Middle income trap

Discussion by Tadashi Ito, Institute of Developing Economies, JETRO

1

Should middle income countries pursue the same development strategies of Korea or Japan?

My answer is NO! Why?

2

Because of 2nd unbundling due to ICT revolution from the end of 1980s.

Up the 1970s, industrialization meant building the whole supply chain at home, but in the 21st century globalization, nations could industrialize by joining a supply chain. (Richard E. Baldwin (2010))

3

Intra-industry trade (IIT) index Factory Asia and Factory Europe increased IIT.

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

119

6219

6419

6619

6819

7019

7219

7419

7619

7819

8019

8219

8419

8619

8819

9019

9219

9419

9619

9820

0020

0220

0420

0620

0820

1020

12

Argentina

Chile

China

Czech Republic

Hungary

Indonesia

Korea

Mexico

Malaysia

Philippines

Poland

Thailand

Vietnam

4

But is it enough? My answer is no. Evidence of product quality upgrading in the

Eastern European countries, while no such evidence in Asia.

5

Evolution of GDP per capita

0

5000

10000

15000

20000

25000

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

China

Malaysia

Thailand

Czech Republic

Hungary

Poland

6

Unit value difference in IIT (Data of Germany)

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

1.2

1.419

8819

8919

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

0720

0820

0920

10

Czech Rep.

Poland

Hungary

Slovakia

Romania

Slovenia

Bulgaria

7

Unit value difference in IIT (Data of Japan)

-1.2

-1

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

119

88

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

China

Germany

France

Indonesia

Korea

Malaysia

Philippines

Thailand

USA

8

So, better to go to higher technology stages. (as Porametee from Thailand has argued) But is it always better to go to more “high-tech”

stages? My guess is “probably no”. Need some concentration to some stages in

order to benefit from agglomeration effect and also to have market power.

9

No need to be Apple computer, but be GIANT of bicycles or Chimei of ABS resins in Taiwan.

So, the government needs to provide a business friendly environment. (as Allauddin from Malaysia have argued)

10

Up to here, the global supply chain. Another thing which I think is important is

service trade liberalization. Evidence from Czech Republic: Service sector

trade is associated with productivity increase of related manufacturing sector. (Arnold, Javorcik and Matto (2011))

Service trade is very small in Asia (Baldwin and Lopez-Gonzales (2012))

11