What is the concept of the middle income trap. Trap, i.e. "middle income trap"
By the end of 2013, when it was already clear that Russia's economic development was slowing down for reasons mainly of an institutional nature, there was a demand among the domestic political elite for a relatively plausible explanation of what was happening. It was put into the mouth of Dmitry Medvedev, who at the 5th Gaidar Forum in January 2014 said that the country was “gradually approaching restrictions on the price of labor” and this “... could lead us to problems of competition both with developed economies with a highly skilled workforce and exporting technological innovations, as well as with low-income economies, low level wages and cheap production of manufactured goods. The prime minister called this phenomenon a "middle-income trap", and politicians began to repeat this thesis - and, surprisingly, they still do it today (for example, Alexei Kudrin at the last St. Petersburg Economic Forum). Meanwhile, just a couple of months after the announcement of the identified problem, the decision to expand towards Ukraine dramatically changed the course Russian history- and today Russia is in a completely different trap.
The “middle income trap” suggests that wages for some reason (in our case, due to the “oil rain” poured on the economy) have risen so much that the traditional products produced in the country are uncompetitive, and advanced industries are underdeveloped. However, in Russia, the indication of such a “trap” is crafty - both because our country did not export anything except raw materials (in the price of which the rent is up to 90%), even when wages were low, and because today there are no can not be called unreasonably high. Let us dwell on the second circumstance.
Since 2014, due to lower oil prices and “wise” foreign policy Russian authorities, which led to the rupture of financial ties with the main investment partners, the previously overvalued ruble devalued sharply. The maximum value reached average salary Russians in dollar terms (that is, in the amount of dollars that a person could buy with his earnings at an exchange office) was $ 751 in July 2008 (the average salary, according to Rosstat, is 17,538 rubles at 23.34 rubles per dollar ) and $915 in the fall of 2013 (the average salary is 29,640 rubles, the exchange rate is 32.41 rubles per dollar). Then it fell to $716 in November 2014 and to $412 in January 2016, stabilizing at $655-680 by spring 2017. At the same time, the government today does not count on significant “rebounds”: if in 2008-2011 the pre-crisis dollar level of income recovered after 30 months, today the authorities openly declare that even after 20 years nominal wages in dollar terms will not return to 2013 levels. Considering that the world does not stand still, the incomes of Russians in 2035, if they return to the level of 2013, will not be “average” by world standards. In other words, Russia now and in the future will remain in the “low income trap”. If in the next “thirteenth year”, which may remain our “reference point” for a long time, the average salary of a Russian was higher than in Romania, Lithuania, Turkey and Latvia ($673, $856, $907 and $913 respectively), today it is lower than in Brazil, Jordan, China and Mexico ($894, $796, $740 and $702).
So what kind of “middle income trap” can we talk about if wages in Russia are below the world average? On the contrary, any international economist will say that the current situation opens up enormous opportunities for modernization, but not those who are familiar with the realities of Russia in the 21st century.
Economic growth during the years of prosperity (1999-2007), when GDP grew by 77%, was provided primarily by the service sector and trade in imported goods. The gross product in the field of communications and communications increased (in comparable prices) by more than 10 times (the volume of services for the provision of Internet traffic - by 22 times), the gross income of banks and financial institutions- 6.7 times; wholesale and retail increased by 4.3 times, construction - by 2.3 times. By the beginning of the crisis in 2008, the share of trade in Russian GDP reached 18.7%, construction and real estate operations - 16.3%, communications and communications - 5.2%, and the financial sector - 5.1%.
In total, these four industries accounted for almost 2/3 of Russia's GDP growth during Putin's first two presidential terms. At the same time, unlike all successfully modernized countries, the industry in Russia lagged behind - and more and more - in terms of growth rates: in 2000-2004 - 28.6% with a GDP growth of 39.3%, in 2005-2008 - 19%. .2% at 31.4%. And not a single new industry was created.
