Economic development theorists and practitioners are increasingly using the term “middle-income trap” to describe the situation where developing economies’ convergence to the development frontier comes to a halt once their income per capita reaches a middle-income level. The term is ambiguous: is it a halt in convergence or slowdown in growth, and what exactly is the definition of middle-income? Nevertheless, the concept has been successfully used to create a scare that developing countries are more likely to run out of breath or even give up the race in the middle of the track than to continue catching up with the leading economies. Eichengreen et al. and several IMF economists are among those who provide empirical evidence that the “middle-income trap” is real and that developing countries do get stuck at some low-level equilibrium.
Middle Income Countries
The Western Balkans Case
The Western Balkans have a lot going for them: ideal location next to the world’s largest economic bloc, a well-educated workforce, relatively low wages and decent infrastructure. FDI and investors should be rushing in … but are they?
Southeast Europe is the next frontier of EU expansion and includes six countries: Albania, Bosnia & Herzegovina, Kosovo, Macedonia, Montenegro and Serbia. These countries have a lot in common and an equal amount of differences. They are all relatively small open economies, with a growth strategy premised on deeper international integration. Some, especially Macedonia, are more advanced in attracting international investors but as a whole, the region seems to be stuck in a classical Middle Income Trap: they are too rich to compete on low-cost manufacturing but are too poor to be global innovators. After a strong recovery following war and conflicts in the 1990s, the growth momentum has stalled over the last five years and the region has been particularly vulnerable to external shocks.
When the negotiations for IDA17 were wrapped up in December, there was great relief that IDA deputies were supportive of an IDA expansion despite their own significant budget difficulties. As part of that package, the World Bank Group itself pledged to give IDA $3 billion from profits.
This was a generous gesture by the World Bank (albeit a drop in the bucket of total aid), but how good was it for the global development effort? Consider the following—net disbursements of official grants and concessional loans (the category where IDA flows appear) have expanded from $39 billion per year in the 1980s (in constant 2005 dollars) to $85 billion in 2010 and 2011. In contrast, official non-concessional lending (the category where IBRD and IFC flows appear) has stayed steady. The latter was $15 billion in the 1980s and $22 billion in 2010/11. This picture is even more striking when considering the amounts in terms of recipient GDP. Grants and concessional flows to low income countries have gone from 3% of their GDP in the 1980s to 13% today, while non-concessional flows to lower middle-income countries (excluding India and China) have gone from 0.7% to 0.3% of their GDP. In fact, from 2000 to 2009, non-concessional flows to lower middle- income countries (and to developing countries as a whole) were negative, implying that developing countries repaid more to official development agencies than they received in gross disbursements.