal growth include the concentration of high-value economic
activity in limited geographic areas and poor enabling environments
for SMEs, which restrict their abilities to improve productivity and
move up the value chain.
Reshaping Policies to Overcome the
Middle-Income Trap
• Both countries need policies to address real concerns in
research and innovation capability, quality and
appropriateness of human resources via education and
productivity improvement, inequalities and proper access
to arising economic opportunities, for example.
• Both still suffer from better institutions dealing with
changing democracy, dynamic markets and good
governance that support a new era of middle-income
growth
• Pay greater attention to investment in infrastructure
development that is still insufficient, and to nourishing
resources to targeted sectors as well as to improving
business environment with a more sustainable and
inclusive path
Reshaping Policies to Overcome
Middle-Income Trap (Continued)
• Malaysia “Wawasan 2020” with its New Economic Policy to
be reformulated and Thailand toward a service/knowledgebased BOI’s new industry investment promotion strategies.
• Risks and danger for decline in investment and distortions
caught by the political economy for both Malaysia and
Thailand which might not be able to cope with dynamic
changes in comparative advantage structure toward higher
skill- and more innovative-intensive product contents.
• Unlike Korea (ROK) in the 1990s, today’s requirements of a
proper understanding of a new landscape of middle-income
growth, although with more global competition and
uncertainties with up- and down- movement, but is still
needed a more inclusive and sustainable way with proper
policy orientation and action
Summary
• Emerging Asia’s growth practices might get caught in the
middle while moving toward a high-income status in a
global society and knowledge landscape that is changing
very fast.
• Deeper knowledge needed to find out what could cause
overall economic slowdowns, so not to falling into the
middle-income trap, as there are various experiences and
lessons to be learnt.
• Unlike Korea (ROK), cases of Malaysia and Thailand are
interesting, however, also placing at different time and
different economic, political and social context.
• Policy formulation such as R&D, human capital, institutions,
investment, leading to a sustainable and inclusive growth.
Selected References
•
•
•
•
•
•
Eichengreen, Barry, Donghyun Park and Kwanho Shin (2011), “When Fast Growing
Economies Slow Down: International Evidence and Implications for China,” NBER
Working Paper no.16919 (March).
Chirathivat,S. and Ng. C.Y. (2009), Emerging Asia’s Growth Practices, Chula Global
Network, Chulalongkorn University
Jesus Felipe (2012), “Tracking the Middle-Income Trap: What is It, Who is in it, and
Why? Part 1,” ADBI Economics Working Paper Series No. 306, Tokyo: Asian
Development Bank Institute.
Shekhar Aiyar, Romain Duval, Damien Puy, Yiqun Wu, and Longmei Zhang (2013),
“Growth Slowdowns and the Middle-Income Trap,” IMF Working Paper.
Tran Van Tho (2013), “The Middle-Income Trap: Issues for Members of the
Association of Southeast Asian Nations,” ADBI Working Paper 421, Tokyo: Asian
Development Bank Institute.
Vijayakumari Kanapathy, Pasuk Phongpaichit, Herizal Hazri and Pornthep
Benyaapikul (2014), Middle-Income Trap: Economic Myth, Political Reality Case
Studies From Malaysia and Thailand, Kuala Lumpur: The Asia Foundation.