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Adding-Up Problem and Wage–Productivity Gap in Exports of Developing Countries: A Source of the Middle-Income Trap

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Abstract

The possible causes of the middle-income trap phenomenon are diverse, and the difficulty in sustaining export growth, particularly in small open economies in the South (developing countries), can be one such cause. Exports from the South tend to be subject to the adding-up problem, which several studies have argued to happen because of the limited market size in the North (developed countries). The present study revisits the adding-up problem by dealing with diverse factors as determinants of export growth. It considers the following variables: undervaluation to represent the exchange rate effect, the top five trading partners’ weighted GDP growth to represent the market demand effect, and wage–productivity gap to represent the price–cost effect. This research introduces this new variable of wage–productivity gap as a factor, and finds that the adding-up problem occurs not because of the limited market in the North but because of the wage–productivity gap (i.e., low productivity relative to the ever-increasing wage rates) in the South. Moreover, undervaluing currency does not significantly improve the aforementioned condition.

Cette étude revisite la littérature sur la croissance économique selon laquelle le problème des excédents (Spence 2011) est l’une des sources de difficultés pour soutenir la croissance économique, y compris le piège du revenu intermédiaire. Les exportations du Sud tendent à être sujettes au problème des excédents, ce qui serait dû à la taille limitée du marché du Nord (pays développés). La présente étude revient sur cette question en traitant de divers déterminants de la croissance des exportations, tels que la sous-évaluation, la croissance pondérée du PIB des partenaires commerciaux pour représenter la demande du marché et l’écart salaire-productivité. Cette recherche conclut que le problème des excédents ne se produit pas en raison du marché limité dans le Nord mais à cause de l’écart salaire-productivité (c.-à-d. la faible productivité par rapport aux taux de salaire toujours croissants) dans le Sud. En outre, la sous-évaluation de la monnaie ne contribue pas à aider les pays en développement à promouvoir leurs exportations.

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Figure 1

Source: Rodrik’s (2008) data drawn by the authors (Figures are in 10 years moving average).

Figure 2

Sources: ILO and WDI data calculated and drawn by the authors (Figures are in 10 years moving average). *Wage growth rate and productivity growth rate in the manufacturing sector.

Figure 3

Source: International Labor Organization data calculated and drawn by the authors.

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Acknowledgements

Previous versions of this paper were presented at several conferences, including the Conference on New Structural Economics held in Beijing, China during the summer of 2015; the 12th GLOBLICS Conference in Addis Ababa, Ethiopia; the 15th International Schumpeterian Society Conference in Jena, Germany; and the Korea Development Economics Association Conference. The authors acknowledge useful comments by two anonymous referees, as well as the support provided by the Korean government through the National Research Foundation of Korea (NRF-2016S1A3A2923769).

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Authors and Affiliations

  1. Department of Economics, Seoul National University, Seoul, Korea

    Keun Lee

  2. IDRC Post-Doctoral Fellow, Indira Gandhi Institute of Development Research, Mumbai, India

    Sanika Sulochani Ramanayake

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  1. Keun Lee
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Correspondence to Keun Lee.

Appendix

Appendix

See Tables 5 and 6.

Table 5 Variable definitions and sources
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Table 6 Correlations among key variables
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Lee, K., Ramanayake, S.S. Adding-Up Problem and Wage–Productivity Gap in Exports of Developing Countries: A Source of the Middle-Income Trap. Eur J Dev Res 30, 769–788 (2018). https://doi.org/10.1057/s41287-017-0124-1

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