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Policy Mimicry, Institutional Isomorphism, and Middle Income Traps: Lessons For and From Thailand, Korea and China
M Ramesh and M. Howlett
National University of Singapore
Policy Mimicry, Institutional Isomorphism, and Middle Income Traps: Lessons For and From Thailand, Korea and China
Introduction: Middle-Income Traps and Other Forms of Economic Stagnation
Issues in Identifying Middle-Income Trap
The Role of Innovation and Learning in Creating, and Overcoming, the MIT
Comparative Economic Performance: Thailand, Korea, China
Thailand: The Failure to Move Beyond Isomorphism and Emulation
South Korea: The Transitions to a High Level NIS
China: Alternative Practices in NIS Development
Mimesis and Isomorphism as Innovation Strategies for Overcoming Middle Income trap
Endnotes
References
Introduction: Middle-Income Traps and Other Forms of Economic Stagnation
As Agenor, Canuto and Jelinic (2012) define it, a ‘middle income trap’ (MIT) refers to a situation in a country whereby there develops a “stable, low-growth economic equilibria where talent is misallocated and innovation stagnates.” (p. 1)[1] Many studies have focused on the phenomena of stagnation. Aiyar et al for example identify several factors that determine economic growth, including institutions, demography, infrastructure, macroeconomic environment, economic structure, trade structure, and other factors.
Thus, La Porta, Lopez-de-Silanes, Shleifer, and Vishny (1997, 1998) have argued that the quality of a country’s legal institutions – such as legal protection of outside investors – could affect the extent of rent seeking by corporate insiders and thereby promote financial development. [1]Another strand of the literature has emphasized the advantage of limited government (Buchanan and Tullock, 1963; North, 1981 and 1990; and DeLong and Shleifer, 1993),” [1]while Mauro (1995) finds that corruption lowers investments, thereby retarding economic growth, although Mironov (2005) cautions that this is true of only certain kinds of corruption. Knack and Keefer (1997) have also provided evidence that formal institutions that promote property rights and contract enforcement help build social capital, which in turn is related to better economic performance and growth.” [1]
It is important to recognize that the MIT is not the only type of stable stagnating equilibria and many low income and also high income countries (Japan, for example) have also developed relatively stable ‘trajectories’ in which their growth has levelled off or stagnated. Nor is MIT a new phenomenon. There are many countries in Latin America and some in Africa that have been in the middle income bracket for decades [33] Separating what is new about the ‘middle income trap’ and other kinds of traps and trajectories is therefore important both in terms of understanding whether such traps exist and are unique in any way, and, secondly, how they are to be overcome. This is the purpose of this paper. The available evidence shows that income traps are real but may be overcome with appropriate policy measures. Emulating other countries with successful record in this regard offers considerable scope for improvement for all countries except those already at high level. However, new economic and demographic challenges are emerging for which there is little precedence and call for policy ingenuity. These issues are discussed below in reference to Thailand, South Korea, and China.
Issues in Identifying Middle-Income Trap
In general it is not unusual for a country to become mired at a middle income level. The chart below compares a country’s per capita income (relative to United States, adjusted for purchasing power) in 1960 with its income in 2008. Only 13 countries are said to have moved into a high income bracket over this half century including Hong Kong, Japan, South Korea, Singapore, and Taiwan.Most high income countries simply entered the twentieth century as wealthy and stayed that way while others began and stayed poor.
Source: Screenshot from The Economist (2012)
The ‘middle income trap’, however, refers to more than just the process of attaining a stable but stagnating equilibrium. As Aiyar et al have put it “The middle-income trap is the phenomenon of rapidly growing economies stagnating at middle-income levels[2] and failing to graduate into the ranks of high-income countries.” [3][1]
That is, a MIT is a specific two stage pattern of development in which some progress in incomes occurred which allowed a country to climb out of ‘low income’ status but was then followed by failure to continue to climb into the ranks of ‘high income’ countries. Unlike simply stagnating at some given level, this particular kind of trajectory is a challenge to some orthodox economic thinking which generally assumes that once the appropriate conditions are present to allow a transition from low to medium levels of income and a country has transitioned to middle-income status, these same conditions will continue in place or lead to a virtuous path of development towards a high income status.[4]
Typically, according to the World Bank, MIT countries have the following characteristics: low investment ratios, slow manufacturing growth, limited industrial diversification, and poor labour market conditions. Eichengreen, Park, and Shin (2012), define a growth slowdown episode as one in which three conditions are satisfied: i) growth in the preceding period is greater than or equal to 3.5 percent per annum; ii) the difference in growth between the current and preceding period is greater than or equal to 2 percentage points per annum, and iii) the country’s per capita income exceeds US$ 10,000 in 2005 constant international prices. [1]
But the MIT phenomenon raises crucial conceptual, empirical and methodological issues, such as when to determine the ‘start’ of a trajectory, what should be considered as the defining features of a “trap” - be it GDP growth, environmental deterioration, or stagnant or declining well-being, - what triggers the trap, and how the trap can be avoided.
