6 May 2013Asset managementThe Chinese have historically referred to their land as theMiddle Kingdom, a place of civilization surrounded bydangerous ‘barbarians’. In development economics themiddle is actually the dangerous place. As economies growand reach what is known as ‘middle-income’, they run therisk of getting caught in a slow-growth middle-income trap.When markets are all hoping that these middle-incomecountries will be the growth engines for the world, thequestion of the middle-income trap is imperative.Once low-income countries achieve growth ‘take-off’, theytend to grow very quickly into middle-income economies. Infinancial terminology, they become emerging markets. Somecountries have been skilled or lucky enough to grow quicklythrough middle-income and rapidly become high-income.Such robust and sustained growth has earned some of theseeconomies the epithet ‘Asian Tigers’, including South Koreaand Taiwan (see chart 1). Other countries have been lesssuccessful, storming into middle-income with rapid growthbut then slowing down sharply on achieving that level. Inmany cases, the growth of income per capita has sloweddown to less than half of its earlier pace. Latin America hasbeen particularly susceptible to the middle-income trap.Brazil, Mexico and Peru have all spent decades stuck in thetrap, with flat or even declining real GDP per capita.One may well think that income traps are not unique tomiddle-income countries. After all, some high-incomecountries appear to have slowed down markedly as well.Two decades ago Japan was the first high-income country toexperience a sharp slowdown in trend growth. Following thefinancial crisis in 2008, almost all advanced economies haveexperienced a multi-year slowdown in growth. Nonetheless,economists at the IMF have found that middle-incomecountries are, historically, half-again as likely to suffer amarked growth slowdown than either low-income or high-income countries (chart 2). That probability could narrow ifhigh-income countries continue to experience lower trendgrowth over the next five years as well – this would generatea much higher incidence of growth slowdowns than seen inthe historical data.
Senior Fixed Income EconomistUBS Global Asset Management email@example.com
Fixed Income EconomistUBS Global Asset Managementgianluca.firstname.lastname@example.org
Source: IMF Regional Economic Outlook: Asia and Pacific (April 2013)Note: Data is expressed as logs so the slope reflects the growth rate: a straightupward sloping line describes a constant strong growth rate, a shift to a flatter linedenotes a slowdown and a downward sloping line is a decline. Middle income isdefined as GDP per capita of between USD 2,000 and USD 15,000 per capita perannum at 2005 prices calculated using purchasing power parities.
Chart 1: Trap-piste
GDP per capita (log scale) rebased to first year that economy becomes‘middle-income’.
G D P p e r c a p i t a ( l o g s , r e a b a s e d t o 1 0 0 )
Years since reaching middle-income
The Chinese have historically referred to their land as theMiddle Kingdom but in development economics the middleis actually a dangerous place. As economies grow they runthe risk of getting caught in a slow-growth middle-incometrap, which is a concern when markets are hoping thatmiddle-income countries will be the growth engines forthe world. For China and others, getting policy right shouldensure that they do not stay middle-income economies forlonger than necessary.