Growth and labour markets in middle-income countries

By Rolph van der Hoeven1 International Institute of Social Studies at Erasmus University, The Hague & Member of the Committee for Development Policy of the United Nations

It is almost as if the lyrics of the world’s best rated song ‘Hotel California’ were written for the large category of middle-income countries (MICs) as since the classification was introduced in 1992 only four2 MICs outside Eastern and Western Europe (The Republic of Korea, Chile, Uruguay, and Argentina) have so far managed to ‘graduate’ to the high-income category. Are all other countries unable ‘to leave’?

“You can check out any time you like but you can never leave… “

To look into this, it is worth recalling that the middle-income country group is a vast one and spans countries with considerable differences in per capita income, growth rates and labour market experiences. MICs are therefore often subdivided into Lower and Higher Middle-Income country categories. To see how dynamics play out, it is therefore as important to look how countries develop within the large MIC grouping, as it is to look at the differences between those MICs that have graduated to the high-income category and those that have not.

In terms of labour market performance, the labour force participation rate in lower middle-income countries is low and even decreasing. In upper middle-income countries, it is much higher, though also decreasing. In graduated countries however, labour force participation increased – although the rate is somewhat lower than in the upper middle-income countries. Education and literacy levels, an indication of the quality of the labour force, also differ considerably. In the lower middle-income countries less than three-fourths of the population in 2017 were literate while the literacy rate in upper middle-income countries is almost 95 percent. For the four graduated countries, literacy rates are not fully available in the database used, however other sources show already very high rates in 1992 that attained their maximum in 2012.  

So what are the lessons from those MICs that did better in terms of economic growth and labour market performance?

There is a definitive need for continuation or stronger adoption of demand-led growth with good labour market policies – factors that have contributed to the success of fast-growing and graduated MICs. Productive transformation from commodity production to higher value-added activities is also at the heart of the transition from a middle-income to a high-income economy with better labour market performance.

Also key is the development of domestic innovation capabilities to move up the value chain on a broad enough basis to generate sustained productivity growth. Since World War II few countries have achieved this transition. Asian countries under the market-led and government-led strategies of the past 30–40 years performed better in moving up to higher income groups, but Latin American and sub-Saharan countries seem often to have found themselves trapped. Current globalisation processes, particularly the rise of China, have shifted the goal posts for middle-income countries and increased the urgency for domestic innovation capabilities. (Re-) industrialisation in Latin American and sub-Saharan countries might well be a determining factor in achieving a virtuous growth path. Given current geo-political changes, this challenge becomes more difficult, but it certainly must be pursued.  

In order to face current challenges, however, the emphasis can no longer be on industrialisation per se. The general principles of successful industrial policies apply in any successful multi-faceted strategy, not just to manufacturing, but also to agriculture, services, and natural resources. In facing technological challenges policymakers in MICs should be aware that excessive optimism as well as excessive pessimism both lead to passive policy and to undermining adequate responses to technological change. A comprehensive development strategy is called for; with a balance between markets, government, and society, based on a new understanding of what leads to successful economic and societal transformation.

To restore balance in society, development policies need to be strengthened by good labour market policies. These should not only reduce income inequalities in general but also reverse the declining share of labour income in national income and protect workers against the inevitable economic transformation by introducing or strengthening unemployment insurance and basic social protection, independent of job status. Given the challenges of technological change and the increasing flexibility in the economy, there needs to be a rethinking of traditional social protection based on employment in large conglomerates in the form of citizen dividends or basic income. Labour market performance also improves when the education system better prepares workers for coping with and mastering new technologies, leading to a “learning” society. So, are the lyrics of the famous Eagles song really predictive or should we heed the lyrics of Jimmy Cliff’s famous song ‘You can really get it if you want’? Our analysis shows that Jimmy Cliff ’s lyrics may point us to a better future.

1.For details see Rolph van der Hoeven, 2020 ‘Employment and labour markets in MICs: How to cope with technological change and global challenges?’ chapter 9 in Alonso, J.A and J.A. Ocampo (eds.) Trapped in the middle? Developmental Challenges for Middle-Income Countries, Oxford, Oxford University Press

2. Panama, the fifth graduated MIC has, because of its small size and geopolitical situation, not been retained in blog.