Mon, 21 Jun 2021 Today's Paper

Escaping from middle-income trap

21 June 2017 01:41 am - 0     - {{hitsCtrl.values.hits}}

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Lack of economic growth for most part following confused state of policies and patch work national endeavours lead to nowhere except stagnation and a Failed State. 

Instability breeds instability. The chronic disease of  lacking material comfort leads to stagnant socio-economic development over time. This can happen to any country. Creeping dissatisfaction and dissent can escalate to violence if there is no hope of steady development in sight. 

At the very least there is evidence in history that lack of economic growth for most part, following a confused state of policies and patch work national endeavours lead, to nowhere except stagnation and a Failed State. 

What is most urgent in such circumstances is to focus on a steady development and growth process. This discussion is to focus on the steady development and growth process aiming to escape a possible, middle-income trap on the path to progress.   

What is urgently required now is planned development together with suitable strategy replacing the patch-work pattern at the highest level of Government.  

It is well recognised that economic development is a continuum that brings about progress in a country’s economy, usually based on an agrarian (subsistence) level or status, to a high-income status, based on a diversified industrial and service sector, along with a modernised, self-sustained and productive agriculture sector.   

The process involved here is not a ‘dichotomy’ or one with discreet jumps as such, though there can be no smooth line of progression. Hence development can best be described as continuum, even though the pace of change, as measured by the growth of the GDP, can be observed as slow or rapid by economists, over a period.   

Hence development economists, for generations, have shown unending quest for studying the process of economic development and growth of various countries for the benefit of all. 

The economists do so to identify the ‘critical mass, of factors, variables, systems and conditions’ that have worked well and effectively, to render an economy’s deliverables of goods and services, plus opportunities, for human needs and wants for material comforts, safety and wellness.  

Therefore, to study and understand the factors and the processes and the related problems and issues are of immense importance to business community and the policy makers, as well as the general public.   

The avowed objective in development is to transform the economy and society from the low-income level to the sustainable high-income level with equity.   

During the expected transformation of the traditional Small Farm Sector and its non-farm activities, deploying a large surplus labour accumulated over time, (Mostly underemployed) would experience a transfer of labour from it to the expanding industrial and service oriented urban sectors in the economy, in response to labour demand and increased employment opportunities.   

This transfer process would also involve a change in settlement pattern and demand for new housing areas, houses, utilities and road and transport, together with other social infrastructure (schools, hospitals, markets).   

As this transformation takes place, the structure of the economy’s output (GDP) and employment tends to change both in character and content, quantitatively and qualitatively.   

The outcome would be that all economic sectors, including agriculture, becoming more productive and innovative (dynamic) and would be capable of generating self-sustained growth and development, ensuring rise in incomes, and consumptions for the people- thus attaining what Rostow called high performing ‘self sustaining growth’ and what this writer would like to call a State of Human Dignity and Meaningful Life.  

As pointed out recently by Kharas, (2010) this development process bring out a rising middle-class, not living off the land primarily but on knowledge, innovation and enterprise (knowledge workers) who pioneer new products and systems and technology of immense potential for trade and industry.   
The Economist calls them ‘geeks’, smart brainy people who created the Silicon Valley in the San Francisco Bay, in the US and the same journal however adds a cautionary note to say ‘the accumulation so much wealth’ (Estimated to be worth over US US $3 trillion of the tech companies there on annual basis) in the US so fast comes with risks’ reminding the dot.com crash in 2000. Prophetic comment it is indeed, in the boom and bust of the market place economics.   
Our focus here is more on a fundamental theme of early development. How does a country experience the change when moving from low-income level to high-income level and what really is involved and are there any pitfalls that the country can slip into?  

These are the questions that we in Sri Lanka should know and be familiar with, if we are to progress from where we stand now: Beginning of a middle-income stretch to the long and arduous road to the high-income status economy, where our people can enjoy good living conditions with quality lifestyle and dignity, maintaining a moral society.  

The Asian Development Bank in a recent study provides a classifications of countries according to four income levels :   

Being at (d) in this classification, one may even call this a divine class, with of course anticipated dignity in behaviour and manners and far above the ‘Ugly American’ portrayal.   

This classification system though appears fine but for analytical purposes, in reality there can be some critical issues for decision makers. Particularly when moving from low-income level (less than US $ 2000 level) to higher income level of US $11,750 in per capita GDP.   

The path of progression, implicit here for a country to reach high-income status is indeed a long stretch, measuring in income rise to US $9,750, over time (That is from  US $2,000 to  US $11,750), this is no doubt, an arduous’ long walk’, most probably requiring high efforts and commitment, organised and planned work and indeed sustained dedication to the cause, exemplifying, perhaps what the late Chinese leader Mao’ expressed as the great feat in changing to then poverty stricken China to what it is today: An economic juggernaut in Asia. It expresses a powerful message that, nothing is impossible for a collective will of a nation.   

 

Moving from low-income level to high-income level, a country may run in to a risk of getting entrapped in the middle-income level, what is now recognised as the middle -income trap, meaning that the country would stagnate in middle-income level for many years.  

