If you want to be the champ, you gotta beat the champ. And economist Simon Johnson notes that all the contenders for “the world’s top economic dog” — China, India, Brazil, the EU — have to tackle some very difficult issues. Do they secure property rights for individuals? Do they have a viable financial system? Is debt on a sustainable path?
Emerging economies also have some particular problems that contribute to what’s been called the “middle-income trap.” As a new article at VoxEu explains (and as the chart shows):
In the postwar era, many countries have managed to quickly reach middle-income status, but few have gone on to become high-income economies. Rather, after an initial period of rapid ascent, many countries have experienced a sharp slowdown in growth and productivity … The World Bank (2012) estimates that of 101 middle-income economies in 1960, only 13 became high income by 2008. Those countries were Equatorial Guinea, Greece, Hong Kong SAR (China), Ireland, Israel, Japan, Mauritius, Portugal, Puerto Rico, the Republic of Korea, Singapore, Spain, and Taiwan, China.
The common explanation is that shifting labor from agriculture to industry/services provides a huge, one-time boost in per capita income. But then wages rise making labor-intensive exports less competitive just at the time when other low-income countries begin making the shift. It’s the China-Vietnam scenario.
But the VoxEU piece, written by economists Pierre-Richard Agénor, Otaviano Canuto, and Michael Jelenic offers some some escape routes from the middle-income trap. They include “developing advanced infrastructure in the form of high-speed communications networks, improving the enforcement of property rights through patent protections, and reforming labour markets to ensure that rigidities do not prevent the efficient firing and hiring of employees. Fundamentally, these policies attract more high-ability workers into the design sector, improve productivity and wages in that sector, and increase a country’s capacity for innovation.”