Several preliminary insights are available in the literature as to why such traps occur. Arthur Lewis, for example, argued as far back as the 1950s that productivity gains were achieved as labour shifted from low-productivity agriculture to more productive manufacturing, a process that could be expedited by appropriate policy measures[5].Following his insight, “The migration of labour from agriculture to manufacturing, and the corresponding structural transformation of the economy have come to be viewed as the engine of economic development and growth (Harris and Todaro, 1970; Lewis, 1979).” [1]
While helpful in explaining the initial development situation in many countries, such economistic explanations did not explain why the newly productive industrializing countries would then stagnate. Other work in dependency theory (Wallerstein, Amin et al CITES)[6] blamed unfair terms of trade and protectionism while others (A. G. Frank CITES)[7] blamed neo-colonial investment practices and political conditions in many countries favoring large land owners and commericial practices rather than manufacturing. And some transitions in income did occur in countries lin the 1960s and 1970s as world trade and investment opened up and countries engaged in different divisions of labour internationally (CITES ON WTO AND 1970s and 1980s Developments – Hellenier et al).[8]
However, such explanations do not explain why stagnation would occur once trading conditions equalized and countries were governed by governments seeking productivity and trade enhancement and general improvements in wages and working conditions rather than self-enrichment- the specific phenomena associated with the ‘middle income trap’. Some explanations focus on changes in demographic factors as key variables. Several papers , for example, document a positive impact of the working age ratio on economic growth in a cross-section of countries (e.g. Bloom and Williamson, 1998; Bloom and Canning, 2004). Others find that national savings rates are strongly connected to demographic structure (Higgins, 1998; Kelley and Schmidt, 1996). Another approach is to focus on particular countries or regions. Aiyar and Mody (2011) use data on the heterogeneous evolution of the age structure of Indian states to conclude that much of the country’s growthh acceleration since the 1980s can be attributed to the demographic transition. Bloom, Canning, and Malaney (2000) and Mason (2001) find that East Asia’s “economic miracle” was associated with a major transition in age structure.” Other studies have suggested that demographic variable of interest include the sex ratio, a measure of gender bias. Sen (1992) and others have argued that the phenomenon of “missing women” reflects the cumulative effect of gender discrimination against all cohorts of females alive today. Gender bias could impact economic growth through higher child mortality, increased fertility rates, and greater malnutrition (Abu-Ghaida and Klasens, 2004). In their study of Indian states, Aiyar and Mody (2011) find that a more equal sex ratio is robustly associated with higher economic growth.” [1]
While it has long been recognized that economic growth does not necessarily lead to equal distribution of income, recent findings increasingly point to evidence that equality supports growth and, conversely, inequality stymies it. This poses new challenges for countries with high and growing inequality which had been harbouring the view, fostered by Kuznetz hypothesis, that inequality will decline when economic development reaches middle income levels. The phenomenon of population ageing – as a result of declining birth and increasing life span – with rise in income has been recognized since the 1970s. What was less recognized that some countries , particularly in Asia, will turn old before they become rich, posing new development challenges. Aged population imposes additional costs on public finance which may diminish resources available for development if not addressed effectively.
