To move out of the ‘middle income’ economic trap

Shortly after gaining political independence, our country earned high expectations about its economic future. By the 1970s, we were considered within 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 in the following decade by mistakes in energy policies that reduced the nation’s capacity for rapid recovery. Furthermore, growth was badly hampered by a decline in competitiveness arising from high energy and unit labor costs, and by a decline in infrastructure investments.

Trapped in lower middle-income? The history of our economic status in middle income position has been a long slog in East Asia and among our Southeast Asian neighbors.

In the course of many decades in our region, some countries that were formerly less developed began to surpass us in economic performance.

When a country is unable to manage the transition to a high income position because of 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 move from a middle income stature toward a country moving to high income as a country?

Income classes among countries. The World Bank classifies countries into four income groups instead of only three or: low income, middle income, and high income. For improved sharpness, it divides the middle income countries into two classes: the lower-middle income and the higher-middle income.

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

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

These per capita estimates are of Gross National Income or GNI, formerly known as GNP (Gross National Product) calculated in US dollars.

(Note: The technical explanations of the estimation method, especially the essential exchange rate conversions, is for specialists and cannot be elaborated here.)

These groupings enable us to define countries in our immediate neighborhood in East Asia and in Southeast Asia, in particular our ASEAN partners.

Fast-growing East Asia.  During the period from the early post-World War II to the present, East Asia has been host to a number of countries that experienced rapid growth.

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

The early economic miracle economies 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 has reverted by treaty to be part of China.)

Then came the rapid economic rise of China (the big, massive Peoples’ China with its population of 1.4 billion people 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 big ASEAN member countries, Malaysia, Thailand, Indonesia, the Philippines, Vietnam, are still in middle income status. Among these four countries, only the Philippines and Vietnam fall in the group of lower-middle income countries as per the estimates of income per capita in dollars.

This might surprise many countrymen among us, especially those who were already adults by the 1970s and 1980s.

In 2019, Malaysia and Thailand income per capita in dollars were far above those of Indonesia, the Philippines and Vietnam. Malaysia’s $11,230 income per capita is close to the borderline of high income countries. Thailand, a per capita income at $7,260 is itself among the many higher-middle income countries of the world.

Indonesia with a per capita income of $4,050 is ahead of the Philippines, a state of affairs that has come to pass for some years now. Indonesia’s income per capita is now in the group of higher-middle income countries even though it is still close to the borderline of lower middle-income countries.

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

As for Vietnam with $2,590 income per capita, the low level of the income estimate indicates its late-comer position; as a country, Vietnam suffered from a long civil war and it was still in deep poverty until the 1990s. Although it is still among the lower-middle income countries, Vietnam’s performance since the 1990s is reminiscent of China’s early growth pace in the late 1970s.

In the year 2020, when the covid-19 pandemic hit every country, recent estimates of income growth among all the ASEAN countries was adversely affected.

But the Philippines felt it the hardest. Vietnam’s growth of per capita income was reduced to 2.7 percent, but it was still growth. The other countries suffered a contraction of  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 Filipino leaders. These numbers provide a clear picture of how far our overall long term record has been with respect to our immediate peers in the region – both in ASEAN and within East Asia. The country needs to improve its economic performance. Sadly, we are at the tail-end!

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

Those needed economic reforms have been stressed, time and again in this column and need no further repeating.

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