Middle Income Trap (new) (1) PDF

PUB 4349 Lesson 06 Middle-Income Trap Lesson: Middle Income Trap PUB 4349: Development Policy and Management Department of Public Administration By: MSD Kumari Least developed countries in the world (https://unctad.org/publication/least-developed-countries-report-2023) Issues in Develop...

PUB 4349 Lesson 06 Middle-Income Trap Lesson: Middle Income Trap PUB 4349: Development Policy and Management Department of Public Administration By: MSD Kumari Least developed countries in the world (https://unctad.org/publication/least-developed-countries-report-2023) Issues in Developing countries………. ▪ High rate of Poverty ▪ Indebt Ness ▪ High level of Inequality ▪ Higher Trade deficit ▪ High Unemployment ▪ Middle-Income Trap ▪ Corruption ▪ Energy Crisis ▪ Political Instability ▪............................... ▪ Inadequate Health service ▪............................... ▪ Outdated educational ▪................................ system ▪................................ ▪ High Population growth  Middle-Income Trap -Meaning The middle-income trap exists for some countries that find it challenging to achieve high-income levels after being a middle- income country Those countries have made significant progress in reducing extreme poverty, experienced growth and structural changes earlier but then stagnated The countries with this risk of growth slowdown mainly include China, Indonesia, Malaysia, Philippines, Thailand, and Vietnam. Only 13 of the 101 countries deemed to be middle-income countries in 1960 had achieved high-income levels in 2011  ‘Middle-income Trap’ – this term set by a group of economists attached to the World Bank when observing the failure of some developing countries to move from an upper middle-income country to a rich country. The concept has gained new relevance with Brazil's long-lasting recession and China's decline in growth rates. Remaining stuck in the middle-income trap means that the country has not succeeded in changing its development strategy from an accumulative and imitative economy to a competitive, entrepreneurial, and innovative economy According to the proponents of the middle-income trap hypothesis, a poor country can easily move from a low-income country to a lower middle-income country (cheap labor/foreign aid) but not later.  World Bank classification of countries based on Income Threshold 24/25 FY Examples GNI per capita $ Lower Income Group < 1,145 Afghanistan, Burundi, Chad, Gambia, Somalia, Rwanda, Niger Lower Middle-Income Group 1,146 – 4,515 Sri Lanka (3540 $, 2023) , India, Philippines, Kenya, Ghana, Vietnam Upper middle-Income Group 4,516 – 14,005 China, Indonesia, Malaysia, Brazil, Argentina, South Africa, Mongolia High Income Group > 14,005 Australia, Bahrain, Oman, UK, Canada, Denmark, USA, UAE, NZ https://datahelpdesk.worldbank.org/knowledgebase/articles/906519-world-bank-country-and-lending-groups The World Bank defines the 'middle-income range' as GNP per capita between $1,136 and $13,845 at a constant rate in 2023 and 1146 to 14005 in 24/25.  World bank classification of countries based on income level (2024/25) https://blogs.worldba nk.org/en/opendata/ world-bank-country- classifications-by- income-level-for- 2024-2025 Activity Update the above table using the latest data of the World Bank for the year 2023/2024.  Economic transformation is costly to sustain (lack of domestic sources of intermediate goods) Possible However, both aspects are needed; leading to the high-income category and causes of sustain in high income category in the long run Ex: The case of Turkey and Argentina MIT Powerful interest groups that may attempt to block policy reforms designed to continue the transformation process (Raising wages) Institutional Failures and Social Capital weaknesses (corruption/ poor accountability /bureaucratic inefficiencies) Lack of long-term commitment to the transformation strategy No enough efforts to create policies that promote knowledge and innovation(use typical industrial policy tools)  Why it is difficult to overcome MIT? Lack of innovation Insufficient higher education Inefficient use of the infrastructure State monopoly of main industries Poor governance Excessive corruption Loss of aids  Strategies for Primarily it requires a shift from growth driven by cheap labor and basic manufacturing to more complex, Avoiding innovation-driven, and value-added activities. Middle-Income Trap https://blogs.worldbank.org/en/develo pmenttalk/from-shadows-to-sunrise-- how-to-overcome-the-middle-income- trap#:~:text=In%20order%20for%20th e%20six,a%20cornerstone%20of%20ra pid%20development. Strategies for Avoiding the Middle-Income Trap Enhancing human capital (Investing more in the STEM field; fostering lifelong learning) Promoting Innovation and Technology (R &D; moving into higher value industries; digital transformation, automating manufacturing processes, and using AI and data analytics to drive efficiency; fostering a Startup) Industrial diversification (Move Up the Value Chain; Develop Knowledge-Intensive Industries; Support High-Tech Exports) Institutional Reforms & Governance (Improve Governance and Institutions, Streamline Bureaucracy, Policy Consistency) Trade & Global integration (Diversify Trade, Global Value Chains, FDI) Public-Private partnerships Poland - what lay behind Poland’s success? Poland sustained high growth and graduated to high income focused on five key policy areas; and took less than 15 years In 1994, the Poles had one-fourth less income than the Mexicans did. By 2014, a Pole had become 50 percent richer than a Mexican. This economic growth was inclusive: jobs and wages increased, inequality across income groups and regions remained low, and poverty declined. They were used to call as “European Tiger” with this rapid transformation Read more :https://www.worldbank.org/en/country/poland/publication/lesson s-from-poland-insights-for-poland Sri Lanka and Middle-Income trap (Based on the article ‘THE PROBLEM OF OVERCOMING MIDDLE-INCOME TRAP: GETTING INTEGRATED TO GLOBAL ECONOMY IS THE WAY OUT’ written by Dr. W.A. Wijewardena) Sri Lanka was elevated to the status of a lower middle-income country in 1997 in terms of the World Bank classifications We became an upper middle-income country in 2019 after 22 years Moving up from this status to a rich country – attaining a per capita Gross National Income (GNI) of US$ 14,005 at today’s threshold level – will be challenging. It once became an upper middle-income country in 2019, recording a (GNI) of US$ 4060, It soon returned to its previous status in 2020 Currently continuing in the lower middle-income category, recording US$ 3540 of GNI value (2023). Sri Lankan transition Status between 2018, 2019 What Sri Lanka can do? 1) Sri Lanka to have a new export drive To beat the middle income trap, Sri Lanka needs to concentrate on promoting exports by diversifying them to new areas (wooden furniture/toys/plastic products/minerals). Our export sector has been growing very slowly. It has to move into new exportable products involving high technology. Since Sri Lanka cannot develop high technology within the country immediately, it has to obtain it from other countries that have been developing new technologies. In this connection, having bilateral free trade agreements with countries that matter to Sri Lanka’s external trade is a policy taken in that direction. 2) Requires to join global production-sharing networks There are several essential areas that a country should consider when jumping on the trend of global production-sharing networks. Trade-off between high-value addition and low-value addition. Entering into free trade agreements signed with front-level (Israel, Ireland, Singapore, South Korea, and Taiwan) and second-level countries(India, Malaysia, and Thailand) in the race will enable Sri Lanka to join the global production-sharing networks Acquisition and adaptation to the latest technology are essential for any emerging economy keen on benefiting from the new global production network model. Ex: Lanka Harness Company  The previous government aimed to break free from the middle- income trap and become a rich country by 2048. As a small economy, Sri Lanka’s wealth and prosperity must be created by producing for a bigger market than the limited market it has domestically. Sri Lanka is a ‘small fish in a big pond’ with scary waters all around. But with the proper technology, as Singapore, South Korea and Taiwan did in the 1970s and 1980s, it can swim in those scary waters safely.