Emerging Economy Malaysia – Middle Income Trap

The country classification in the World Economic Outlook divides the world into 2 major groups such Advanced Economies and Emerging & Developing Economies:

1. Advanced Economies
2. Emerging & Developing Economies

Emerging & Developing Economies is an economy that is not too rich, not too poor and not too closed to foreign capital. The term was coined by Antoine van Agtmael in 1981 when he was working for the International Finance Corporation (IFC), a division of the World Bank. He hoped to create what he had named. A set of promising stockmarkets, lifted from obscurity, thereby attracting the investment they needed to thrive. Simply a different name to 3rd World Country

An Economist Works

At the time, it was hard work even to compare the performance of stockmarkets in places like Brazil, India and South Korea. The IFC, having collected data on 10 such markets. Felt that foreign investors might take to these boondock bourses, but would be put off by the risk of investing in a single company or the trouble of diversifying across many firms and places. The answer, the IFC concluded, was to provide them with a one stop, broadly representative “3rd World Equity Fund”.

The emerging markets group has also become more prosperous and more Asian. As well as progress, uplift and dynamism, emerging markets have traditionally featured crises, defaults and slumps. Poor economies typically become “emerging markets” because they have grown quickly. They remain “emerging” because they have not managed to grow steadily [1]

Defining emerging markets

According to that logic, poorer countries can grow faster than richer ones because imitation is easier than innovation and because capital earns higher returns when it is scarce. By the same logic, a country’s growth will naturally slow down as the gap with the leading economies narrows and the scope for catch up growth diminishes.

All else equal, then, middle income countries should grow more slowly than poorer ones. But Mr Garrett was making a bolder argument: that middle income countries tend to grow more slowly than both poorer and richer economies. The notion of a trap resonated widely with policymakers, note Messrs Kharas and Gill, especially in countries where growth had lost its lustre. Najib Razak, Malaysia’s prime minister, began talking about it in 2009 [2]

1. Middle income countries (often more accurately described as mixed-income economies) will be squeezed between higher technology and lower wage rivals on either side. those rivals rely on high technology or low wages for a reason 
2. Rich economies need advanced technologies and skills to offset high wages 
3. Poor countries, for their part, need low wages to offset low levels of technology and skill 

Obvious conclusion is that middle income countries can and do compete with both, combining middling wages with middling levels of skill, technology and productivity [3]

So, who’s who in Advanced and Emerging Economies [4]

1. Advanced Economies consist of 36 countries
2. Emerging Economies consist of 114 countries
   • Central & Eastern Europe
   • Commonwealth of Independent States
   • Developing Asia (consist of ASEAN-5)
   • Latin America and the Caribbean
   • Middle East and North Africa
   • Sub-Saharan Africa

Sources

1. Defining emerging markets
2. The middle income trap has little evidence going for it
3. China 2030
4. Country Composition of WEO Groups