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 develop.
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
17,000 $ a year income per capita,
that their growth rate on average is falling from 5.6 % to 2.1 %
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.
It 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.
Will China continue to grow at outrageously high rates
or will the Chinese economic miracle slow down considerably
and 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 cost
but that 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".