Let's envision three mighty knights of our times - technological development, globalization, and growing social awareness – all heroically joining their forces together to lead humanity towards profound development, ending global hunger and poverty on the side.
Sounds beautiful and relieving, doesn't it?
It would be even more appeasing if it were not just a utopian dream as we scrutinize this vision from the economic point of view...
Is it even possible for all countries to eventually become labeled as developed?
First of all, what makes us call a country developed?
According to the most prevalent definitions, a developed country has a mature and sophisticated economy, measured by its GDP and average income per resident. Amongst its trademarks, we can also distinguish expanding technological infrastructure as well as an increasing share of services in the national income compared to the profits earned from industrial and farming activity.
With advancements at every step taken by the greatest minds of all industries, with more knowledge piled up in laboratories and institutes across the globe than humanity has ever witnessed, there is one factor halting that omnipresent-development dream from becoming our reality…
The middle-income trap can be considered guilty
This notion was first coined by Indermit Gill and Homi Kharas in 2007, as they were trying to link the phenomenon of economic slowdown after reaching the middle-income status observed in Latin America and the Middle East to the eventuality of slowdowns in East Asia. They have described "how rapid growth from low-income to middle-income levels—fueled by cheap labor, basic technology catch-up, and the reallocation of labor and capital from low-productivity sectors like to export-driven, high- productivity manufacturing—is often followed by lower growth" (from "The Middle-Income Trap: Myth or Reality?" - Larson, Loyaza, Woolcock, March 2016).
In other words, numerous countries have managed to reach a particular standard of life, the so-called middle-income standard, but were unable to transform into fully developed wealthy countries. It was a widely discussed issue known in East Asia after 1997 when many countries have experienced a protracted chapter of poor economic performance.
There are exceptions, like Japan, South Korea, Singapore, and Taiwan, who have managed to break through that invisible borderline, but many countries could not achieve it. According to the famous economist and broadcaster Linda Yueh, "History is littered with examples of countries such as Argentina, where growth slows so much that they never join the ranks of the rich."
According to the research paper written by Barry Eichengreen, Donghyun Park, and Kwanho Shin, by the time countries get to the broad range of $17,000 income per capita annually, their growth rate tumbles on average from 5.6% to 2.1%. Researchers have also observed that the possibility of that happening is significantly more substantial for the aging societies and countries whose real exchange rates are artificially low.
Reasons behind the middle-income trap
There are some uncertainties in the scientific understanding of the middle-income trap, but economists tend to unanimously point towards particular potential causes of this phenomenon. At the forefront of the reasons stand rising wages.
How could rising wages not be beneficial for the economy?
Well, as the country gets richer and salaries increase, it is no longer a place abundant in cheap labor, so its prior competitiveness on the global stage decreases. Another reason is the halt of labor migration – many countries develop economically due to a specific transfer of human resources, also known as urbanization. Nonetheless, this situation cannot continue for eternity – "eventually, the pool of underemployed rural labor is drained," invoking the words of B. Eichengreen.
It is relatively easier to transport people from the countryside to the city than to help them specialize and advance once they are there.
Amongst the most frequently highlighted sources of the middle-income trap, slowing demographics and aging society also play a significant role. As the number of young, vigorous people willing to enter the labor force decreases, the process of development becomes strikingly interrupted.
Above all, the middle-income trap's main factor is the era of technology that we live in - as a country develops, its growth starts to depend increasingly on innovation. This argument is frequently used in debates on the questions, whether all countries can be developed or not.
So, can they?
Let's take into consideration the renowned Silicon Valley in California. According to the Crunchbase report, startups in the Bay Area have attracted approximately $45.9 billion in new funding just throughout 2019. Now, let's shift our attention to one of the developing countries, Argentina, for instance. Just to reach the standards of infrastructure stretching all over the San Francisco Bay Area, it would require monstrous amounts of local and foreign investments; meanwhile, brand-new technologies emerge in Californian laboratories and tech hubs every single minute. Colloquially speaking, developing countries resemble a cat spinning in circles, trying to catch its all-time escaping tail of development due to significant barriers constraining technology spillovers and efficient resource reallocation.
How to break through this?
But hey, why would we be so pessimistic? As I have already mentioned at the beginning of today's post, several countries have indeed managed to surge above the middle-income tier, becoming current global tycoons.
What is their secret?
Actually, there is a mixture of factors that enabled, for instance, South Korea and Japan, to achieve their current levels of prosperity. First of all, they have continued investments in economic specialization and improved their education systems. Striving for progress, they have also employed new processes and strategies to maintain export growth and ramp up domestic demand. The crucial step taken by these countries was also the shift towards democracy in terms of political systems. Moreover, one of the aspects characterizing them is a relatively thick middle class, demanding particular results from their governments.
Nonetheless, all of these strides would be impossible if these countries were not capable and determined enough to create large-scale institutions at the world-class level.
What will happen to China?
One of the most attention-grasping questions in development economics is if China – the largest developing country in the world - will be able to move from a middle-income country to a high income one, escaping the trap. According to Linda Yueh: "after three decades of rapid growth, China is now approaching the so-called 'middle-income country trap': a dramatic slowing of an economy after it has reached upper middle-income status." Other hurdles on China's road to development are its prolonged trade war with the United States and energy security anxieties aggravated by the aftermath of the COVID-19 pandemic.
Some analysts have suggested that the Belt and Road Initiative can substantially help China escape falling into the abyss of the middle-income trap by enhancing regional connectivity.
But is there enough room for overall economic development on the global scale these days?
I would earnestly love to believe it, but apparently, the time will tell…
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