Escaping the Middle-Income Trap: Innovate or Perish
Paus, Eva | March 2017
Abstract
This paper analyzes the reasons for the middle income trap in Latin America, where countries have been at the middle income level for decades, and draws out lessons for Asia. The ‘middle income trap captures a situation where a middle income country can no longer compete internationally in standardized, labor-intensive goods because wages are relatively too high, but it can also not compete in higher value added activities on a broad enough scale because productivity is relatively too low. The result is slow growth, stagnant or falling wages, and a growing informal economy.
Insufficient development of domestic innovation capabilities is at the heart of the middle income trap. In Latin America, it is the result of a market-led strategy which generated dismal productivity growth, rapid de-industrialization, a decline in export sophistication in many countries, poor innovation performance, and underinvestment in the requisite social capabilities. The current globalization context provides a challenging context for middle income countries to narrow the capabilities gap, because they have less time to do so, with more players competing in the innovation space and technological innovation changing faster. A comprehensive innovation-focused strategy with strategic active policies is the only way to escape the middle income trap. The nature of the production structure, already existing elements of an innovation eco system, and the possibilities for creating political coalitions in support of a systemic advancement of innovation capabilities are critical factors conditioning the escape from the middle income trap.
Citation
Paus, Eva. 2017. Escaping the Middle-Income Trap: Innovate or Perish. © Asian Development Bank Institute. http://hdl.handle.net/11540/7618.Keywords
Enterprises
Financial aid
Economies in transition
Local Finance
Local Government
Insurance Companies
Banks
Social Equity
Economic Development
Economic Infrastructure
Economic Policies
Regional Economic Development
Microfinance Programs
Public Finance
Local Financing
Financial Stability
Financial Sector Regulation
Social responsibility of business
Accounting
Personal budgets
Cost and standard of living
Bank accounts
Credit control
Regulatory reform
Banks and banking
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