The middle income trap

The Nation on Sep. 12, published an article announcing ADB's approval of a $300mn loan to Thailand to develop its capital market. The 15 year period loan is to be used in support of the Thai government's Capital Market Development Master Plan for 2009-13 for the development of the equity market, bond market and money market in four areas: regulatory environment; market efficiency, liquidity and transparency; market infrastructure; and new products and investors. 

The government has made substantial headway in developing Thailand's capital market. Recent measures included establishing a timetable for the demutualisation of the Stock Exchange of Thailand, strengthening the surveillance and enforcement capabilities of the Securities and Exchange Commission, moves to develop the domestic bond market, and simplifying taxes on financial transactions. There has also been activities organised to improve public financial literacy.

What caught my interest was the mention of the capital market development plan's goal to help the country "transform from a middle-income to high-income economy through increased contribution of the domestic capital market to financing domestic investment and economic growth".

"The middle income trap" seems to be a recent development agenda that is being 'pushed around' at the moment. I remembered having recently read an article at Time about Malaysia's dilemma with this interesting concept. I had felt then that the writer didn't do much justice for Malaysia. However, it seems that this economic criticism is gaining some weight among policy makers. Here are a couple of related articles:

The Star, "Caught in middle income trap"

China Law Blog, "China, Malaysia, Korea And The "Middle Income Trap"

From an economist's blog, "Getting out of the middle income trap"

From a Vietnamese point of view, "Avoiding the middle-income trap: renovating industrial policy formulation in Vietnam"

From an Indian point of view, "The middle income trap" and "The challenge is to escape the middle income trap"

Of course, moving towards a higher income economy is a desired goal, but I can't help wondering. Is the simple focus on "income" levels obscuring other desired developmental goals? Like income distribution for one? Does higher income come with skewered income distribution? If it does, well, maybe it's okay to be "stuck" for a while, until those higher income countries can show us that people with lower income in their countries are receiving desired benefits of higher income, let's say... a good welfare service system for one, no?

Some recommendations of how to escape the middle income trap:

• a managed growth program with higher income, stronger currency, while maintaining a flexible foreign exchange regime and inflation control targets
• a more efficient capital market, availability of capital for sme and local firms to grow
• R&D spending
• tax reform (capital gain tax)
• investment in human resources
• developing an ability to produce and contribute to the global economy via home grown innovations

Economics aside, I think there are other socio-political issues that can cause a country to be stuck, my own list:

• political instability, stunted political development
• corruption
• a polarized society
• debt
• lack of investment in infrastructure and human capital
• energy self-sufficiency

To cap off, I found this interesting and useful guide, from You can read the Bangkok Post, by Jon Fernquest, "Avoiding the middle income trap: The challenges ahead for Thailand"