Asian Angle | How South Korea avoided the ‘middle-income trap’ to grow and diversify its economy
Early land reform reduced income and wealth inequality, allowing South Korea to later focus on manufacturing and innovation to boost growth
Last week, the World Bank released its annual World Development Report. Titled “The Middle-Income Trap”, the report observes that while most countries are able to get from low- to middle-income, getting from middle- to high-income is much less common and far more difficult.
As the report points out, development strategies that served countries well when they were still low-income – especially high capital investment – yield diminishing returns when these countries reach middle-income status. Getting from lower-middle to upper-middle-income requires not just high investment, but also infusion, in which a country imports technologies and diffuses them widely. Even harder is the transition from upper-middle to high-income; this requires the country to innovate.
The report is a timely and sobering one for China’s policymakers given the country’s ongoing struggles to boost investor and consumer confidence, end a three-year-long property slump, and raise productivity.
In Asia, South Korea was the last populous country to join the ranks of high-income nations. Since it did so about 30 years ago, no other major Asian country has graduated to high-income status. This shows how hollow the claim of Asia’s rise or the Asian century is. To paraphrase the late economist Robert Solow, we can see that the “East is rising, and the West is declining” everywhere except in income per capita statistics.
As Chart 1 shows, South Korea went quickly from being a middle-income country in the 1980s to a high-income one in the early 1990s, while other middle-income countries including Brazil, Malaysia and Thailand were unable to do so.
