Frequency distribution of growth slowdowns
--- Education and the middle-income trap ---
Rapid growth in developing countries is an eye-catching feature of the world economy. The question is how long
this rapid growth can continue. Attempts to...
answer it have given rise to a literature on growth slowdowns that have become known collectively as the middle-income trap. The grim global economic outlook since the global financial crisis of 2008–2009 has further intensified interest in the middle-income trap. The issue is of great interest to the ASEAN-4: Indonesia, Malaysia, the Philippines, and Thailand, all of which are middle-income economies
aiming to make the jump to high-income status. Eichengreen, Park, and Shin (2012) analyzed the historical experience of growth slowdowns to shed light on
future prospects. They considered post-1956 cases of fastgrowing
countries that did or did not seem to fall into the middle-income trap, defined as sustaining GDP per capita at an average annual rate of 3.5% for 7 years or longer but then slowing significantly by at least 2 percentage points between successive 7-year periods. The authors found that
growth slowed at a mean GDP per capita of $16,540 in 2005 constant US dollars adjusted for purchasing power parity. At this income, per capita income growth slowed on average from 5.6% to 2.1%. By comparison, per capita GDP in the PRC was $8,511 in 2007, when the source
data, Penn World Tables 6.3, ended. Slowdowns most likely affect economies with high growth in the earlier period,
high old-age dependency ratios, very high investment ratios, and undervalued currencies. Eichengreen, Park, and Shin (2013) revisited these questions, updating and extending earlier results. There are
several reasons for doing so. Concerns about slowdowns have continued to grow, as has the literature on the subject. The PRC’s growth rate has decelerated from more than 10% in 2010 to less than 8% in 2012. In addition, more and better data are available through 2010, courtesy of Penn World Tables 7.1. The paper revises earlier
estimates of per capita GDP for a number of countries, not least for the PRC, whose 2010 per capita GDP at 2005 prices purchasing power parity is now estimated to have been somewhat lower at $7,129.
The new data illuminates a slightly different list of growth slowdowns. The results are broadly consistent with the earlier findings but not entirely. While slowdowns are still most likely when per capita GDP reaches about $15,000, the new data point to two modes, one at around $15,000 and the other at around $11,000 (box figure).
A valuable finding is that the share of the population with at least a secondary education correlates positively with dodging the middle-income trap, other things being equal. Education in general has the same effect, holding constant the share of secondary school and university.The quality of human capital matters in avoiding growth slowdowns. In addition, slowdowns are less likely in
countries with high-tech products accounting for a large share of exports. This highlights the importance of moving up the technology ladder. The finding that high-quality human capital reduces the probability of a slowdown is especially relevant for ASEAN. Skilled workers and professionals are needed to move up the global value chain. High-quality human capital is especially important for modern services with high added value like business services (ADB 2012). It matters for moving up the technological ladder and the global value chain in manufacturing, as the experience of newly industrialized economies clearly shows. Yet the lack of skilled workers and professionals is the single biggest business concern for employers in ASEAN (ADB 2008). Whether or not the ASEAN-4 can avoid the middleincome trap thus depends largely on whether they develop education systems that successfully produce graduates with the skills that employers require. A highly skilled workforce holds the key to the region’s quest to produce and export more sophisticated high-tech goods.
Eichengreen, B., D. Park, and K. Shin. 2013. Growth Slowdowns Redux: New Evidence on the Middle-Income Trap. National Bureau
of Economic Research Working Paper No.18673. ________. 2012. When Fast Growing Economies Slow Down: International Evidence and Implications for China. Asian Economic Papers 11. pp. 42–87. ADB. 2008. Asia’s skills Crisis, In Asian Development Outlook 2008: Workers in Asia. Manila: ADB.
ADB. 2012. Asian Development Outlook 2012 Update: Services and Asia’s Future Growth. Manila: ADB.
--- Note: The bars indicate the frequency of actual growth slowdowns by per capita
--- Source: Eichengreen, B, D. Park, and K. Shin. 2013.