The Leap of the Tiger: Escaping the Middle‐income Trap to the Technological Frontier
| Date | 01 November 2019 |
| Author | Fuad Hasanov,Reda Cherif |
| DOI | http://doi.org/10.1111/1758-5899.12695 |
| Published date | 01 November 2019 |
The Leap of the Tiger: Escaping the
Middle-income Trap to the Technological
Frontier
Reda Cherif
International Monetary Fund
Fuad Hasanov
International Monetary Fund and Georgetown University
Abstract
The Asian miracles along with a handful of European economies and oil exporters are the few countries that reached high-in-
come status during 1960–2014. In contrast, many good-performing countries such as Malaysia have been middle-income
countries for several decades despite relatively strong growth and a substantial improvement in education and export sophis-
tication. We argue that the key factor differentiating the Asian miracles from economies like Malaysia is the creation of tech-
nologies by domestic firms and leapfrogging to the technological frontier at an early stage of development.
Policy Implications
•Improving standard growth determinants such as education, business climate, infrastructure, and regulation and relying
on FDI and multinational firms are not sufficient to achieve high growth rates and escape the middle-income trap.
•The key to escaping the middle-income trap is creation of technologies by domestic firms and a push to leapfrog to the
technological frontier at an early stage of development.
•Encouraging firms to export and compete on both domestic and international levels provides crucial incentives for firms
to innovate and grow, potentially resulting in high productivity and employment growth.
•Policies should support firms to move to high-tech sectors and could include access to: (1) finance; (2) innovation and
spin-off ecosystems; (3) public research institutes and (4) research and development funds.
•Permissions for any reproduced figures (if applicable –i.e. any figure which has previously published must be provided
with permission in writing from the copyright holder).
Only a handful of European economies and oil exporters
along the Asian miracles –Hong Kong (China), Korea, Singa-
pore, and Taiwan Province of China –reached high-income
status during 1960–2014. Although there is evidence that
overall middle-income countries have been converging
toward the frontier, we argue that there is a ‘middle-income
trap’as the expected time it takes to reach high-income sta-
tus is long. In our analysis, we use the example of Malaysia,
one of the successful economies in East Asia –a second
generation newly industrialized country (NIC) following the
Asian miracles –that has been a middle-income country for
more than four decades. We show that despite relatively
strong growth, improvement in business climate, education,
and export sophistication, Malaysia’s total factor productivity
lagged that of the Asian miracles. We argue that the key
factor explaining this divergence in productivity is the cre-
ation of technology by domestic firms and leapfrogging to
the technological frontier early on.
We provide cross-country evidence indicating that the
odds of reaching high-income status within a ‘reasonable’
time are low. We show that the probability that a country
crossing the upper-middle-income threshold would graduate
to high-income status within half a century is about 50 per
cent and falls to about 30 per cent when correcting for data
censoring. Even countries that are relatively close to the
frontier such as Malaysia and Chile in 2014 have about 50
per cent chance to graduate within 25 years. Given the his-
toric record, reaching high-income status from upper-mid-
dle-income within one generation, as the Asian miracles did,
is the exception, while it would take the ‘average’economy
more than half a century. Although there is evidence that
on average middle-income economies converge with the
frontier in the long run (e.g. Barro, 2016; Bulman et al.,
2014, and Han and Wei, 2017), one can still establish that
there exists a ‘middle-income trap’to the extent that this
convergence would only happen in the long run, after
everyone is dead, to paraphrase Keynes.
Many of the countries that have been trapped in the mid-
dle-income for several decades are second generation NICs.
These countries, like the Asian miracles before them,
Global Policy (2019) 10:4 doi: 10.1111/1758-5899.12695 ©2019 University of Durham and John Wiley & Sons, Ltd.
The International Monetary Fund retains copyright and all other rights in the manuscript of this article as submitted for publication.
Global Policy Volume 10 . Issue 4 . November 2019 497
Research Article
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