Asia’s Economic Traps

by John West, Asian Century Institute

Most Asian economies are being stalked by low-income traps, middle-income traps, and even high-income stagnation traps.

The world is wondering if the Chinese economy will fall into a “middle income trap”, according to distinguished US economist Barry Eichengreen. After successfully transitioning from low-income to middle-income status, could China fail to maintain sufficient economic growth to achieve high-income status?

In other words, could it get stuck at a middle income level like Brazil and some other Latin American countries have done? Countries caught in middle-income traps find themselves squeezed between countries that compete on the basis of low wages and costs (like Cambodia and Vietnam), and those that compete on the basis high-skills and innovation capacities (such as Japan and Korea).

But while economic commentators are obsessed with speculating about China’s future, economic traps of all sorts are lurking everywhere in Asia, stalking all economies, both rich and poor.

In fact, only the micro-economies of Hong Kong, Macao and Singapore have managed to climb the development ladder sufficiently to match the dizzying heights of leading Western economies like the US, Germany and Switzerland. And there is little prospect of any other Asian economy achieving such success, notwithstanding economists’ insightful analysis of conditional economic convergence.

First of all celebrate we should celebrate the fact that virtually all Asian economies have escaped the “poverty trap”, that vicious cycle of poverty breeding poverty. And thankfully Burma/Myanmar may finally be on the verge of breaking out of its longstanding poverty trap.

The once-seemingly desperate cases of Bangladesh, Cambodia and Vietnam have managed to attract sizable flows of foreign investment for the garments industry. True, this is a low-skill and low value-added industry. It is also true that these industries are riddled with human and labor rights abuses. And governments have provided massive incentives to secure such foreign investment.

But the garments industry in these countries has created many jobs, notably for women. And extreme poverty has fallen markedly.

In India and the Philippines, there have been other paths out of the poverty trap. Financial remittances from overseas migrants have enabled many families to survive, send their kids to school, and sometimes start a small business. And English language facility has enabled the development of competitive IT-based industries.