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Escaping the Middle-Income Trap

Escaping the Middle-Income Trap

No. 4, Mar.-Apr. 2017 » Bridging News

The Romanian Academy hosted on October 26th, 2017, a conference held by the well-known economist, Aurelian Dochia. The event was organized by the Academy’s Institute for World Economy, as part of the activity of its internal reflection group “GLOBAL 3G - Repositioning the Economic Agents in Globalization, the Geostrategic and Geopolitics' Impact”.

The subject of this conference was related to Romania's economic growth over the past decades and what specialists refer to as the "middle income trap", a problem that many countries have faced over the years in their attempt to cross the border between what is termed “upper middle-income” country and “developed country”, according to the World Bank classification.

Over the last 15 years, Romania has achieved a good performance in terms of growth: the country's Gross Domestic Product has progressed from $37.4 billion in 2000 to over $200 billion in 2015.

With a gross national income per capita of $9,520 in 2014, Romania ranks among the first of the 53 countries classified by the World Bank as "upper middle-income" countries, with higher average incomes (gross income per capita between 4,125 and 12,735 dollars).

Romania’s objective is obviously to become a developed country, which means exceeding the threshold of 12.735 dollars in GDP per capita.

Given an average annual growth of 3.5%, Romania would be in the developed country category in 2030; an annual increase of 4% would ensure that the threshold would be exceeded in 2026, and a growth rate of 5% would realize this objective in 2024.

And yet, world-wide development experience shows that, although many countries managed to enter the middle-income category, very few could make the leap into the category of developed countries. In a study made in 2012, the World Bank found that out of 101 economies ranked in the middle-income category in the 1960s, only 13 managed to become developed countries by 2008: Equatorial Guinea, Greece, the Hong Kong special administrative region of China, Ireland, Israel, Japan, Mauritius, Portugal, Puerto Rico, Republic of Korea, Singapore, Spain, and the Republic of China (Taiwan).

Economists have proposed the term "middle-income trap" to describe this phenomenon, which is difficult to explain in terms of standard theories of growth and development. Statistical series describing the evolution of the GDP over extended periods repeatedly highlight a phenomenon of sudden slowdown in the economic growth rate that occurs when the GDP per capita is approaching a certain level.

Is Romania capable of overcoming this barrier? The presentations during the event listed some of the objectives that Romania will have to meet in order to support the economic growth needed to become a developed country.

Firstly, the structure of the economy should shift from one characterized by a strong industrial sector dominated by traditional industries (oil and gas, electricity, manufacturing, concentrated around the automotive industry) into one dominated by innovative industries. These relative shifts do not suggest that industry itself is obsolete, especially when the New York Times recently praised Poland’s development through manufacturing. Rather, higher added value must be targeted.

Industry itself needs to develop in terms of processes and degree to which the added value of a product is created in Romania. This ties into Romania having one of the lowest automation rates in the EU, second only to Bulgaria,

This process is amplified by proper infrastructure development and policies of sustainable urban concentration which act as agglomerations of useful infrastructure and a focal point for the development of an innovative business culture generating new ideas and solutions.

Romania will also need to increase the research-development-innovation capacity through the institutional remodeling in order to make it better able to address relevant economic issues. This ties into the modernization of the national education system, the general increase of the creative potential of society and last, but not least, the development of an entrepreneurial ethos facilitated also through administrative policies.

These are just some priorities. In truth, a “perfect storm” of factors need to align in order for a country to transcend to the higher level of development and success cannot be guaranteed even with a recipe followed to perfection. One should keep in mind also demographics, social cohesion, political culture, societal trust and many more issues which, whether or not they are amenable to improvement through public policy, will ultimately impact the development of a country.

Robert Dobre

 
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OEconomica No. 1, 2016