Emerging economies need to rethink development model to escape middle-income trap - EBRD study

By Anthony Williams
@ebrdtony

New EBRD study says emerging economies need to reassess economic model to escape middle income trap.

  • New EBRD study says emerging economies need to reassess economic model to escape middle income trap.
  • Many EBRD economies have reached or are approaching middle-income levels.
  • Governance, skills and infrastructure still key to investment for growth.

New report

Emerging economies trying to break out of the middle-income trap need to reassess their economic model to deliver the governance, skills and infrastructure that will finance sustained economic growth, a new EBRD report says.

The report, entitled “Eight Things You Should Know About Middle-Income Transitions”, funded by South Korea, said many economies in the EBRD regions had reached or were approaching middle-income levels.

The rate at which they were converging with more advanced neighbours had slowed down markedly since the 2008-09 crisis.

The report concluded that overcoming impediments to achieving high levels of per capita income involved rethinking economic development models – even if the key factors behind economic success remained broadly unchanged.

In his foreword, EBRD Chief Economist Sergei Guriev said, “Countries that failed to reinvent themselves got stuck in “the middle-income trap.”

“For every “trapped” middle-income country, economists can identify the reforms that should have been implemented. And for every successful middle-to high-income transition, we can point to the reforms that underpinned it.”

The report said investment and the availability of domestic savings to finance investment remained the primary drivers of sustained strong growth. The fundamental recipe for leveraging growth-enhancing investments – governance, skills and infrastructure – had also changed little, if at all.

The link between per capita income and quality of governance was particularly strong, it said, noting this was a specific problem for EBRD countries.

“For economies in the EBRD regions, improving governance is a particular challenge: currently, they tend to have lower-quality economic institutions than other emerging markets with similar income levels.”

The report said that one key change from earlier examples of successful middle-income development was the need now to ensure the development of social safety nets to support economies before they can become more prosperous. 

It said there should be no trade-off between faster growth and such safety nets. “Without broader societal consensus, growth-promoting economic policies may prove impossible to sustain in the face of brisk technological and demographic change.”

Such policies also included improvements to infrastructure connections to relatively disadvantaged regions in order to boost trade, while investment in municipal infrastructure also promoted growth and equality of opportunities.

Another change in recent years was the impact of technology on the successful development of middle-income economies.

The report referred to the fact that knowledge-intensive services could now be exported much like manufacturing products in the past while manufacturing itself employed fewer workers.

The report concluded that access to finance in itself was only part of the solution to development challenges.

“Simply throwing money at the problem does not seem to make a successful middle-income transition more likely, as the quality of finance plays an important role.”

The depth of equity markets exhibits a strong positive correlation with robust growth, it said. Equity financing tended to be more innovative than bank financing having the added benefit of promoting other positive factors such as more environmentally friendly investment.

New report