Nixing the growth trap

After much strain and struggle, all of the countries in the Caribbean – with the notable exception of Haiti – are now classified as “Middle Income Countries” (MICs). This classification impacts not only on their ability to receive concessional loans from the World Bank, but evidently their empirical bases affect their growth prospects. Specifically, it has been demonstrated that it can lead to some MICs being ensnared in a “middle income trap,” that prevents them from graduating into “high income” status.
After WWII, the World Bank estimates that of 101 countries classified as “middle income” in 1960, only twelve of them went on to so graduate: five of them dubbed as the “Far Eastern Tigers”. Many of the remainder initially grew quite rapidly but then plummeted into just as rapid slowdowns in growth and productivity, characterising the “middle income trap”. Presently several of our more established “mid income states” such as Barbados and T&T have been experiencing problems that suggest that they may be enmeshed in the “middle-income trap”.
For the others yet showing positive growth indices, such as Guyana, research suggests that they should not wait until they enter the trap before trying to extricate themselves. It demonstrates that growth slowdowns are essentially productivity growth slowdowns, whereby 85% of the slowdown in the rate of output growth can be explained by a slowdown in the rate of total factor productivity growth; much more than by any slowdown in physical capital accumulation.
Interestingly, the most popular explanation of growth slowdowns is based on a Lewis-type development process, named after our own Nobel Winning Economist Arthur Lewis from St Lucia. Lewis had posited that switching labour from low-productivity sectors (e.g. agriculture) to higher-productivity sectors (e.g. industry and modern services) provides a massive, but one-off, rise in per capita income.
The switch in this initial phase of development is triggered by the application of imported technologies adopted in sectors producing labour-intensive, low-cost products. We saw this early on in Barbados and T&T. Once these countries reach middle-income levels, however, the pool of underemployed rural workers drains and wages begin to rise, thereby eroding competitiveness.
Productivity growth from sectoral reallocation and technology catch-up is eventually exhausted, while rising wages make labour-intensive exports less competitive on world markets – precisely at the time when other low-income countries become engaged in a phase of rapid growth.
Accordingly, growth slowdowns coincide with the point in the growth process where it is no longer possible to boost productivity by shifting additional workers from agriculture to industry and where the gains from importing foreign technology diminish significantly. Alternatively, it is suggested that several factors may affect productivity growth, including individual decisions to acquire skills, access to different types of public infrastructure, and knowledge network externalities. The last is defined as the possibility that a higher share of workers with advanced levels of education has a positive impact on performance, that is, the ability to benefit from existing knowledge, of all workers engaged in innovation activities.
By extension, therefore, there are a number of public policies that developing countries can employ to avoid or escape from middle-income growth traps. Such measures include developing advanced infrastructure in the form of high-speed communications networks, improving the enforcement of property rights through patent protections, and reforming labour markets to ensure that rigidities do not prevent the efficient firing and hiring of employees.