That is why lower wages do not push economic growth: on the one hand, the market in a number of segments of the service sector (mobile communications, trade, catering and a number of household services) is saturated and focused on the domestic consumer, which means that low wages cannot increase supply, but limit demand; on the other hand, the industry also does not receive much benefit, as domestic demand shrinks and interaction with the outside world is minimal - in South Korea, where salaries converted at a market rate into dollars fell from $ 1,500 to $ 790 between August 1997 and July 1998 , the share of mechanical engineering and electronics in exports was 54.8% at the beginning of the period, and in Russia at the time of the occupation of Crimea - 5.3%. That is why the consequences of the crisis in Korea in terms of incomes of the population were overcome in four years, while in Russia they do not hope to overcome them even in 20 years.
I affirm: structural features Russia's economies are such that it tends to boom with rising rather than falling incomes, as was the case in the early 2000s. This, however, requires additional external factor capable of pushing this rise. In happy times, it was the rise in oil prices - and by 2012-2013, Russia had become a market that was extremely attractive for large international companies. The only right step in such conditions was to attract foreign corporations to the country to the maximum in order to create a new export potential in the event that the raw material bonanza was completed. But the government did just the opposite, breaking off relations with the West on the eve of sharp drop oil prices. Therefore, the economy will not recover, even if the monthly salary of an engineer in industry falls to the hourly rate of a Moscow prostitute (we do not take into account political ones). The “low income trap” in a closing economy is a far worse sentence than the “middle income trap” in open to the world country.
The Russian situation is aggravated by another factor, which relates to the role and strategy of the government. In the coming years, Russia does not have a single chance to stop being a country with raw materials. This means that the de facto government will continue to receive a significant part of the income in foreign currency. This suggests that in addition to the objective pressure on the ruble, which is intensifying with the decline in commodity prices, there will also be a constant desire to artificially lower the exchange rate in order to reduce foreign exchange earnings still allowed to provide ruble financing of budget expenditures. Accordingly, the dollar income of Russians, in principle, has no chance of growth - and therefore Russian economy for a long time will not be of interest to world players as a sales market for both consumer and investment goods. We will focus on China, which will continue to supply us with relatively cheap goods and buy our raw materials, but will do nothing to turn the country into a new industrial power.
Finally, one cannot fail to take into account that “low” incomes, by Russian standards, do not mean that their recipients fall into the lower segment of the middle class, but slide into deep poverty. In the past three years, the number of people earning incomes below living wage(defined by the authorities at $5.4 per day) fluctuates around a value of 20 million people. These people are in a situation of almost complete exclusion from economic life; no rational arguments about "import substitution" or increased capacity utilization have anything to do with them. Falling into poverty, Russia may follow another devaluation not along the East Asian, but along the Latin American path of the 1970s–2000s, which was characterized by the conservation of poverty and backwardness with a huge wealth inequality, the criminalization of the economy and power, and the continued focus on the commodity sector.
It seems to me that, speaking at the Gaidar Forum in 2014, Medvedev rendered a service to the Russian political elite, but at the same time diverted the attention of economists and politicians from the real danger threatening the country. If he were right, today we would see powerful shocks in the markets of the same China - but the latter seems to have passed the "critical" wage levels without even noticing the "traps" set nearby. The belief that Russia's problems stemmed from its successes and not from its weaknesses was critical to the 2014-2015 series of misguided decisions that set a new development trajectory.
Optimists, of course, can hope that in the fourth, fifth or sixth presidential term, Putin will wake up with a liberal reformist itch, but do not forget that the main challenge for Russia does not come from “excessive” prosperity, but from its striking absence.
..will not let the Baltics defeat poverty and emigration
Latvian Economy Minister Arvil Aseradens said that the government will fight mass emigration from the country with the help of higher wages. However, the economy of Latvia and other Baltic countries is arranged in such a way that salaries there will always be several times lower than in Western European countries. European integration has created peripheral capitalism in the Baltics, and this economic model makes it impossible to defeat poverty and emigration in Estonia, Latvia and Lithuania.
In economics, there is the concept of "middle income trap". It is understood as a situation when a country that has reached a certain level cannot “break through” this level and develop further. A halt in development gives rise to economic backwardness, which leads to the degradation of the country.
Third world countries often fall into the middle income trap. The colonial past of these countries determines their development in the logic of peripheral capitalism, when the former metropolis sucks resources (including human resources) out of them, becomes for these countries the center of concentration of production, technology and capital, and leaves them the fate of the sales market and raw material appendage.
