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Economic Premise
NOVEMBER
JUN 2012
010 Number
Numbe 98
18
Since the 1950s, rapid growth has allowed a significant number of countries to reach middle-income status; yet, very few
have made the additional leap needed to become high-income economies. Rather, many developing countries have become
caught in what has been called a middle-income trap, characterized by a sharp deceleration in growth and in the pace of
productivity increases. Drawing on the findings of a recently released working paper (Agnor and Canuto 2012), as
well as a growing body of research on growth slowdowns, this note provides an analytical characterization of middle-
income traps as stable, low-growth economic equilibria where talent is misallocated and innovation stagnates. To
counteract middle-income traps, there are a number of public policies that governments can pursue, such as improving
access to advanced infrastructure, enhancing the protection of property rights, and reforming labor markets to reduce
rigiditiesall implemented within a context where technological learning and research and development (R&D) are
central to enhancing innovation. Such policies not only explain why some economiesparticularly in East Asiawere
able to avoid the middle-income trap, but are also instructive for other developing countries seeking to move up the income
ladder and reach high-income status.
Middle-Income Traps Past and Present there ever since. In Latin America, for instance, income per
capita relative to the United States fell almost continuously
In the postwar era, many countries have managed to fairly rap-
from 1960 to 2005, especially after the debt crises of the early
idly reach middle-income status, but few have gone on to be-
1980s (figure 2). Likewise, economic growth in many Middle
come high-income economies.1 Rather, after an initial period
Eastern and North African countries has waned and given
of rapid ascent, many countries have experienced a sharp
way to high unemployment, as evidenced most recently by
slowdown in growth and productivity, falling into what has
been called a middle-income trap. To be sure, the World the social and political upheavals that took place during the
Bank (2012) estimates that of 101 middle-income economies Arab Spring of 2011.
in 1960, only 13 became high income by 2008Equatorial Becoming Stuck in the Middle
Guinea, Greece, Hong Kong SAR (China), Ireland, Israel, Ja-
pan, Mauritius, Portugal, Puerto Rico, the Republic of Korea, Formal evidence on growth slowdowns2 and middle-income
Singapore, Spain, and Taiwan, China (figure 1). traps has suggested that at per capita incomes of about
By contrast, although many countries in Latin America US$16,700 in 2005 constant international prices, the growth
and the Middle East reached middle-income status as early as rate of per capita gross domestic product (GDP) typically
the 1960s and 1970s, a great majority of them have remained slows from 5.6 to 2.1 percent, or by an average of 3.5 percent-
Israel
Equatorial high-income rich
Guinea nuto 2011; Eichengreen, Park, and Shin 2011; and
United States (log of %)
Figure 2. Latin America: Per Capita Income Relative to the United States, 19602005
1.05
1.00
.95
.90
.85
.80
.75
.70
.65
.60
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
40
United States
35
30
Japan
patents per 100,000 people
25
20 regression
relation between
Hong Kong SAR, China
patents and per
capita income
15
Singapore
Korea, Rep. of
10
0
8.9 9.4 9.9 10.4 10.9
GDP per capita (log)
Source: U.S. Patent and Trademark Office and World Bank estimates; Gill and Kharas 2007.
those in place in Japan, the United States, and other high- port costs and lowering international trade barriers (Canuto
income countries. 2011). This labor market flexibility has facilitated the new
As a result of a well-functioning system of intellectual labor transition, now increasingly toward innovative occupa-
property rights protections, many countries in the region tions.
have become global leaders in patenting their own technolo-
Conclusion
gies. Using the number of patents issued by the United States
Patent and Trademark Office as a measure, economies in the The features of East Asias experience in transitioning from
region have generated patents at around the same rate as the middle- to high-income status provide important lessons for
advanced economies (figure 4). In particular, Taiwan, China, other countries that are attempting to follow suit. The mid-
now generates nearly as many patents as the best-performing dle-income trap is not an ineluctable outcome; it can be avoid-
developed economies, such as Japan and the United States, ed if governments act earlyrather than late, when the bene-
with Hong Kong SAR (China), Korea, and Singapore not far fits of cheap labor and the gains from imitating foreign
behind (Gill and Kharas 2007). Supporting this innovation technology are all exhaustedand decisively to promote inno-
has been a commitment to investments that promote upgrad- vation. Doing so requires timely implementation of public
ing skills and direct public funds to R&D efforts. According policies aimed at improving access to advanced infrastruc-
to the United Nations Educational, Scientific, and Cultural ture, enhancing the protection of property rights, and reform-
Organization (UNESCO) database on R&D expenditures, ing labor markets. These policies are central to fostering tech-
Korea, Singapore, and Taiwan, China, now devote resources nological learning, attracting talented individuals into R&D
to R&D spending comparable to levels in the United States activities, and encouraging the buildup of national and inter-
and other highly innovative developed economies (Gill and national knowledge networks.
Kharas 2007).
About the Authors
Last, flexible labor markets and open economic policies
have allowed for the reallocation of labor across sectors within Pierre-Richard Agnor is Hallsworth Professor of International
the most successful economies in the region. Countries in the Macroeconomics and Development Economics at the University
region have relied extensively on international trade to accel- of Manchester; Co-Director for the Centre for Growth and Busi-
erate their labor transfer by inserting themselves into the la- ness Cycle Research; Research Fellow at the Kiel Institute of the
bor-intensive segments of global value chains. Such a transfer World Economy; and Senior Fellow at the Foundation for Inter-
was facilitated by advances in ICTs and by decreasing trans- national Development Study and Research. Otaviano Canuto is
The Economic Premise note series is intended to summarize good practices and key policy findings on topics related to economic policy. They are produced by the Poverty
Reduction and Economic Management (PREM) Network Vice-Presidency of the World Bank. The views expressed here are those of the authors and do not necessarily reflect
those of the World Bank. The notes are available at: www.worldbank.org/economicpremise.