 

But as our title of this discussion indicates, moving from low-income level to high-income level, a country may run in to a risk of getting entrapped in the middle-income level, which is a long stretch of income rise to get by and many a country may get caught in what is now recognised as the middle-income trap, meaning that the country would stagnate in middle-income level for many years, may be even many decades with little or no improvements in incomes and living standard of the people.  

Jumping (escaping) from the earlier low-income level to a little higher middle-income level may bring a sense of complacency to people and their government declaring, that they are progressing and the pace they are moving on is all right after all, compared to days of their grandparents.   

But the fact remains that that the rate of movement (economic growth) is too slow in Sri Lanka, and while other countries, our trade partners are moving faster, even under less favourable and less stable conditions, while we are limping.   

Domestic power game in politics and confusion that it brings about to business community and lack of steady state of affairs in a country, can bring about many distortions and disruptions to the country even in peace times to be entrapped as a country in the middle-income level for many years, disappointing people and inducing them to constantly dissent and disrupt politically and socially, reflecting a setting that lacks popular support or good will among people or the question of leadership in government.   

Whatever may be the reasons, for getting entrapped in the middle-income trap (MIT) for a country and remain there year after year is not economic development, but stagnation.   Though there is no accepted definition of what constitute a middle-income trap, except to say that staying in the wide middle-income range (US $2000 to a level less than  US $7250, GDP per capita) a country is said to be trapped in middle-income, (MIT),going on for decades.  

A study by the ADB research group in 2012, covering the experience of 124 countries, from 1950 t0 2010, has identified the extent of achievement made by various countries, over the time. The distribution is as follows: 40 countries were in low-income level, 38 countries were in low middle-income level (US $2000 and less US $7,250) 14 countries as upper middle-income level (US $ 7250 to less  US $11,750) and 32 as high-income level countries (US $11,750 and above).  

The study then identified the length of time that countries had remained in low middle-income, add up to 28 years or more to reach high-income and those in upper middle-income group (US $7500 and above) 14 years to reach high-income status.   

Given these two thresholds, the researchers were able to calculate the average income per capita growth required for a country to ’avoid’ the MIT. Those countries in lower middle-income level, must have at least 4.7 percent per capita growth annual on sustainable level for 28 years to avoid MIT and those in upper middle-income level must sustain an average growth rate of at least 3.5 per cent annually for 14 year to avoid the upper MIT.   

Now then, If and when Sri Lanka can reach the upper middle-income level of  US $7250, in few years and if it is possible to maintain an average growth of 7 percent and little above it, annually, then it would be possible to avoid the upper MIT and possibly become high-income country in South Asia within a decade.   

In fact the ADB has identified in 2012, three (3) Asian countries, hopeful of escaping the trap soon and this group include Malaysia and Sri Lanka.   

By way of contrast recent IMF study on this same subject notes ‘China’s trajectory (Growth curve) has so far outstripped even that of earlier East Asian success stories, although have enjoined less than ideal political systems, but strong leaders with visions, backed by popular support for good and effective public administration systems, appear as crucial precondition for rapid development for a country to escape the MIT and attain high-income status efficiently.   

Of the many strategies available for a country to face the challenge of moving fast in development process, the crucial choice to make is to shift from the resource driven growth strategy, dependent on cheap, unskilled labour and capital (garment industry) to a strategy of economic growth, based on high-productivity and innovation involving advanced knowledge and new technology.   

This requires commitment and investments in a range infrastructure, development, specially dedicated for advanced technology education and training and high quality science biased education.   
The South Korean and Chinese, especially Taiwan, experience of building a high quality education system with a range of science schools and science parks, and centres, using PPP mode, encouraged creativity, leading them to make breakthroughs in science and technology in their respective economies.   

 

  • The fact remains the rate of movement (economic growth) is too slow in Sri Lanka.  
     
  • Domestic power game in politics and confusion that it brings about to business community and lack of steady state of affairs, can bring about many distortions and disruptions to be entrapped in the middle-income level   
     
  • This transfer process would also involve a change in settlement pattern and demand for new housing areas, houses, utilities and road and transport, together with other social infrastructure (schools, hospitals, markets).   
     
  • As this transformation takes place, the structure of the economy’s output (GDP) and employment tends to change both in character and content, quantitatively and qualitatively.   

 

This strategy of developing science and technology savvy entrepreneur class and an educated and Science exposed work force to match, remained the key bulwark, particularly for the South Korean economic success. This led to South Korea gaining competency in cost-advantage in manufacturing of a range of sophisticated products- from ships, trucks, autos and consumer electronics-for far-flung export markets, thus gaining a competitive edge over foreign competitors-more importantly an international image of quality production. 

Thus the South Korean example of a traditional agrarian economy taking up science and technology strategies seriously  for development was the key factor to note here.   

The active part played by ex-army officers in developing private sector enterprises (Family businesses) must also be recognised as an endogenous Korean factor within the Korean development strategy.   

The prevailing conflict condition between North and South Koreas had not detered the pace of rapid development in South Korea. But on the contrary, the conflict appeared to have acted as a stimulant and a compelling force-not merely to survive but also to effect a massive civilian advancement and development, to outshine the dragging conflict.   

This provides a powerful message to others in similar predicament. The Sri Lankans, can read a lot into the economic histories of these of these nations, which have successfully overcome the middle-income trap (MIT).  

 

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