Wages in the countries of peripheral capitalism will never be on par with the countries of the economic Center, because if they reach this level, then business will go to countries with lower labor costs. The economies of such countries operate on the basis of a continuing gap in development from poorer countries so that imports bring profit to producers, and a continued lag behind richer countries so that consumers of these imports have jobs. This situation is called the middle income trap.
European integration has shaped just such an economic model in Estonia, Latvia and Lithuania, and now the development in the colonial logic of peripheral capitalism is driving the Baltics into the “middle income trap”.
Officials and economists have been openly talking about this danger in all three Baltic countries over the past two or three years.
“It must be admitted honestly and without illusions: Estonia has fallen into a “middle income trap”, exacerbated by falling demographics and almost no economic growth,” said a joint study by the audit firm KPMG and the Estonian Employers’ Confederation published at the end of 2016.
“In terms of competitiveness, the advantages of cheap labor still dominate in Latvia. If the current situation continues, the pace of economic development in the medium term will be able to reach only 2-3% per year, and in this case, the economy risks falling into the "middle income trap", - says the "Report of Latvia to the United Nations" published by the Interagency Coordinating Center this spring. on the introduction of sustainable development goals”.
“For us, the proposal of the European Commission to reduce the funding of the equalization policy for Lithuania by 24% is unacceptable. We have always been in favor of allocation rules that would provide for a gradual reduction in funds for regions that have reached 75% of the average EU GDP per inhabitant. The sudden reduction in funds increases the threat of further convergence of Lithuania and increases the likelihood of falling into the “middle income trap”, and this will just increase the rate of emigration,” Lithuanian Finance Minister Vilius Sapoka complained about the upcoming cuts in subsidies from Eurofunds this summer.
Therefore, the initiative of the head of the Latvian Ministry of Economy to overcome emigration by increasing wages is pure pre-election populism.
With the existing economic model In the Baltic countries, salaries and the standard of living in general in peripheral Lithuania, Latvia and Estonia will always be several times lower than in the countries of the "nuclear" region of the EU - Western Europe.
However, the “middle income trap” is not a death sentence for the states that have fallen into it. In different years, Finland and South Korea, Brazil and Singapore got into it and got out, moving to a new level of development. Recipes have long been known and repeatedly described. It is necessary to increase production, stimulate domestic demand for domestic products and search for sales markets to increase exports, long-term investments in science, education and infrastructure, the formation of an innovative economy with high added value, the production of unique products and high salaries for unique specialists.
In other words, in order to get out of the current situation, the Baltic States must solve the problems that they have created for themselves.
In 1991, Lithuania, Latvia and Estonia were not predetermined to become colonies of Germany, Great Britain and other Western European countries. The Baltic countries had a developed high-tech industry with high added value. The share of industry in the Baltics at the time of its secession from the USSR was higher than today in Germany - more than 60% of the economy of Lithuania, Latvia and Estonia.
In addition to industry, there was the most modern infrastructure built by the Soviet Union. There were guaranteed export supplies to traditional markets in the east. It was possible to simultaneously access Russian resources and German technology. There was a transit potential. There were world class training schools. There were unique scientific and production teams capable of creating an innovative product and forming a knowledge economy in the Baltics.
The Baltics themselves refused all this: having all the necessary starting positions, Lithuania, Latvia and Estonia voluntarily chose development in the logic of peripheral capitalism.
The conscious efforts of the Baltic governments, which supplemented the accession to the common European market and the rupture of cooperation ties in the East, destroyed the main part of the local industry - the share of industrial production in the structure of the economy was reduced to 10-15%.
The seemingly unshakable traditional markets were lost, and new markets for Baltic exports were not found. In the past few years, everyone had the opportunity to watch the phantasmagoria with the “war of sanctions”, when the governments of Lithuania, Latvia and Estonia first assured that the Russian food embargo would not affect the meat and dairy industry, then they tried to find buyers for local milk and kefir in China, the Dominican Republic and Cayman Islands, then proudly declared that their countries suffered the most in the EU from the sanctions policy, but did not change their attitude towards Russia, then they asked the European Commission for compensation for their bankrupt milkmen.
