Hello everyone! Hang on to your boots people this is a long one… but it’s Sooooooooo worth it!!!!!!!!!!
As you probably know by now, I have no problem covering uncomfortable subjects from the perspective of Economics. This month’ subject is not so problematic in itself but I am going to say a few things that may be shocking to a number of you. When this happens and your blood boils with anger, remember this very simple thing: Economics has no moral… I am not concerned about morality, I am concerned about actual facts and understanding them.
OK, this being said, let’s start to have some fun… at least some of us! This month I want to talk about what we call the “Middle Income Trap”, a really cool concept with devastating consequences to those that are trapped in it.
If we wanted to be very simplistic, we could divide the world’s countries in three categories: Poor countries, middle-income countries, and rich countries. This is an oversimplification but it serves a purpose. Countries within a certain group tend to have similar characteristics on a number of indicators. This is nothing more than an average but it tends to describe fairly well how poor countries compare to middle-income ones, which then compare to rich ones.
The exact definition of these three categories is based on GDP per capita, which measures the value of economic activity that each person would be responsible for, on average. A better indicator of development is the HDI (human development index) but I am interested in the economic stage of a country, not in its “development”, whatever that means (academics are still debating about its definition, it’s a very complex field that includes many fields, one of which is Economics).
The World Bank defines middle-income countries as having between 1,026 USD and 12,475 USD of GDP per capita (they actually use GNI but it doesn’t matter in this context), which is a huge range. Anything below that is called a low-income country and anything above a high-income country.
SO, what is that trap I mentioned??? Although very few things are linear in the real world, we can make yet another simplification for the purpose of this discussion. Going from low income to middle income is not such a difficult feat. However, going from middle income to high income seems to be very challenging for most economies.
The middle-income trap is a concept that describes that difficulty, where countries that grow very fast seem to get stuck in the middle. Countries such as Brazil (part of the BRICs), for example, have developed (economically) very fast and have moved from low income to middle income in an impressively short time. It seems, however, that Brazil is not moving further in the foreseeable future. It reached middle-income status and stayed there… with little progress towards the next stage.
I have reflected on economic progress for many years now and I think I’ve reached a point where I can share my thoughts on that subject. Please keep in mind that these are my own professional conclusions and they are not shared by all Economists and Sociologists… far from it I would think.
Here we GO!!!!!
Climbing the ladder from poor to middle income is mostly an engineering challenge while climbing from middle income to rich is mostly a cultural challenge.
In order to go from poor to middle, a country needs to provide fairly good quality infrastructures. You need roads, schools, hospitals, reliable electricity, a somewhat consistent legal framework, and some sort of political stability. With these, your population can engage in profitable economic activities and create wealth for the country.
Countries can stay poor when there is a very high level of corruption and/or high political instability for example.
To go from middle to rich, however, a country needs a culture of civil responsibility and inclusion. People need to care about the impact of their actions on others, they need to feel part of a common and fair system (at the country level), they need to appreciate a variety of skills and abilities, and there needs to be some sort of equality of opportunities. With these, high value added activities will be created and productivity will be improved very substantially… which will benefit almost everyone.
Countries that are stuck in the middle income trap have developed their infrastructures but their culture has not evolved. They have what I call a “culture of poverty”… their roads are modern but they race each other, they have many universities but they value short-term thinking and disregard intellectuals, they have somewhat appropriate gender equality laws but they molest their women in public transport and at work.
Not everyone is lagging behind of course. There can be a good number of individuals that have adopted better cultural practices but the majority didn’t. Remember that Economics is about the average, I am not describing any individual in particular, I am describing the state of the average person in these economies.
Now, a little disclaimer if you don’t mind: the “culture of poverty” concept already existed before I came up with this. I discovered it a few days ago (I don’t read much on Development Economics I must say) and saw that it was very controversial.
I personally use the word "culture" to describe average attitudes and behaviours of people in a country. These cultural norms may come from a multitude of factors which are not important in this analysis. What matters in this specific context is the current culture and its effect on economic outputs.
There is a lot more to say on the topic but I’m afraid I’ve already lost 90% of you guys… If you want to see a real-life example of this, I’ve prepared a little research comparing Brazil with Canada. Why these two countries you ask? Well, Brazil because it’s been quite often in the news these days (and it’s a great example of the middle income trap) and Canada because I’m from there (and it’s a high income country)… oh yea also because both countries have almost the same economic size (in GDP term).
You guys are great (even if you didn’t finish reading the article)!
