New evidence on the middle income trap

by on January 11, 2013 at 3:53 am in Economics | Permalink

From Barry Eichengreen, Donghyun Park, and Kwanho Shin:

We analyze the incidence and correlates of growth slowdowns in fast-growing middle-income countries, extending the analysis of an earlier paper (Eichengreen, Park and Shin 2012). We continue to find dispersion in the per capita income at which slowdowns occur. But in contrast to our earlier analysis which pointed to the existence of a single mode at which slowdowns occur in the neighborhood of $15,000-$16,000 2005 purchasing power parity dollars, new data point to two modes, one in the $10,000-$11,000 range and another at $15,000-$16,0000. A number of countries appear to have experienced two slowdowns, consistent with the existence of multiple modes. We conclude that high growth in middle-income countries may decelerate in steps rather than at a single point in time. This implies that a larger group of countries is at risk of a growth slowdown and that middle-income countries may find themselves slowing down at lower income levels than implied by our earlier estimates. We also find that slowdowns are less likely in countries where the population has a relatively high level of secondary and tertiary education and where high-technology products account for a relatively large share of exports, consistent with our earlier emphasis of the importance of moving up the technology ladder in order to avoid the middle-income trap.

The NBER version is here, does anyone know of an ungated version?

Ph January 11, 2013 at 6:02 am
Artur Lerner January 11, 2013 at 7:11 am

Here is another quote from the paper (thanks for the link above): ” ‘high quality’ human capital matters more than ‘low quality’ human capital for avoiding growth slowdowns”.

This seems to corroborate the smart fraction theory. Here is a quote from a Heiner Rindermann paper: “The smart fraction is regarded as responsible for progress in a utilitarian sense (wealth, health and power), but also for achievements in a non-utilitarian sense (music, literature, art, religion, ethics, philosophy and world-views).”

In the paper “Considerations about IQ and human capital in Brazil”, the authors (including Flores-Mendoza) are eager to prove that Brazil’s population does, indeed, contain a large smart fraction. Here is a quote: “national mean IQ is not a good indicator of the potential for Brazilian intellectual and economic leadership in the Latin American region. Instead, one of the best indicators could be the magnitude (and quality) of the top human capital of Brazil, which was estimated in 20 millions of people”.

The above estimate seems highly questionable. Even in the US, there are only about 22 million people with IQs above 120 (Population 311 million, Mean IQ 98, SD 15), which Charles Murray states is the minimum necessary to be successful and productive in college.

uffy January 11, 2013 at 8:52 am

I dunno. A roughly 20% and linear increase in female labor force participation between the early 1960s and 1990s seems to have had no effect whatsoever on GDP growth averages and surely such a phenomenon increased the high-IQ workforce rather dramatically as a percent of total.

Maybe this natural experiment was flawed due to some cultural issue(s), but I remain unconvinced that high-IQ workers are all that useful in and of themselves. Perhaps “high quality” human capital is more important than low in maintaining economic growth but many other variables are more determinant.

Miley Cyrax January 11, 2013 at 10:07 am

If Smart Fraction Theory is true, then the entrance of women into the workforce, even en masse, has much less effect than you would expect. Women have lower variance of IQ, and prioritize aspects of life ahead of grinding away at being “productive.”

Lower variance of IQ has also been proposed for relative East Asian underachievement at the right tail, but I haven’t seen this verified.

Verbal IQ is better associated with national wealth than overall IQ, and Asians do indeed have lower verbal IQ relative to their overall IQ.

dieter January 11, 2013 at 10:45 am

1.) Male labor force participation has declined at almost the same rate.
2.) Just because women weren’t in the labor market doesn’t mean that they did not work and add in various ways to gdp. (e.g. charity; building rich community ties, thus lowering transaction costs; increasing their husbands productivity)
3.) Women work half-time.

shep burton January 11, 2013 at 11:28 am
Saturos January 11, 2013 at 11:40 am

“We also find that slowdowns are less likely in countries where the population has a relatively high level of secondary and tertiary education…”

Another dent in the signalling theory…

Therapsid January 11, 2013 at 12:03 pm

Not really. Most people who have argued for a signalling role for tertiary education have not made the same claim for secondary – the two are conflated here. When we go from a bachelor’s at a state university to a B.A. at an Ivy League school to a Master’s at an elite university, we should expect the signalling component of degree premiums to rise.

wiki January 11, 2013 at 12:20 pm

Doesn’t this depend on the iq distribution in the population? Both the amount of education a population can obtain and what they learn from it are a function of the underlying human capital people start out with which in turn affects the relative ratio of learning to signalling also.

kiwi dave January 11, 2013 at 12:51 pm

I recall reading summaries of studies of self-reported happiness saying that while rich countries are happier than poor countries, the correlation between happiness and higher incomes gets much weaker at per capita GDP of around $10,000 (don’t remember if it was nominal or PPP). The implication was that at about that level, most people are not experiencing genuine poverty and diminishing returns from higher income start setting in. I wonder if these income traps have something to do with increasing substitution of leisure once people reach a decent standard of living (at least according to the frame of reference in that society, which may be a lot lower than in Europe or North America).

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