Economic Development - Strategies for Sustainable Development

Introduction

Which strategies and policies are best for an individual country wishing to see sustained economic growth and development? Remember that growth and development are not the same!

"Never before in history has the dream of eliminating global poverty been so attainable, yet seemed so elusive. We live in a world where the reach of technology and markets are global, and yet more than a billion men, women, and children live in abject poverty, devoid of their benefits. How can that possibly be? In an age of plenty, what deprives people of adequate food, shelter, clean water, education, good health and enough income to live on with dignity? What can governments, international agencies, and non-governmental organizations do to make the dream a reality?”

Source: Professor Dani Rodrik. Harvard

The role of the state: Throughout much of the 1960s and 1970s, traditional development thinking had been that government/state control and economic planning, high levels of public investment and protection from the volatility of the world market using protectionism was the best recipe for promoting development.

Self-sufficiency was the main goal including investment in import-substitution industries - so foreign trade was seen as a hindrance and therefore a tax opportunity to raise revenues for the government.

In the 1980s and 1990s a new pro-market doctrine gained momentum supported by the work of institutions such as the World Bank and the International Monetary Fund (IMF). This approach advocatedmarket-friendly and open-border policies including cuts in import tariffs and increasing cross-border flows of financial capital and labour.

The core idea behind increasing openness in the world economy was that developing countries stronger engagement with the developed world allows them to mimic and develop the technologies of the West, raise productivity and drive per capita incomes higher.

Development Challenges: Escaping the Middle Income Trap

The middle income trap exists for some countries that make significant progress in reducing extreme poverty and experience structural change and growth but then find it difficult to make the climb from being a middle-income country to achieve high-income fully-developed status. GDP growth rates often slow down and a country can struggle to build and maintain international competitiveness.  Research from the World Bank finds that only 13 of the 101 countries deemed to be middle-income countries in 1960 had achieved high-income levels in 2011. Different studies find different thresholds for where growth tapers off, ranging from $8,500 to $18,500 at 2010 prices, adjusted for purchasing power parity.

Possible Causes of the Middle-Income Trap

Strategies for Avoiding the Middle Income Trap

Key to avoiding the trap is for each country to find the right mix of demand and supply-side policies to sustain a further lift in their per capita incomes and to achieve balanced growth sourced from domestic and overseas markets. Every country has a different set of economic, social, cultural, demographic and political circumstances so there is no unique policy mixes to avoid the middle income trap – some of the approaches often mentioned include the following:

• The growth that brings a country out of extreme poverty is not always the type of growth that makes a country richer and lifts their per capita income above middle-income levels
• The middle income trap is largely the result of a country’s inability to continue the process of moving from low value-added to high value-added industries
• The advantages of low-cost labour and imitation of foreign technology can disappear when middle- and upper-middle-income levels are reached
• The focus switches towards improving competitiveness rather than narrow emphasis on input-driven growth (i.e. just adding more land, labour and capital into the production process)
• Many middle-income countries experience a “growth slowdown”. Leading economist, Professor Barry Eichengreen has found that growth slowdowns typically occur at per capita incomes of about $16,700 in 2005 constant international prices. At that point, the growth rate of GDP per capitaslows from 5.6 to 2.1 percent, or by an average of 3.5 percentage points

Case Study: Malaysia attempts to break the middle income trap

• The Malaysian economy achieved rapid growth during the period 1990-97 with annual increases in real GDP close to 10%. The economy then suffered a recession in 1998 because of the Asian financial crisis before starting a recovery. But growth rates since then have been substantially lower – averaging only 4.3% pa from 2001-2009.
• Our chart below confirms this and shows also that capital investment spending as a share of GDP has dropped from over 40% to 15% in 2009. Malaysia can still reach her target of becoming a high income developed country by 2020; indeed the government has an ambitious five year national economic plan that includes a target of doubling per capita incomes.

Malaysian growth potential:

• A youthful population  - 31% below the age of 14 , 5% the population older than 65
• Export driven economy spurred by high technology, knowledge-based, capital-intensive industries
• A leading exporter of semiconductor devices, hard disks, audio/video products and air conditioners
• Tourism regarded as a key growth and development industry – now supported by increased infrastructure investment. Malaysia has 32 airports with paved runways + 83 with unpaved runways
• Focus on giving the private sector a bigger role in driving growth and in attracting FDI

Malaysia ranks well in terms of global competitiveness and the chances of breaking the middle-income trap: The 2012 Global Competitiveness Index ranked Malaysia as follows (ranked out of 142 countries):

• Institutions:                               30/142
• Infrastructure:                            26/142
• Macroeconomic environment:    29/142
• Health and primary education:    33/142
• Technological readiness:           44/142
• Higher education and training:    38/142

Malaysia’s overall global competitiveness ranking for 2012 was 21 out of 142 countries