It is now increasingly recognized that the level of income inequality is a significant determinant of economic growth. “First, large inequalities foster political and social instability as more people engage in activities, such as crime and violent protests, which deter investments. Second, large inequality with credit market imperfection results in under-investment in human capital. Finally, countries with high inequality redistribute more, which creates distortions and lowers growth.” [35]“[9]
However, other studies focus on changes in investment activity and especially infrastructure investment. This conveys beneficial externalities to a gamut of productive activities, and in some instances has characteristics of a public good (e.g. a road network might be non-rivalrous at least up to some congestion threshold). For this reason, it has been uncontroversially viewed as positively related to economic growth, at least up to a point. Nonetheless, a survey by Romp and De Hann (2007) shows that the empirical literature has found mixed results, especially when proxies such as public investment are used to measure infrastructure development. There is also a long tradition of literature pointing to the perils of over-investment (Schumpeter, 1912; Minsky, 1986, 1992). For example, Hori (2007) argues that the investment slump after the Asian Financial Crisis of the late 1990s was at least partly due to overinvestment prior to the investment booms have often been associated with excessive borrowing and rapid accumulation of public and/or external debt. Inflation has also been associated with negative growth outcomes (Fischer, 1993), although Bruno and Easterly (1998) and subsequent contributions emphasize that the relationship is ambiguous when inflation is low to moderate.” [1]More recent contributions, and studies using more direct measures of infrastructure, have generally found a more positive impact of public capital on growth (Demetriades and Mamuneas, 2000; Roller and Waverman, 2001; Calderon and Serven, 2004; Erget, Kozluk, and Sutherland, 2009).” [1]
While this work is interesting and suggestive, the orthodox explanation for the MIT is still that the cost advantages in manufactured exports that once drove growth start to decline as unionization and cost of living spurs wage increases in newly industrialized countries in comparison with lower-wage countries which then become the new targets for investment and production. Middle income countries are then faced with new challenges, including problems with social cohesion if wealth and poverty effects are not borne equally by all sections of the populace, a large pool of urbanized young people in search of jobs, as well as millions who may still live in misery and poverty,particularly in lagging regions which have not yet transitioned from agricultural pursuits.[14]
However this does not explain how some countries have been able to continue or even accelerate their growth trajectory and make the transition to high income status. There is a large literature on the relationship between financial openness and growth (e.g. Grilli and Millesi-Feretti, 1195; Quinn, 1997; Edwards, 2001) for example, but there is more going on than just the adjustment of the cost of factors of production given changes in the international division of labour and labour cost adjustments across countries and regions. As Felipe, Abdon and Kumar have argued “We view today’s development problem as one of how to accumulate productive capabilities and to be able to express them in 1) a more diversified export basket and; 2) in products that require more capabilities (i.e. more complex).” [33] This suggests that a significant part of the MIT story lies in education[10] and human resource capabilities linked to technological change and advanced consumer and production industries and processes. This is at least in part a story about learning and the specific mechanisms – such as mimicry and institutional isomorphism – which have brought countries into the midddle income ranks but which are not capable of bringing them further into the ranks of the high income nations.
The Role of Innovation and Learning in Creating, and Overcoming, the MIT
In understanding why one middle income country might succeed while another might fail to transition, it is necessary to remember what MIT is: “a stable, low-growth economic equilibria where talent is misallocated and innovation stagnates.” (Agenor, Canuto and Jelinic’s 2012, p. 1)[11] This shifts the analysis away from simple factors of production arguments about the nature and origins of the MIT to those linked to learning and innovation. Searching for the reasons why some countries fail to learn and innovate is a more promising direction to follow than focussing on trade or investment relations and patterns in a more or less open world economic system or upon the demographic aspects of what are more often effects of MIT rather than causes.
One way the MIT literature seeks to explain this phenomena, for example, is to argue that ‘middle income’ is a development stage that characterizes countries that are squeezed between low-wage producers and highly skilled and fast-moving innovators. Many middle-income countries tend to make two common mistakes: either they cling too long to past successful policies, or they exit prematurely from the industries that could have served as the basis for their specialization process (Agénor and Canuto 2012; Aiyar et al. 2013; Eichengreen, Park, and Shin 2013; Felipe 2012; Gill and Kharas 2007; Nungsari and Zeufack 2009; OECD 2007). In this view timing and smooth transitions between industries and specializations are two keys to success. [14]
This is a powerful explanation, as for instance, it underscores the significance of events such as wars or crises which prevent such transitions from occurring and sometimes result in a lagged or stepped pattern of development (for example Korea after the Korean war, or other countries after years of non-innovating dictatorships e.g. Spain, Portugal or Greece). Capital inflows, for example, have classically been regarded as conducive to growth, allowing capital to be allocated to wherever its marginal product is highest, besides facilitating consumption smoothing and diversification of idiosyncratic income risk. But the “sudden stops” literature pioneered by Calvo (1998) has emphasized that periods of surging capital inflows are sometimes followed by a cessation or even reversal of the flow, with often severe repercussions. Recent evidence from the global financial crisis suggests high domestic spillovers from reliance on cross-border banking flows (Cetorelli and Goldberg, 2011; Aiyar, 2011, 2012). This is consistent with the “twin crises” literature emphasizing that banking crises and sudden stops are often joined at the hip (Kaminsky and Reinhart, 1999; Glick and Hutchinson, 2001).
Such shocks, however, may not affect long-term growth, they have been found to lower potential output levels permanently, consistent with persistent – albeit temporary – impact on potential growth (Cerra and Saxena, 2008). Such explanations require refinement if the reasons for growth, and stagnation, in innovative behaviour are to be clearly understood.
Here it is useful to look at endogenous growth theory and problems with developing and applyingtechnology in national and regional innovation systems(Add more cites here, such as Soete, Edquist, Nelson, Lunvall, Gibbins etc.).[12] Such theories focus attention in explaining the MIT on understanding why innovation would occur up to one point and then stall.