To get out of the economic trap of “middle income”

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Shortly after its political independence, our country raised great expectations about its economic future. In the 1970s, we were considered to be part of the group of middle-income developing countries.

In the mid-1980s, as a country, we faced and suffered a major economic and political crisis. This crisis was amplified over the next decade by errors in energy policies that reduced the country’s capacity for rapid recovery. In addition, growth was severely constrained by a decline in competitiveness due to high unit energy and labor costs, as well as lower investment in infrastructure.

Trapped in the lower middle income bracket? The story of our economic status in a middle income position has been a long task in East Asia and among our neighbors in Southeast Asia.

Over the decades in our region, some formerly less developed countries have started to outperform us in terms of economic performance.

When a country is unable to manage the transition to a high income position due to rising costs and declining competitiveness, it is said to be in the middle income trap.

Are we stuck in the middle income economic trap? In particular, when will we ever go from being a middle-income stature to a country moving to a high-income country?

Income classes between countries. The World Bank classifies countries into four income groups instead of three or just: low income, middle income and high income. For greater clarity, it divides middle income countries into two classes: lower middle income and upper middle income.

In its 2020 income classifications, low-income countries have a per capita income of less than $ 1,036. High-income countries have per capita income above $ 12,535.

All intermediate countries – middle income countries – are divided into two groups. The lower middle income with per capita income of $ 1,036 to $ 4,045 and the upper middle income with per capita income of $ 4,046 to $ 12,535.

These per capita estimates correspond to gross national income or GNI, formerly known as GNP (gross national product) calculated in US dollars.

(Note: The technical explanations of the estimation method, in particular the essential exchange rate conversions, are intended for specialists and cannot be developed here.)

These groupings allow us to define the countries of our immediate neighborhood in East Asia and South East Asia, in particular our ASEAN partners.

Fast growing East Asia. During the period from the onset of post-WWII to the present day, East Asia has been home to a number of countries that have experienced rapid growth.

The first of these was Japan, which recovered economically from a disastrous war it started and lost. By the 1960s, it had regained its status as a high-income country.

The first economies of the economic miracle of the 1960s were the so-called East Asian Tigers – South Korea, Taiwan, Singapore, and Hong Kong. They have now become high income nations. (Hong Kong returned by treaty to be part of China.)

Then came the rapid economic boom of China (the great and massive People’s China with its population of 1.4 billion today). China today is now almost a high income economy, bringing prosperity to its masses.

How we compare within ASEAN. In Southeast Asia, among the major ASEAN member countries, Malaysia, Thailand, Indonesia, the Philippines, Vietnam, are still in middle income status. Of these four countries, only the Philippines and Vietnam belong to the group of lower middle income countries according to per capita income estimates in dollars.

This might come as a surprise to many of us compatriots, especially those who were already adults in the 1970s and 1980s.

In 2019, Malaysia and Thailand’s per capita income in dollars was much higher than that of Indonesia, the Philippines and Vietnam. Malaysia’s per capita income of $ 11,230 is near the limit for high-income countries. Thailand, with a per capita income of $ 7,260, is itself one of the many upper middle income countries in the world.

Indonesia with a per capita income of $ 4,050 is ahead of the Philippines, a fact that has been around for a few years now. Indonesia’s per capita income is now in the upper middle income group, although it is still close to the lower middle income country limit.

In the case of the Philippines, its per capita income of $ 3,850 in 2019 is in the group of lower middle income countries. This level of income is close to the category of upper middle income countries, but it is not yet.

As for Vietnam with $ 2,590 per capita income, the low level of the income estimate indicates its lagging position; as a country, Vietnam suffered from a long civil war and was still in great poverty until the 1990s. Although still a lower middle-income country, Vietnam’s performance since the 1990s are reminiscent of China’s initial growth rate in the late 1970s.

In 2020, when the covid-19 pandemic hit all countries, recent estimates of income growth in all ASEAN countries were affected.

But the Philippines felt it the hardest. Per capita income growth in Vietnam was reduced to 2.7 percent, but it was still growth. The remaining countries experienced a contraction in per capita income ranging from minus 2.9 percent (for Thailand) to minus 10 percent for the Philippines. (For the Philippines, per capita income fell to $ 3,430 from its level of $ 3,850 in 2019.)

Message to the Philippine leaders. These numbers give a clear idea of ​​the extent of our overall long-term track record relative to our immediate peers in the region, both in ASEAN and East Asia. The country must improve its economic performance. Unfortunately, we are at the end!

The gaps in economic reform that the country needs to achieve greater economic progress must be addressed. Ignoring them could mean the country could be left further behind its economic peers in the region.

These necessary economic reforms have been highlighted repeatedly in this column and need not be repeated any further.

For archives of previous Crossroads trials, see: https://www.philstar.com/authors/1336383/gerardo-p-sicat. Visit this site for more information, comments and comments: http://econ.upd.edu.ph/gpsicat/

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