Stuck in the middle-income trap

By Bruce Gale, The Straits Times, 27 Jun 2012

MR SAMPAN Silapanad, president of Thailand's Electronics and Computer Employers' Association, had a grim message for participants at a forum on the Asean Economic Community earlier this month.

Thailand, he said, was 'caught between low- and high-end production, unable to move either up or down the value chain'. Many economists believe Malaysia is facing a similar problem.

In other words, the two countries have fallen into what has become known as the 'middle-income trap'. This refers to a situation in which poor countries achieve a high level of economic growth, often by taking advantage of a low-wage workforce and abundant natural resources. But after reaching a certain level of per capita income, they find they are unable to take the next step to becoming developed nations.

Based on their per capita incomes last year, Malaysia, with US$9,700 (S$12,400), and Thailand, with US$5,300, are perhaps the best examples in South-east Asia. The Philippines is sometimes cited as facing a similar problem, but its per capita income is so low (US$2,200) as to preclude any realistic chance of achieving developed country status in the near future.

The World Bank classifies high-income countries as those with a per capita gross domestic product (GDP) of at least US$15,000. Singapore's per capita GDP last year was US$49,300.

For both Malaysia and Thailand, the turning point was the 1997 Asian financial crisis, which saw a decline in local and foreign investment from which neither country has since been able to recover. After enjoying an annual growth rate of between 8 per cent and 9 per cent in the decade prior to 1997, Thailand's growth rate in later years declined to between 3 per cent and 4 per cent annually, and the economy actually contracted 2.3 per cent in 2009. Malaysia's economic history is similar. After growing rapidly at about 7 per cent from 1991 to 2000, the economy expanded by an average of only 4.6 per cent annually in the 2001-2010 period, thanks largely to strong government spending.

One reason for the slower growth is that as incomes increase, so do costs. This means that to ensure continued growth, a country needs to innovate and use capital and labour more productively. That said, the various causes of this relative stagnation and the proposed solutions will doubtless be debated by economists for years to come.

But there are at least three themes in the common experience of both Thailand and Malaysia worthy of further investigation. One is the lack of English language proficiency. Lamenting the difficulty of upgrading to higher value-added production in Thailand, Mr Sampan noted that 'a major obstacle is that many in our workforce cannot speak English'. Standards of spoken English are higher in Malaysia, but educationalists there have also noted marked declines in recent years.

This linguistic handicap cuts off both countries from the advanced technology they need to ensure continued development.

The second point of similarity is a longstanding emphasis on redistributive policies. Then Thai prime minister Thaksin Shinawatra (2001-2006) spent his time in office introducing universal health care and focusing on measures designed to alleviate rural poverty, an orientation maintained by a succession of like-minded Thai governments.

Malaysia's policy of affirmative action in favour of the economically weak Malay community, meanwhile, has inhibited the efficient allocation of labour and capital.

Neither policy was necessarily wrong in itself, but both approaches - together with the controversies they engendered - have deflected attention away from the need to enhance national competitiveness.

Both governments are trying to fix things. Malaysia is focusing on its Economic Transformation Programme, which aims to improve the nation's competitiveness, drive up investment and thereby more than double gross national income by 2020. Recently, Thai Prime Minister Yingluck Shinawatra asked the National Economic and Social Development Board to formulate a similar national strategy. Details of the latter plan have yet to be released.

But there is a third similarity that may yet stymie even the most enthusiastic leader. This is the preoccupation of the political elites in both countries with the need for political survival.

The 2006 coup in Thailand and the 2008 elections in Malaysia changed the politics of both countries in fundamental ways. The result is that neither Ms Yingluck nor Malaysian Prime Minister Najib Razak can be sure that they will still be in power this time next year.

And it is this political reality, rather than any concern about the need to support the drive for developed country status, that will dominate economic policymaking in the near future.

Sadly, both countries seem fated to remain in the middle-income trap for some time.