Growth Convergence and the Middle-Income Trap

Abstract

Emerging market economies in East Asia have followed a similar growth path (growth convergence) from a low-income, high-growth state to a middle-income, middle-growth state through industrialization. The economic development of Japan was followed by the “four tigers” (Hong Kong, China; the Republic of Korea; Singapore; and Taipei,China) in the 1970s; and subsequently by members of the Association of Southeast Asian Nations in the 1980s and the People's Republic of China in the 1990s and 2000s. The growth rates of Asian economies are slowing over time and may fall to advanced economy levels before incomes fully catch up with the advanced economies. This is defined as the middle-income trap in the paper. This paper proposes that there exist three convergence paths in Asia: low income, middle income, and high income. Economies need to shift from one convergence path to a higher one by implementing economic and political reforms that can generate innovation. Without reform, economies may fall into a low- or middle-income trap.