Following the footsteps of Vietnam

Both the Philippines and Vietnam will become upper middle-income countries in the next two years. The $64 question is which of the two will fall into the so-called middle-income trap.

- BERNARDO M. VILLEGAS

In development literature, the “middle-income trap” is a term employed to describe a situation in which a country that has achieved a certain level of income (say upper-middle which today is roughly close to $5,000 per capita) fails to progress to high-income (about $16,000 per capita) and remains stuck at that level for a prolonged period. This phenomenon happens when a country grows rapidly after escaping poverty, but growth decelerates before it can become a high-income economy. The economy loses competitive advantage in labor-intensive industries, but fails to develop innovation, achieve productivity increase, and the value-added sectors that are predominant in high-income economies.

Leading causes for economies to fall into this trap are loss of cost advantage, weak innovation, poor institutions, inequality and social exclusion, and underdeveloped capital markets.

The loss of cost advantage in most cases is the steep rise in wages, making labor-intensive exports less competitive. This problem is usually aggravated by a misplaced population control program that leads very early to the ageing of the population before the country becomes rich. The example usually cited is Thailand, the first country to grow old before becoming rich. To a certain extent China is also already suffering from this syndrome as its population ages rapidly because of the one-child program that it implemented strictly (and sometimes brutally) in the last century. China’s leaders today are frantically trying to increase the birth rate but to no avail.