The Baltic countries missed the opportunity to be a “bridge” between East and West and make money on this economically, instead starting to play the function of a wedge driven between Germany and Russia. They are losing their transit potential right before our eyes: the fall in cargo turnover continues for the fifth year railways and Baltic ports.
Finally, the most important resource - human - also almost all leaked through our fingers.
Immediately after gaining independence, higher technical education was dealt a mortal blow by its translation into the state languages. Unique scientific and production teams were dispersed, their research institutes and design bureaus were closed. Science is destroyed. World-class professors, engineers, inventors in Latvia and Estonia were deprived of their citizenship and left for where their brains are more valued. Young talented Lithuanians, Latvians and Estonians today leave Lithuania, Latvia and Estonia en masse as soon as they reach adulthood.
In this state of affairs, what innovative economy, what increase in production and exports and what sales markets can we talk about?
The Baltic countries have doomed themselves to the backwaters of Europe: the “middle income trap”, peripheral capitalism and steady degradation.
Over the past few years, they have been depriving themselves, step by step, of the remaining levers to reach a new level: Agriculture, transit. Their only chance is flying to London with low-cost airlines full of guest workers. It is impossible to stop this process, because emigrants are fleeing poverty, and Baltic poverty is not a misunderstanding, not a temporary inconvenience, and not a mistake, but an integral part of the formula of the Baltic “success story”.
Alexander Nosovich
A fashionable explanation of the reasons for the decline in economic growth at a certain stage has appeared.
Very convenient in particular. explain the reasons for the decline in GDP growth in Belarus.
It is debatable, since not all factors are taken into account. In particular, institutional factors are poorly taken into account.
And in general, one gets the impression of digital fetishism when, instead of analyzing the real causes, the problem is seen in a "bad figure".
"Growth in Russia will slow down dramatically in 2014," Renaissance Capital economists Ivan Chakarov and Natalya Suseeva say. Like many others before her, Russia will fall into the middle-income trap. Growth will slow down to level developed countries West, while in terms of development and income of the population, Russia will still lag behind them for ages.
When and who falls into the trap?
The effect of the "trap" that countries fall into halfway through the transition from the category of "poor" to the category of "rich" has been known for several decades. In the 70s, a sudden stop after a long "golden age" happened in many countries of Europe and in Japan. Prior to this, the United States experienced a similar problem, where the vigorous growth of the 60s was replaced by stagflation.
Since then, many other countries in Asia, Eastern and Southern Europe and Latin America have fallen into the trap. Many have never been able to get out of it - growth in them either stabilized at a minimum level, or, in some cases, was replaced by a long and deep decline.
All countries were at about the same level at the time of the sudden slowdown economic development and had a similar average per capita income.
Last year, UC Berkeley professor Barry Eichengreen and co-authors collected extensive statistical material on all cases of sudden slowdowns. Eichengreen considered only those cases of stunting when:
1. Before "stop" average annual growth for 7 years exceeded 3.5% (fast-growing countries).
2. Over the next 7 years after the "stop" the average growth was 2 percentage points per year lower than in 7 years before it (deep decline in growth rates).
3. Country had a per capita income of at least $10,000 at the time of shutdown (middle-income countries).
Eichengreen then calculated the per capita income that is most likely to "fall into the trap".It turned out that about equals $16,740 international prices in 2005.(What precision - ha! - L)
Chakarov of Renaissance Capital estimates that Russia will reach this income level by 2014.
Her turn will follow Kazakhstan (2016) Turkey (2019).
Other BRIC countries will reach the fatal threshold later China it seems that 2020 is already in close proximity to the trap (according to the calculations of Renaissance Capital, Eichengreen named 2016), Brazil India in 2024 and 2038 respectively.
Russia is approaching a dangerous line
Why is there a trap?
Ivan Chakarov writes in his report that a banal answer will do for the simplest explanation: it is easier to grow from a low base to an average level than from an average to a high one. (And this is the explanation?! - L.)
