Abstract
We present three conditions for a demography-driven middle-income trap and show that many economies in East, South, and Southeast Asia satisfy all of them. The conditions are (1) support ratio—the ratio of workers to consumers—matters for economic growth, (2) economic development accompanies more investment in human capital and lower fertility due to the quantity–quality trade-off, and (3) current low level of fertility corresponds to too low support ratios for keeping up with the frontier economies in the long run. The panel analyses for 178 countries, among which 30 are ADB developing member economies, show that (i) and (ii) are satisfied for Asia with higher elasticity than others. As for (iii), we set up a dynamic model for simulations, showing that about two-thirds of ADB members have unsustainable level of support ratios, implying possibilities of a middle-income trap due to demographic headwinds in the future.
Highlights
Most Asian countries have been experiencing rapid demographic transitions for the last several decades, leading to huge changes in economic environment
To test the conditions for middle-income trap, we conduct annual panel analyses using the Penn World Table (PWT) 9.0 and World Development Indicators for 178 countries among which 30 are Asian Development Bank (ADB) developing members for the years 1970–2014.2 We present the results for both random-effects models and fixed-effects models as the Hausman test results are ambiguous for many cases
Economies with low steady state support ratios and middle income are quite likely to get into the trap, if they do not get into the high-income group quickly or fail to raise fertility
Summary
Most Asian countries have been experiencing rapid demographic transitions for the last several decades, leading to huge changes in economic environment. The possibility of a demography-driven middle-income trap has been proposed by Ha and Lee (2016), where the role of support ratio—the number of workers as a ratio of the number of consumers—in the process of economic convergence has been analyzed using the panel data of more than 100 countries. They argue that the level of support ratio is closely related with the speed of convergence or growth rate of GDP per capita, and the level of economic development and average human capital has negative relationship with fertility.
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