How Malaysia Can Escape the Middle-Income Trap: IMF Research

choi

Ieda Cherif and Fuad Hasanov, The Leap of the Tiger: How Malaysia Can Escape the Middle-Income Trap. IMF, June 2015 (released on June 23; Working Paper No WP/15/131)
www.imf.org/external/pubs/ft/wp/2015/wp15131.pdf

Quote:

(a) "Only a few European economies and Korea and Taiwan Province of China reached high-income status during 1970-2010. Malaysia’s real income per capita increased to 26 percent of the US level in 2010 from 20 percent in 1970. Despite relatively strong growth and a substantial improvement in export sophistication, Malaysia’s total factor productivity lagged behind that of Korea and Taiwan Province of China."  Abstract

(b) "Gross domestic product (GDP) per capita [in Malaysia] grew by an average 2.8 percent per year over 1970-2010, reaching $10,830 per capita (in 2005 purchasing power parity, PPP, terms)." page 2

(c) “"The following section [section III, titled "III. THE MISSING LINK: CREATING OWN TECHNOLOGY”] argues that the lack of domestic technological upgrading is the main reason Malaysia could not follow in the footsteps of Taiwan Province of China and Korea.”  pages 2-3

(d) "Using the definition of real income per capita relative to the US, only nine out of 167 economies in the sample in 2010—Cyprus, Czech Republic, Greece, Ireland, Korea, Malta, Portugal, Slovenia, and Taiwan Province of China— reached high-income status in the past 40 years. Furthermore, only two economies,which were below Malaysia’s income in 1970, made it to high-income status: Korea and Taiwan Province of China. Given the historic record, escaping the 'middle-income trap' would constitute an economic 'miracle.' " page 2

(e) "The experiences of Korea and Taiwan Province of China, who mostly relied on creating technology by local firms, were much more successful in innovating and increasing productivity. Creating and diffusing technology through local firms are key to improving productivity and generating innovation and technological upgrading." page 2

(f) continuing from dc): “Seven of them are European countries, which were already upper-middle income countries and above Malaysia’s income in 1970, and later became part of the European Union. It is not surprising that these countries grew relatively fast. The remaining two economies, Korea (KOR) and Taiwan Province of China (TPC), made it to high-income status while starting at a level of development below that of Malaysia (MYS) in 1970 (Figure 1).”  pages 3-4

(g) “"The growth stories of Korea and Taiwan Province of China illustrate the leap of the Asian tigers. On average over the past 40 years,Korea and Taiwan Province of China grew by about 7.1 percent and 5.3 percent per year, respectively. In contrast, Malaysia grew by 2.8percent annually (Figure 2). Taiwan Province of China overtook Malaysia around 1975,while Korea caught up in 1985. Only 5 years later, in 1990, Korea reached the level of income it took Malaysia to reach in 30 years.  Although Malaysia grew from about $4100 to about $10,800 over 1970-2010, it barely changed its relative position. It reached 26 percent of the US income per capita in 2010 from 20 percent in 1970. Korea and Taiwan Province of China skyrocketed from less than 20 percent of the US income in 1970 to above 65 percent in 2010.”  page 4

(h) "A theoretical explanation for the middle-income trap relates to productivity slowdowns[,] as gains from low-cost labor and foreign technology imitation diminish in moving through the stages of development."  page 6

(i) "Moving away from labor-intensive manufacturing to sustain increases in productivity and per capita income requires innovation—the use of new ideas, methods,processes, and technologies in production—rather than imitation (Aghion and Howitt 1992). Innovation-driven growth is key to avoiding the middle-income trap. * * * Acemoglu,Aghion, and Zilibotti (2006) argue that if countries do not switch from an investment-based strategy to an innovation-based strategy before a certain level of development, they may get stuck in a “non-convergence trap” without reaching the world technology frontier. * * * The middle-income trap could also be characterized by a misallocation of talent and a limited access to advanced infrastructure [roads, electricity, broadband etc].”  page 7

(j) "We argue that the missing link in Malaysia’s growth strategy in comparison to Taiwan Province of China and Korea is local technology creation. Technology creation was relatively low as is evident by the number of patents granted in the United States.”  page 9

My comment:
(a) There is no need to read the rest.
(b) Total actor Productivity (TFP) measures how EFFICIENTLY an economy uses its resources (factory, money, land and human resources).