There is also a slightly less banal explanation: in the cases investigated by Eichengreen, the rapid growth before the stop was usually provided not by the expansion of the labor or capital market, but, mainly, by the explosive increase " total factor productivity". (heard, heard. Tell me more with a synergistic effect - L.)
Behind this term may be hidden technological changes, the transfer of the mass of the labor force from the countryside to urban industrial enterprises, improving the quality of "human capital" or, more simply, an increase in the level of education of workers.
Respectively, subsequent shutdown caused by sharp slowdown in productivity growth. The reason for this may be, for example, a technological shock (for example, the inability to quickly master more sophisticated technologies that allow raising productivity above a certain level) or the exhaustion of cheap rural labor that can be sent to the city. We would say that the country "lost its competitiveness."
But, states Eichengreen, The reasons for the decline in productivity may be different, but the essence is the same - upon reaching the "threshold" of $15-16,000, the country most often falls into a trap. (digital fetishization? -L.) At the same time, of course, this figure in itself cannot be the source of an unexpected drop.
A variety of countries fell into the trap. And not everyone managed to get out of it.
Are there exceptions?
Eichengreen found only 4 countries that never experienced a dramatic slowdown but were able to grow GDP per capita to $20,000 or more.
A few more countries, including Russia, approached the "threshold" after 2000, and therefore there is no data on a long-term slowdown for them.
Countries have been found that fall into the "trap" already being quite rich and developed. All of them have one thing in common: they are small in size and their economy is as open as possible: Hong Kong, Singapore and Israel.
Several countries fell, rose, and then fell again. This is most likely due to their governments' efforts to restart growth. Japan, fell into the trap twice: in the 1970s and in 1992. For the first time, growth rates fell by as much as 6.6 percentage points, and GDP per capita did not even overcome the mark of $14,000. After 22 years, the situation was less tragic: the economy slowed down by only 3.5 percentage points, but GDP per capita The population was much higher - $27,250.
The exceptions are also oil-producing countries, especially those with a small population.. With them, the situation can be completely unpredictable, and this is quite understandable: their performance is completely dependent on external shocks. They can, without noticing, jump over the threshold of the "trap", but then collapse.
A prime example is Libya, which was trapped in the 1980s. At that time, GDP per capita was equal to a fantastic $ 56,000, grew by 5-6% per year, and then the growth rate decreased by as much as 17.5% (in fact, it was the deepest drop).
The same Russia can survive 2014 without shocks, but this will not save it from further decline. However, it is more likely that we will act " general rules"- the country's economy is more complicated than that of Libya. The example of Holland, which fell into the trap of being a prominent energy producer, is suitable. As you know, this happened because of " dutch disease", certainly associated with oil, but it happened at the "time" strictly appointed by Eichengreen - in the early 1970s, after the per capita GDP barely exceeded $ 17,000.
The dangers of falling into a trap
According to Eichengreen's research, falling into the trap is influenced (albeit not very strongly) by demographic reasons.
- Countries with high birth rates fall into the trap earlier. This is clearly not our case.
- Countries with a large (and growing) proportion of older people are more likely to experience an abrupt stop. Russia needs to take this into account.
Authoritarian states are more likely to fall into the trap than democracies or countries with a transitional political system. Political regime change does not in itself affect the likelihood of a recession.
Countries with an open financial system are also more prone to recessions.
Countries with undervalued currencies fall into the trap earlier than others. A weak currency is good when you need to support the rapid growth of exports and protect the domestic market from imports. By the time you fall into the trap, a weak currency does one harm to the country. China should consider whether it is worth continuing the old policy.
Another "bell" for China: countries that are rapidly increasing their share of industrial employment fall into a trap when this share exceeds 23%. Such statistics are not kept in China, but it is likely that the country has reached a critical point. Russia crossed it in the middle of the 20th century.
The countries with domestic consumption exceeding 64% of GDP are best selected from the trap. In Russia, this figure (taking into account government consumption) is above 70%. The consumer market occupies more than 50% of GDP.
Equally important is the share of investment in the economy. The larger it is, the easier it is for the country to survive the "stop" on the way to high prosperity.
Will Russia be able to get out of the trap?
