Friday, March 30, 2012

Is there a 'middle income trap?'

Development economists have spent a lot of time recently talking about various types of poverty traps -- conditions which function to keep countries locked in low-income positions. For example, Paul Collier, in The Bottom Billion: Why the Poorest Countries are Failing and What Can Be Done About It, identifies the following traps: conflict trap, natural resources trap, landlocked with poor neighbors trap, and the bad governance trap.

More recently, economists have identified the existence of a 'middle-income trap' -- the notion that many middle income countries are also locked into their structural position in the global economy (For additional details about the concept, see the citations at the end.)

These two 'traps' are shown diagrammatically in the figure to the left (see the bottom left quadrant and the middle quadrant). The figure plots each country’s income per person (adjusted for purchasing power) relative to that of America, both in 1960 and in 2008. In other words, countries such as Burundi, Brazil and the United States that fall into the quadrants along the diagonal running from the lower left to the upper right have 'stayed put' in the global economic order over a period of nearly 50 years. Barundi started out poor and remains poor. Brazil was a middle income country in 1960 and remained a middle income country in 2008.

Countries in quadrants to the left of the diagonal (e.g., Botswana, South Korea) have improved their relative economic status over the past 50 years. Botswana was a poor country in 1960 and rose to middle-income status by 2008. Similarly, South Korea improved from a middle-income country in 1960 to a high income country in 2008. On the other hand, countries in quadrants to the right of the diagonal (e.g., Niger, Argentina) have experienced a relative decline in their economic status over that 50 year period.

Interestingly, the figure doesn't identify the 'staying rich' countries of the upper right quadrant as experiencing a high-income trap. This is because economists operate with a progressivist bias -- they presume that all countries should be able to achieve economic growth if the proper policies are followed. Thus, remaining at the top is 'staying rich' or doing things right while failing to advance implies falling into some type of trap which limits the opportunities for economic advancement.

Stated another way, economists operate with a theoretically inconsistent view of stability and transformation. Stability is taken as desirable for one group of countries (those staying rich) while transformation (economic growth) is the goal for all others and remaining stable becomes the result of a 'trap.' Panarchy theory, by way of contrast, would render stability (no matter which quadrant along the diagonal a country was located) as the product of a set of factors controlling the stability state while transformation would result from disturbances leading to the shift to another, different stability state of the system that is controlled by a different set of processes.

One final note, even if you leave out the countries in the unlabeled high-income to middle-income quadrant (Argentina, Kuwait, etc.) because they are all clustered near the border with the high-income countries, the number of countries that are becoming poor (21%) exceeds the number experiencing relative economic growth (3% of the countries improved from low-income to middle-income status while 11% improved from middle-income to high-income status -- for a total of 14%). Counting by country rather than by population obviously isn't the best way to conceptualize the change but it is instructive none the less.

Or, to render the diagram in yet another way, the evidence it presents seems more consistent with the perspectives advanced by world systems theorists (i.e., that one group can only stay at the top by exploiting another) and ecology (e.g., not all animals can be at the top of the food chain) than that advocated by traditional economics (i.e., that all countries can rise to the top and their failure to do so is evidence of some sort of 'trap').

Additional resources:
  • For additional information about the figure, see pages 11-12 of the World Bank report China 2030.
  • The term “middle-income trap” was first defined on pages 17-18 of Gill, Indermit, Homi Kharas, and others. 2007. An East Asian Rennaissance: Ideas for Economic Growth. Washington, DC: World Bank. 
  • The globalization of labor markets may make escaping the middle-income trap even harder according to Eeckhout, Jan, and Boyan Jovanovic. 2007. “Occupational Choice and Development.” Working Paper 13686, National Bureau of Economic Research, Cambridge, MA

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