MAGYAR NEMZETI BANK claim: over the long term, economies with identical system, integrate into global trade and adopt more fundamentals (e.g. factors of production, preferences, developed foreign technologies. In the case of Hungary, it is economic policy) will reach the same level of devel- more important to compare the middle-income trap and the opment, irrespective of where they started from. It is state of equilibrium of developed economies, and accorimportant to note here that endogenous growth models dingly this is discussed in more detail below. Before becoming do not contain convergence to developed economies, stuck in a trap, a middle-income economy may be able to as there is no mechanism in the model that would transition to another convergence path towards developed decelerate a developed economy. This means that the economies through significant technological development. disappearance of initial income disparities is not Accordingly, innovation is a key issue for middle-income guaranteed on the basis of these models. economies. Chart 2-5: Stylised chart of states and transitions
Growth
Developing countries
In
Middle income trap
e nc ge er nv Co
Poverty trap
n
tio va no
ce en erg nv Co
s, on uti ss, t ti Ins pene of O tion y g ita Im hnolo c te
Developed countries GDP per capita
Source: Based on ITO (2017).
In addition to the above, so-called club convergences are also often mentioned,22 according to which various clubs come into being: countries with similar fundamentals and starting levels move towards the same level of development. This means that not only similar characteristics are important, but the current/initial state as well. Accordingly, on the whole, an economy that starts from a very low level is unable to completely catch up with the most developed one, i.e. income disparities will never disappear in the world as a whole.
2.3 The middle-income trap as an undesirable steady state
What is this trap? Various studies address the middle-income trap. There are several possible approaches to determine These considerations lead us to the so-called multi-equi- which country is considered as a middle-income country. librium approach. Chart 2-5 presents the various states and The World Bank’s breakdown by income groups is used most equilibria. GDP per capita and the rate of growth are often. A key question in these studies is why a middle-income measured on the horizontal and vertical axes, respectively. If country is unable to grow further. Agenor (2016), for example, an economy starts from a lower level of per capita devel- provides a good summary. Several factors can be identified opment, but its growth gradually cools off, it becomes among the reasons: trapped. What state it arrives at also depends greatly on the initial income level. In the case of low-income economies, it • According to the law of diminishing returns on physical may even mean getting stuck in the poverty trap. In their capital, initially the GDP-increasing effect of investment case, it is important to set up an adequate institutional is higher, but later its contribution declines steadily. For more details on the various convergence types see Galor (1996).
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GROWTH REPORT • 2018
