Almost 20 years ago, the World Bank released a groundbreaking report – The East Asian Miracle – that called worldwide attention to the economic success of eight economies in the region, leading to a discussion on the extent to which policies followed by them could be replicated. In a recent Economic Premise – "Avoiding Middle-Income Growth Traps" – Pierre-Richard Agénor, Michael Jelenic and I suggest that the region can now provide a new round of lessons:
"The features of East Asia's experience in transitioning from middle- to high-income status provide important lessons for other countries that are attempting to follow suit."
In 2008, of the 101 economies classified in 1960 by the World Bank as middle-income, only 13 had moved up the ladder to the high-income group. Five of them – Ireland, Portugal, Spain, Greece and Puerto Rico – constitute a special case, with their ascent inextricably associated to their absorption by existing high-income country spaces. Equatorial Guinea also has the singular experience of a very small country that is extremely well endowed with natural resources. But it is with the five East Asian economies in that select group – Japan, the Republic of Korea, Singapore, Hong Kong SAR (China) and Taiwan (China) – where a reference of broader reach can be found for autonomous efforts to transit steadily from the bottom of the income ladder to the top. Meanwhile, most other economies already at middle-income levels in 1960 seem to have been caught in some sort of "middle-income trap."
The evolution from low- to middle-income levels has been reasonably similar wherever it has happened. Typically, a large pool of unskilled labor is transferred from subsistence-level occupations to more modern activities that do not demand much upgrading of these workers' skills, but nonetheless employ higher levels of capital and embedded technology. Such technology is available from more-advanced countries and is often easy to adjust to local circumstances. The effect of the labor transfer is an extraordinary increase of GDP values beyond what could be explained by the augmented use of labor, capital and other physical factors of production.
This growth pattern tends to eventually slow down, either when the pool of transferable unskilled labor is exhausted or if the expansion of labor-absorbing modern activities peaks before the pool is empty. Beyond that point, growth toward high-income levels will require an increasing share of the population occupied in activities that are more technologically sophisticated, human capital-based, and intensive in design and organizational capabilities.
As my colleagues and I emphasize in our note, that new stage differs from the previous one in that a local and idiosyncratic process of skill acquisition is essential. It no longer suffices to transfer and adapt technology blueprints and organizational capabilities from abroad. Education of the labor force and access to advanced infrastructure – which facilitate the circulation of ideas and promote knowledge networks – are obvious requisites. However, government efforts to provide them will not get a country very far if they are not accompanied by institutions that reward innovations in products and processes and that allow complex chains of low-cost market transactions. Local people's investment in innovative skill acquisition and organizational capacity building only materializes if appropriable private returns are commensurate.
The five East Asian cases exhibit those features. As we illustrate in the note, they all have succeeded in developing advanced infrastructure networks, particularly in the form of high-speed communications and broadband technology. Private-sector returns derived from successful innovative efforts have also been a major factor in facilitating home-grown innovation. Furthermore, flexible labor markets and trade exposure allowed for the reallocation of labor across sectors and sped the transition toward innovative occupations.
Similar features can also be found in Israel and Mauritius, the two heretofore unmentioned members of the group of 13 that have managed to ascend to high-income status. Before you say that most of those successful cases are small economies, recall that this is not the case with Japan and the Republic of Korea. The lessons learnt have no reason to be deemed country-size dependent.
A case in point is Brazil, a large middle-income country whose current average income reflects a combination of some high income-level activities (aircraft industry, deep-sea oil-drilling capabilities, technology-intensive agriculture etc.), a rich natural-resource basis, a precarious basic infrastructure, and a large pool of unskilled-labor occupations. While improvements on the latter two features provide opportunities for income growth, moving up toward average high-income levels will depend on widening the local creation of innovative and organizational capabilities. For that to happen as it did in East Asia, access to advanced infrastructure will need to significantly improve and a more transaction-friendly institutional basis will have to be in place.
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