2016 Reports

Growth Convergence and the Middle Income Trap

Ito, Takatoshi

Asian emerging market countries have followed growth convergence from a low-income, high-growth state to a middle-income, middle-growth state through industrialization. The economic development of Japan was first followed by the “four tigers” in the 1970s, by the ASEAN countries in the 1980s, and China in the 1990s to 2000s. Asian economies were
severely affected by the Asian Currency Crisis of 1997-98, and again by the Global Financial Crisis of 2008-09, but much more so by the former. The growth rates of Asian countries are slowing over time. The growth rate may fall to the advanced countries level, before the income level fully catches up to the advanced countries’ level, which is defined as the middle income trap in the paper. This paper proposes a hypothesis that there exist three convergence paths in Asia: low-income, middle-income, and high-income. Countries need to shift from one convergence path to a higher one by implementing economic and political reforms that would generate innovations. Without reform, countries may fall into a low-income trap or a middle-income trap. The findings in the paper have important implications for the literature about
middle-income traps. Providing an interpretation of the middle-income trap in the growth convergence framework is novel. Empirical investigations using panel data are also new. Some Asian countries are successfully transforming to a high-income convergence path, but others have failed thus far to make that transition. However, these results are more in the form of suggestive evidence than a hypothesis testing due to the limited sample size.