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Navigating the Road to Riches

Jul 12, 2011 Otaviano Canuto

The “middle-income trap” has snared many developing countries: they succeeded in evolving from low per capita income levels, but then appeared to stall, losing momentum along the route toward the higher income levels of advanced economies. Does moving up the income ladder get harder the higher one climbs?

WASHINGTON, D.C. – A switchover of global growth engines is taking place. Developing economies as a whole are now the source of more than half of global GDP growth. As a result, concern has naturally shifted to a new question: Are there risks that some or many of these developing countries could fall prey to the “middle-income trap”?

The “middle-income trap” has captured many developing countries: they succeeded in evolving from low per capita income levels, but then appeared to stall, losing momentum along the route toward the higher income levels of advanced economies. Such a trap may well characterize the experience of most of Latin America since the 1980’s, and in recent years, middle-income countries elsewhere have expressed fears that they could follow a similar path. Does moving up the income ladder get harder the higher one climbs?

In most cases of successful evolution from low- to middle-income status, the underlying development process is broadly similar. Typically, there is a large pool of unskilled labor that is transferred from subsistence-level occupations to more modern manufacturing or service activities that do not require much upgrading of these workers’ skills, but nonetheless employ higher levels of capital and embedded technology.

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Otaviano Canuto

Writing for PS since 2011
13 Commentaries

Otaviano Canuto, former State Secretary for International Affairs at the Brazilian Ministry of Finance, is Executive Director on the Board of the World Bank for Brazil, Colombia, the Dominican Republic, Ecuador, Haiti, Panama, the Philippines, Suriname, and Trinidad and Tobago. A former vice president and senior adviser at the World Bank, he previously served as Executive Director of the IMF and Vice President of the Inter-American Development Bank.

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Nathan Coppedge Oct 28, 2012

The position that countries such as Brazil should grow their GDP by using other developing countries may depend on an assumption of interdependence with the United States financial system. Clearly Brazil does not want to escalate debt by imitating the policies of the United States government. What if revenue from those other developing countries depends on loans offered by the United States? That just seems like bad banking karma, as much as Brazil might already be involved.

In some ways it might be as simple to compare investment in developing countries with the debt crisis as it is to compare national investments with global investments. If Brazil joins in a multinational corporation, does that mean more GDP by wise investing than to involve itself in an international debt crisis? Perhaps it looks on the surface like an involvement with international corporations would be a failure of the bottom line, and an abstraction of interests---involvement with greedy moguls or something, and this is partly what is arbitrated by international relations such as the much earlier Venezuelan oil crisis. But what if it turns out that, globally, international corporations are the only alternative to debt through wise investing? Maybe the global community would benefit by corporations being more forthcoming about their strategic policies? Or must we assume that these "agencies" are somehow unthinking, and physically minded constructs which blindly tap nature's resources for numeric benefit?

I would be highly encouraged to hear that Brazil benefited by a global business alliance, but I have heard much to the contrary about the role of business and politics in Brazilian news.

Evidently the wise thing is not the obvious thing, while following an American policy may not seem automatic either. If America could instill faith that America has the right system, perhaps countries would be more willing to integrate with banks rather than international corporations. If there is an innate inefficiency with global businesses, perhaps now is the time to declare it. Or some sort of international business structuring that takes account of investment in developing countries.
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