On the one hand, Russia has every chance of falling into the "middle income" trap for a long time:
- Growth over the past 10 years has been supported almost exclusively by increases in factor productivity, which Lately obviously started to slip.
- The share of oil exports in GDP is still very high, which increases the chances of falling into a trap.
- The Russian population is rapidly aging.
On the other hand, Russia has prepared well for difficult times:
- Unlike many of its neighbors, the country (after the 2008 crisis) actually let its currency float freely and allows it to weaken or strengthen as the market requires.
- In Russia, as already mentioned, a high share of consumption in GDP.
- Finally, writes Chakarov of Renaissance Capital, there are quite obvious measures economic policy, which can mitigate the consequences of Russia falling into a trap. These measures have already been announced by Vladimir Putin during his campaign speeches.
Chakarov recalls that Putin is planning:
- Increase the share of investment in GDP from 22% to 25% by improving the business climate and increasing the savings rate of the population as a result of lower inflation;
- Carry out a "tax maneuver" by easing pressure on the labor and capital markets, by increasing the taxation of consumption (especially luxury);
- Launch a policy of "new industrialization" - a mechanism for the development of new technologies, bringing the company's investment in new developments to 3-5% of their income.
All this, Chakarov believes, will make it possible to restart the growth of factor productivity. However, Putin's goal - to double labor productivity by 2020 and return the economic growth rate to 6-7%, he considers not very realistic. Stabilizing growth at 4% would be a big achievement.
Researchers from the Renaissance believe that over the past 15 years, the Czech Republic managed not only to get into the economic trap (in 1997), but also to get out of it. Hungary (trapped in 2005) and Poland (in 2008) are on the road to recoveryBut for most developing countries, which are now catching up with the developed West with all their might, the "Eichengreen rule" does not bode well. Growth based on the absorption of Western technology, a weak currency, and the transfer of labor from the countryside to the cities will not last forever.
As Professor Berkeley himself wrote in his scientific work, "it remains to quote the prominent theorist Nelly Furtado: all good things come to an end."
I thought about the middle income trap. This is such a famous concept that, they say, countries that have reached a conditional “middle income” begin to grow at a slower pace than before. This concept is popular in round tables and in columns, and a few years ago someone shoved it even into the speech of Prime Minister Medvedev (although Russian problems growth has little to do with the traditional concerns of countries that exemplify this trap). The scholarly literature on the middle income trap is also growing. However, this "trap" is one of those about which I would like to understand whether it really exists or not.
The main picture illustrating the "middle income trap" is interpreted in both directions - both "for" the existence of the trap, and against.
On the one hand, there are countries - such as Brazil, which have been in the "middle group" for fifty years. Russia is basically the same. But this “development at an average pace” is not universal. There are countries that over the same 50 years have moved from the middle group to the “rich” - from South Korea to Spain (and if we took a different period, 1948-2000, let's say, then Italy would be included). By comparison, Brazil and Russia are "trapped". On the other hand, in terms of growth different countries there is a large spread and some countries are growing rapidly, some slowly (plus the general patterns such as growth slowdown as the capital-labor ratio increases). Lant Pritchett and Larry Summers made a very strong case in 2014 that this is what we are seeing. (About intellectual prehistory - remember the explanation offered by Evgeny Slutsky to explain the "Kondratiev waves" - the famous phenomenon, the empirical confirmation of which has never been received?)
Eric, as it turned out, was not going to talk about it - the patterns that he talked about - about the fact that much more is known about how growth moves depending on the distance to the “technological front” and what institutions are needed at different stages of development. You can start reading with Aghion-Acemoglu-Zilibotti, and Aghion and Blundell have a whole series of articles on this, including data at the level of individual firms and different industries. I have described this many times in columns, and in, and before - my own, my first column, confusing and verbose, was just about this cycle of Aghion's works - then at the very beginning of the cycle. Those works that I describe there existed only as preprints, and now they have become building material standard textbooks on economic growth. In this formulation - how countries are moving to innovative growth, if as a result of catching up development they seriously reduce the distance to the most developed, rich countries - the question becomes more meaningful. On the other hand, for many countries - including ours - the practical problem is how to grow at a pace that would allow at least to keep up with the development leaders - and this is definitely not"middle income trap".