Question

1. What is the ‘Middle Income Trap’ and why is it important for Asia?

Answer 1

Data from many countries suggests economic growth seems to be faster at low incomes but growth rate often, but not always, slows down after reaching about PPP $3000 (middle income) –recall figure drawn during the lecture. Initially, countries grow through factor accumulation and using comparative cost advantages, particularly in labor in the case of labor-rich Asian countries. [In Latin America in the past –many countries used land abundance to drive growth (e.g. Argentina).] Strategy that drove the economy at low incomes fails to propel it forward in the middle income stage. They lose cheap factor cost advantage but cannot get to the innovation-driven stage of high-income economies that are rich in capital, skills, and technology.