>HARD NUMBERS: Asia and the middle income trap

 Despite rising prosperity, slowing growth in Asia has raised concerns that the region might fall into the middle income trap
 As measured over the last four decades, a number of markets have indeed failed to lift income relative to the United States
 Despite rapid growth in the last ten years, further gains will be harder to achieve as productivity gains slow across the region



It gets harder over time
Investors are nervous about Asia. Impressive story, sure. But growth is slowing. Questions abound. Is this just a cyclical downturn that can quickly be cured with an adequate dose of policy easing? Or is there a deeper malaise? Will we have to get used to more subdued rates of growth than in the past? Ponderous stuff.


In reality, the answers strike middle ground. Asian economies will respond to policy easing in the coming months, but a return to the heady growth rates of the last decades appears hard to achieve. A number of reasons come to mind, including demographic forces and evidence that productivity growth has slowed (see Frederic Neumann and Tushar Arora, Asia’s shifting demographics, 24 February 2012; Frederic Neumann and Sanchita Mukherjee, Is productivity growth slowing in Asia? Parts 1, 2, and 3, April 2012). Asia’s growing challenges are not terribly surprising. As economies mature, they tend to slow down. It is easier to grow fast when poor. Harder to do so when rich.


Lurking beneath all of this is the middle income trap. History shows that in some countries growth slows so much as they mature that they never break onto higher ground, forever stuck in a range where per capita income doesn’t rise meaningfully further. Hence the question nagging investors: Is Asia at risk of getting caught as well?


Clear-cut answers are impossible. Much depends on policy. In the early phase of development, growth is usually driven by pumping cheap labour from farms into cities. Productivity gains are also easily attained as foreign technology is imported or imitated, and evident inefficiencies eliminated. With time, however, growth becomes more dependent on sustaining efficiency gains, not least because the supply of rural migrants dries up and wages rise. Productivity growth also becomes harder to achieve as countries catch up to international standards. At this point, policy becomes decisive. Further advances depend largely on efficient administration.


We will have much more to say on the subject in the coming months. For now, however, let’s look at where the region currently stands.


To read report in detail: HARD NUMBERS