Stuck in the middle?

Abstract

Most of the world’s population lives in middle-income countries— neither very rich nor very poor. While middle-income countries are full of economic opportunities, the way up to higher incomes and living standards is not straightforward. Homi Kharas and Indermit Gill coined the term ‘middle income trap’ a decade ago to describe the hazards. The aphorism caught on, a worry for policymakers and a puzzle for debate among the analysts. To get out of the middle income trap countries have to shift from lowskilled to high-skilled, innovative growth industries. That seems simple enough, but what do they need to do to make that transition? Education, how it’s delivered and to whom are clearly critical parts of the story, but how is an innovative economy created? Putting the right institutions in place is at the heart of long-run improvement in living standards. But the institutions that helped poor countries reach middle income are clearly not necessarily those that are needed to grow out of the trap. As innovation takes a more central role, institutions that constrain economic (and perhaps political) freedoms, for example, are not likely to foster creativity or entrepreneurship. Middle income can be achieved through adopting other people’s technology and creating policy settings that reap the benefits from specialising in international markets. Beyond middle income, the institutional foundations for open financial markets, governance intolerant of economic patronage and supportive of risk-taking and entrepreneurship are required. Demography also has far-reaching consequences for the trajectory of national incomes. A rising young labour force is a valuable but fleeting asset. Ageing populations present unprecedented challenges, even for those at the top like Japan. The essays in this issue of EAFQ, which derive from the soon-tobe-released 37th Pacific Trade and Development Conference volume edited by Francis Hutcheson and Sanchita Basu Das, bring together the field’s most prominent voices to explore these issues that press upon the prospects for Asia today. And as well, our Asian Review includes essays on the lessons from Fukushima, the geo-political consequences of China’s rise, Australia’s leaders over the years and their approach to Asia.