W6 - MIT Flashcards
What is the middle income trap?
The hypothesis that middle-income countries struggle to grow into high income countries becuase they cannot compete with other cutting-edge technologies of high-income countries or cut throat pricse of low-income countries
How is the middle-income range defined?
No clear consensus but typically 15%-40% of the US per capita income
How does the middle income trap compare with the neoclassical growth model?
MIT is not to be confused with a growth slowdown. Instead the MIT means the country fails to have continual technological progress. Increasing TFP sustainably
How many countries have escaped the MIT since the second world war?
Only around 8 or 9
Have the EA Tigers escaped the MIT?
Yes all 4 have
When did China enter the middle income range?
2009
How do we measure the efficiency of investment?
Using the Incremental Capital Output Ratio (ICOR)
How is the ICOR calculated?
ICOR = I/^Y
Investment undertaken/ Change in output
What does a lower ICOR mean?
The lower ICOR, the more efficient capital productivity. The smaller the ICOR, the smaller amount of investment needed to increase output significantly
How can the ICOR concept be used in relation to China?
China overinvested, if your capital output ratio is too high as the production function is concave, you get decreasing returns to scale. This model is therefore consistent with the production function approach
How can countries avoid the Middle income trap?
- Use existing production factors more efficiently
- Move production factors into new industries
- Add more production factors (Capital deepening)
- Innovate
Where does an increase in TFP come from?
Endogenous growth. More investment in human capital and R&D, develop more skilled workers, be more open to new ideas, strengthen intellectual property rights
Why has the US been at the frontier of ideas and innovation?
The US has been at the frontier of ideas because intellectual property rights are so well protected in the legal system.
Why do many countries struggle in the MIT?
Because their ICOR is too high meaning investment undertaken is not that good at increasing GDP overall
Why is R&D important and who has been doing it well?
R&D is important because it increases TFP. China has been doing well in this figure. Outperforms SE Asian countries here, largely government driven here. Private sector R&D is more efficient than the public sector R&D
What is the issue with declining fertility rates?
Younger generations have to provide more labour to support the older generation
- Less labour input, fewer savings, sluggish consumption
What is a demographic dividend?
Demographic dividend means when you have a young growing population it pays dividends. China can not expect to receive this any more due to aging population but India can
What does the disappearance of a population dividend lead to?
An economic slowdown
Which countries in Europe suffered after the GFC the most?
PIGS
What are the key factors behind sustained long-term growth?
Technology, demography, institutions
Summarise movement from Low income to middle income to high income?
Recipe to move from a poor country to a middle income country is well known, just need a coherent government and pour in all the labour and capital inputs. When you reach MI, you now have to compete against advanced economies meaning you have to be at the technological frontier to compete, that’s why you need more efficient investment and technological investment. Demography and institutions are key in effecting TFP. Government policy is important because it provides the framework for the economy to grow
Is China about to fall into the Middle Income Trap? Why may they?
- Excess investments and debt (inefficiency)
- Tightened state control over the digital economy
- Stricter financial regulations and constraints on capital flows
- Deteriorating international relations
