Emerging Asia: At Risk of the “Middle-Income Trap”?

IMF Blog, April 29, 2013

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Emerging economies in Asia have weathered the global financial crisis relatively unscathed and appear to be on track for continued strong growth this year and the next.
Signs of gradual weakening have appeared despite strong international performance.
China: growth has slowed from a rate of over 10 percent in the 2000s to between 8 and 9 percent in the past two years.
India: growth has slowed from around 8 to 6 percent during the same period.
ASEAN-4 (Indonesia, Malaysia, Philippines, Thailand): no trend slowdown observed, but growth was lower to start with and—with the notable exception of the Philippines—remains significantly below pre-Asian crisis rates.

Empirical evidence: over the past half century, the frequency of abrupt slowdowns lasting for at least a decade has been 1.5 times higher for middle-income countries than for low- or high-income counterparts.
Counterexamples within Asia: Korea, Singapore, and Taiwan Province of China graduated from middle income to high-income status in just a few decades, showing the trap can be avoided.

Research highlights the following as especially helpful in minimizing risks:
- Good infrastructure.
- Sound economic institutions.
- Open and diversified international trade.
- Sound macroeconomic and macro-prudential policies that alleviate booms and busts.
Many middle-income Asian economies compare favorably on several of these dimensions relative to counterparts in other regions, but weaknesses remain.

India, the Philippines, and Thailand: exposed to larger risk of growth slowdown stemming from subpar infrastructure.
India and the Philippines (also China and Indonesia): need improvement in economic institutions.
China: relative risk factors relate to its post-crisis increase in investment.
Malaysia: strong capital inflows have clearly supported growth but also involve potential vulnerabilities.

Demographic trends are widely heterogeneous across the region.
China, Thailand, and Vietnam: will experience a rise in the so-called dependency ratio—the size of the young and old population relative to those of working age—over the next decade.
India and the Philippines: will see a decline in the dependency ratio over the next decade.
Ageing will increase the importance of reforms that mobilize untapped pools of labor, notably women, many of whom remain under-employed or out of the labor force across the region.

Emerging Asia is doing well, but only through unremitting reforms—improving infrastructure, strengthening institutions, maintaining open trade, applying sound macroeconomic and macro-prudential policies, and mobilizing labor—will the region be able to fulfill its promise.

Source: Emerging Asia: At Risk of the “Middle-Income Trap”? (Anoop Singh, April 29, 2013).