Middle income trap

Middle income trap

In Turkey, as well as perhaps in some other countries, if an important politician does not highlight a serious problem, nobody cares about it. But after Deputy Prime Minister Ali Babacan mentioned the “middle income trap” concept, which has become the subject of hot debate as the growth of emerging economies has begun to slow down, it has begun attracting attention in our country as well.

The origin of the idea is in Professor Walt Whitman Rostow’s famous book, “The Stages of Economic Growth” (published in 1960). He advanced the idea that the beginning of rapid economic growth for a nation looks like the take-off of a plane from the runway.

This take-off concept naturally opened a fierce debate among professional economists, as well as among some politicians. Is it a smooth beginning to a safe journey or a threshold that must be jumped over to begin sustainable, rapid growth? Is this threshold a mixture of certain social, political and economic conditions or simply a per capita income level that secretly contains those necessary conditions?

As everybody knows, most developing countries, which are now called “emerging economies,” began with rapid economic growth for several reasons. First of all, they could easily import and use advanced technologies that had already been developed in rich countries. Second, the migration from rural areas to big industrial towns in the search for a job in the newly established manufacturing sector initially increased productivity very rapidly. Another advantage was that they had the benefit of newly constructed infrastructure while the infrastructure in already-developed countries was generally obsolete.

Again, during the beginning of rapid growth when per capita income increases at the same pace, domestic savings and, as a result, investments also increase rapidly. However, as has been observed now, a kind of “growth weariness” begins in those countries as importable new technologies become scarce and expensive, infrastructure becomes obsolete and labor productivity loses its initial pace. This results in slower growth, as well as a slower increase in savings and investments. This situation is called the middle income trap.

Rich and developed countries experienced the same phenomenon and lost their rapid growth appetite that they had during the last two centuries. However, although they have many problems today, their per capita incomes have reached such high levels that even small increases in growth rates might seem satisfactory. Unfortunately, this is not the case for the newly emerging countries of today. They might be stuck in their development process with comparatively modest per capita income levels that cannot encourage further rapid increases in savings and investments.

After World War II, the countries that are now described as emerging markets, including Turkey, faced several growth stoppages. These examples make Western countries uneasy amid their concerted attempts to prevent a second recession. If recent growth slowdowns in some newly emerged Latin American and Asian economies appear likely to become a middle income trap they might induce it earlier than expected instead of conducting their awaited contribution to stop a new recession.

There are, of course, some ways to overcome the middle income trap. First of all, developing countries must understand that without full-scale democracy, freedom and human rights, it is impossible to develop an education system, which is crucial in allowing one to escape the middle income trap and continue reasonable growth. The obvious examples in this are the countries that are now called “developed” and that have already reached high per capita income levels.

Their present problems must not mislead decision-makers in developing countries.