MiddleIncomeTrap

Avoiding the Middle Income Trap

Going from middle-income to high-income status will require capabilities different from those needed at previous stages of development.

The emerging world is facing a massive dual challenge transforming itself into advanced economies and at the same time adjusting itself to technological change and the increasingly binding environmental and social constraints. As part of the INET Transformation Commission chaired by Nobel Laureates Michael Spence and Joseph Stiglitz, IGA has initiated a policy research initiative “Avoiding the Middle Income Trap” (MIT).

The initiative brings together some of the world’s leading academics and a unique coalition of four international financial institutions – Asian Development Bank, European Bank for Reconstruction and Development, Inter-American Development Bank and the World Bank – along with academics and policymakers from a broad range of emerging economies. The MIT project will produce a large number of background papers and a final report, accompanied by a series of case studies elucidating the experiences of individual countries that have recently transitioned from middle to high income status.

The Dual Transformation Challenge and the Middle Income Trap

The dominant paradigm for the policy debate in many, if not all, emerging economies is the Middle Income Trap. This notion suggests that going from middle-income to high-income status will require capabilities different from those needed at previous stages of development and that countries often experience a severe slowdown in growth rates as they try to make this transition. As structural transformation is about changes in both economic structures and the institutions supporting these structures, a Middle Income Trap, to the extent that there is such a phenomenon, could have both structural and institutional explanations, often some combination of the two.

In fact, emerging and developing economies are facing a dual structural transformation challenge. Not only must they move towards the world technology frontier, gradually shifting from imitation and adaptation to genuine innovation (what we denote the “catch-up transformation”), but the frontier is constantly moving, in response to technological change (e.g., digitalisation and robotics) and environmental and social imperatives (e.g., climate and inequalities). We call this second transformation the “sustainability transformation”. In particular, the global climate and environmental constraints and the time imperative they imply make this transformation challenge more difficult than any previous growth experience. To a large extent these two transformations will take place within the context of national economic and political systems, but increasingly they will put pressures on the global system to accommodate the changing nature of cross-border production networks and financing arrangements.

There is by now a considerable literature discussing whether the empirical evidence supports the notion of a Middle Income Trap. Most authors would probably agree that the economic structures and institutions must change as an economy moves closer to the world technology frontier, but it seems less plausible that countries gets stuck at specific ranges of income. The evidence suggests that countries that grow fast at lower levels of income also tend to grow relatively fast as they go from middle to high income status. This indicates that some economies may have superior transformational capacity independent of level of income and current economic structures and institutions. Establishing the sources of, and constraints for, this capacity should help us understand the growth path of countries.

The task of “Avoiding the Middle Income” project is to better understand the dual structural transformation challenge facing middle income countries. A concerted effort will be made to organise the project around a broad conceptual framework for structural transformation inspired by the Neo-Schumpeterian literature pioneered by Aghion and Howitt (1992)[1] and developed in Aghion et al. (2006)[2]. From a focus on firm dynamics and innovation this research programme has expanded to include a rich set of institutions and to explore a broader set of issues, such as the role of human capital and inequality. We believe that this framework lends itself particularly well to collaboration across scientific disciplines and our ambition is to engage social sciences more broadly in understanding the interplay between economic structure and institutions, and among institutions. Importantly, it can be used to understand both successes and failures of transformation and how different factors interact in encouraging and discouraging transformation.

The INET Transformation Commission, of which this project is one part, follows in a sequence of initiatives addressing the global growth challenge, most prominently the Growth Commission led by Michael Spence. The current commission builds on the massive work made under these initiatives, but it deals more explicitly with the structural transformation associated with climate and wider environmental challenges as well as the social constraints arising from growing inequalities within countries and the political constraints arising from these developments. The “Avoiding the Middle Income Trap” project stands out by focusing on a particular conceptual framework and the critical innovation link in the growth chain. Most importantly, it explicitly addresses the second sustainability transformation – it integrates the transformation needed to respond to technological change and increasingly binding environmental and social constraints. The “Avoiding the Middle Income Trap” project is also unique in that it exploits the extensive experience of the broad coalition of international financial institutions taking part in the initiative. As important is the close collaboration with a set of emerging economy institutions with a strong commitment to research-based policymaking. It is this combination of conceptual focus, massive global development experience and deep engagement with emerging economy institutions and policymakers, that makes this effort stand out.

Notes

[1] Aghion, Philippe, and Peter Howitt. 1992. “A Model of Growth through Creative Destruction." Econometrica 60, no. 2: 323-351.

[2]Acemoglu, Daron, Philippe Aghion, and Fabrizio Zilibotti, 2006, “Distance to Frontier, Selection, and Economic Growth,” Journal of the European Economic Association, 4 (1), 37-74

Background papers under the project

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Structural reform and productivity growth in Emerging Europe and Central AsiaYordan Georgiev, Sergei Guriev, Piroska Nagy-Mohacsi and Alexander Plekhanov, November 2016.
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The Middle Income Trap from a Schumpeterian Perspective Philippe Aghion and Cagatay Bircan, November 2016

Events

LSE IGA hosted the 2nd Workshop on the Middle Income Trap on November 16-17, 2017, with participation from LSE, the European University Institute Florence, and four international financial institutions: the ADB, the IADB, EBRD and the IMF.

Middle Income Trap project 1st Workshop discussion took place during the IMF-World Bank Annual meetings took place on October 7, 2016 in Washington DC, 2016. Hosted by IADB, the workshop discussed draft presentations and plans for paper commissioning.

 

 

 

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MIT Workshop 001
MIT workshop on October 7th, 2016
MIT Workshop 002
Second workshop on MIT, on November 16th and 17th, 2016