By Richard F. Doner, Professor Emeritus, Department of Political Science, Emory University1
Scholars, advisors and policymakers alike have paid extensive attention to the middle-income trap. Despite some differences in definition, most agree that the “trap” refers to various conditions that have discouraged many middle-income countries from ascending to high-income status. Cross-national economic convergence has been nowhere near what was expected given middle-income countries’ access to advanced technologies and market opportunities.
Explanations for the trap vary but typically include some combination of low productivity, inconsistent macroeconomic policies, weak institutional frameworks, policies ill-adapted to promoting technology absorption, and weak human resource development. As a recent post by Alonso and Ocampo argues, these writings have been valuable in focusing attention on the challenges of a particular stage of development. Nevertheless, gaps, we might even call them blind spots, persist in analysis of the middle-income trap.
“Cross-national economic convergence has been nowhere near what was expected given middle-income countries’ access to advanced technologies and market opportunities.” #DevMattersTweet
First, there is precious little attention paid to the specific challenges of formulating and implementing policies central to moving into high income. Whereas movement into middle-income typically occurs through investment-driven strategies of capital mobilisation that help generate new industries, the shift to high income has been based on innovation-driven strategies that help firms to identify and absorb technologies “new” to them. Policies designed, for example, to strengthen the technical skills of a country’s workforce require access to and understanding of information that is technical, changing, and appropriate to local conditions. Designing and delivering effective curricula require coordination of multiple actors, such as teachers, curriculum designers, technical training institutes, education ministries, equipment suppliers, firms and associations. There are few if any templates for such measures. Finally, because carrying out these measures is often a lengthy process with results less visible than the bricks and mortar of, say, a fancy building or laboratory, they require support from officials and political leaders with long time horizons.
Second, addressing the challenges of such measures requires institutions capable of monitoring results, promoting consultation among actors, and credibly rewarding and/or sanctioning them for (not) fulfilling their commitments. For example, an investment board eager to promote technological and managerial spill overs from foreign to local firms, needs to go beyond easy-to-measure-and-monitor export and employment data. It needs to learn about specific technologies, to facilitate engagement between local and foreign firms, to monitor specific outcomes, and to provide appropriate rewards and sanctions. Similarly, experience shows that creating “quality” infrastructure, such as testing and research centres useful to local firms, usually requires effective public-private exchanges that go well beyond the (admittedly difficult) challenges of building roads, ports, and IT networks.
“While effective institutions take time and resources to establish, most leaders are preoccupied with short-term, visible benefits available to immediate supporters.” #DevMattersTweet
Third and most important, analysis of the middle-income trap is even weaker when it comes to strong institutions and how they come about. The implicit assumption in existing literature is that leaders, once enlightened, will nurture effective rules and organisations. This assumption neglects political reality. While effective institutions take time and resources to establish, most leaders are preoccupied with short-term, visible benefits available to immediate supporters. In failing to acknowledge problems of time inconsistency and self-dealing, the literature ignores the political economy of the demand side of the story. More specifically, it ignores the question of whether a coalition exists in support of effective policies and institutions. It also ignores the frequent tendency of multinationals to keep functions such as technical training in-house and thus (what Albert Hirschman labelled their “mousiness”) avoids cooperating with local firms and officials in pressing for collective, local services. It ignores the absence of strong pressure for broader technical training from workers due to suppression of unions, and divisions between formal and informal workers (including migrants). And it ignores the organisational weaknesses of the firms most in need of collective goods provided by strong institutions – namely, domestic firms.
This brings us to a final gap in the middle-income trap literature: there is very little attention paid to the specific needs and status of domestic firms. This is problematic for equity, political stability and sustained growth. Weak domestic firms imply weak linkages which in turn limit the degree to which the benefits of even vibrant GDP growth are shared. As we are learning, the absence of more inclusive growth undermines political stability and, in the long run, growth itself.
1.↩ Co-author, with Ben Ross Schneider, “Centripetal Politics and Institution Building in the Middle-Income Trap” in Alonso and Campo, eds., “Trapped in the Middle” Developmental Challenges for Middle-Income Countries, Oxford Univ. Press 2020