Indermit S. Gill and Homi Kharas
IN 1997–98, a financial crisis brought three East Asian middle-income countries—Indonesia, Korea, and Thailand—to their knees. It also affected Malaysia and the Philippines, which had difficulty sustaining growth. Many predicted that the structural weaknesses that the crisis laid bare—corruption, cronyism, and nepotism—would condemn the region to stagnation, as they had in Latin America after its debt crisis in the mid-1980s. Emerging East Asia was expected to lose years of growth. Instead, its growth record since 1998 has been remarkable: GDP has almost doubled, growing by more than 9 percent a year, to reach $4 trillion in current dollar terms by 2005. Despite the setback in the 1990s, growth during the past 40 years has been consistent (see table).
Now, almost a decade later, Korea is a high-income country, and the other four are growing fast. China has joined the middle-income club. Once Vietnam achieves middle-income status, possibly as early as 2010, more than 95 percent of East Asians will inhabit a middle-income country.
Should East Asia expect to continue these high growth rates? The reality is that middle-income countries (those with per capita incomes of $826-$10,665) have grown less rapidly than either rich or poor countries. The per capita GDP of high-income countries rose by about 50 percent between 1980 and 2000, that of low-income countries increased more than 150 percent, and the income ratio between high- and low-income countries has been halved. In contrast, average real per capita incomes of middle-income countries grew by less than 20 percent over this period, widening the gap between them and high-income countries by about 20 percent. Middle-income countries, it is argued, are squeezed between low-wage competitors in poor countries, which dominate mature industries, and innovators in rich countries, which dominate industries undergoing rapid technological change.
This line of reasoning suggests that East Asian middle-income countries must update their strategies. What permits countries to grow fast from a per capita income of $1,000 to $10,000—the current challenge for most East Asian countries—is different and more difficult than what helped them grow from a per capita income of $100 to $1,000—the challenge they successfully faced in the past.
Economic research suggests that two opposing forces are at work. On the one hand, as countries get richer, they demand a greater variety of goods, many of which can be produced domestically. This creates a force toward sectoral diversification. On the other hand, countries get richer only if they specialize in what they do best. Which tendency dominates is an empirical question. Researchers have found that a switch to specialization happens during middle income and depends critically on the extent of economies of scale in production (see box).
What did the Asian leaders in the first wave do to successfully transit through middle-income stages of development? And what can today’s middle-income countries in East Asia do to ensure that they do not suffer the same fate as Latin America’s middle-income countries, which have struggled unsuccessfully to grow into rich countries? This article explores the challenges facing middle-income East Asia today.
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)| false Aghion, Philippe, and Peter Howitt, 2005, “ Growth with Quality-Improving Innovations: An Integrated Framework,” in Handbook of Economic Growth, Volume I A, ed. by ( Philippe Aghionand Steven Durlauf Amsterdam; Boston: Elsevier; North-Holland), pp. 67– 110. 10.1016/S1574-0684(05)01002-6
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