now let's talk about the so called
middle income trap the so called middle
income trap refers to the fact that a
lot of countries reach a particular
standard of living broadly called middle
income but then they don't break through
to being fully developed fully wealthy
countries if you look at this graph here
you can see that Japan has broken
through and you can see that South Korea
has broken through Singapore and Taiwan
but most developing nations they reached
a certain level it's the group banded in
here and then they more or less stick
there they grow slowly and they do not
as I said fully developed there's a
paper by Barry Eichengreen and two
co-authors it runs some specific numbers
and what they find is that by the time
countries get to the general range of
seventeen thousand dollars a year income
per capita that their growth rate on
average is falling from five point six
percent to two point one percent which
is a pretty steep tumble they also find
this is especially likely for societies
as they get older and countries which
had driven their earlier growth with an
artificially low real exchange rate I
don't think we have a good scientific
understanding of the middle income trap
but there are a number of plausible
hypotheses for what exactly goes wrong
one possibility is simply as the country
becomes wealthier its wages go up and it
can no longer compete as simply being a
place with a lot of cheap labor there's
also the possibility that labor
migration runs dry so a lot of countries
generate a lot of economic growth just
by sending people from the quite
unproductive countryside to relatively
productive cities it's simply a transfer
of human resources
but this transfer cannot go on forever
it's harder to take people in cities and
make them much more productive than it
is to simply ship people from the
countryside to the city it's also the
case that in these countries the
demographics may slow more people get
older and there are fewer energetic
young people entering the labor force
very important is that it may be hard
for countries to keep on moving up the
value chain so for instance Mexico has
gone successfully from
just growing tomatoes to growing
tomatoes and producing automobiles but
it would be much harder for Mexico to
become the next innovator say producing
the next Google or the next Facebook or
inventing the design for the next iPhone
in general economic growth as you get
wealthier it depends increasingly on
innovation and innovation is much harder
than simply copying what already
developed countries do but at lower wage
levels for all these reasons and
possibly more this may be motivating the
so-called middle income trap the United
States is one country which is
continuing to grow that may not be
growing at its previous peak rates but
it is growing somewhat and innovating
somewhat nonetheless but we can see by
looking at the United States just how
hard this is how many pieces of the
puzzle have to fit together just right
for notions such as the iPhone or Google
or Facebook to have been possible as
mentioned before some countries have
broken through the middle income trap
such as Japan and South Korea and the
way they have done it is by a
combination of factors but they have
continued to invest in economic
specialization they have improved their
systems of Education they have worked at
being innovators they have moved to
democracy they have thick middle classes
which demand decent results from their
governments and maybe most importantly
putting these all together for a country
to break through the middle income trap
it has to be capable of producing large
scale institutions at world-class levels
very often the middle income trap is
discussed today in the context of China
well China continued to grow at
outrageously high rates or will the
Chinese economic miracle slow down
considerably in China would then be
caught in the middle income trap of
course there are economists on both
sides of this debate the China optimists
say the country has a lot more building
to do and a lot more people it can make
productive and that fundamentally the
productive institutions are on the right
track the pessimists point out that a
lot of Chinese institutions appear to be
of relatively low quality and China has
progressed a great deal by copying
production methods and by lowering their
cause
but the China is not really close to
being a major innovator and if we refer
back to the Barry Eichengreen paper it
seems China does very much have two
features which characterize those
countries which tend to get stuck in
middle-income traps namely slowing
demographics and having been a country
which relied in the past on an
artificially low real exchange rate for
growth this debate continues and of
course time will tell
to read more on the middle income trap I
recommend that you google to these
sources which are all online and for
some general readings you can simply try
googling middle income trap