Skip to main content

Middle-Income Trap and the Evolving Role of Institutions Along the Development Path

  • Chapter
  • First Online:
The Political Economy of Emerging Markets and Alternative Development Paths

Part of the book series: International Political Economy Series ((IPES))

  • 236 Accesses

Abstract

Since the mid-twentieth century, we observe large differences in the development paths of countries, even when characterised by similar starting positions. Taiwan and South Korea hold world records in the speed of development, some of Latin America score in the middle, and few African countries are poorer per capita than they were seventy years ago. The main puzzle relates to countries stuck in the middle range of development. At this stage, innovativeness, openness, and adaptability are characteristics that become critical for further development. Yet, these successful development strategies may not be followed, when middle-income traps arise in a form of lock-ins of oligarchic political and economic power structures. This implies that political institutions matter early on, and small institutional differences may be amplified over time due to path dependence. Supporting empirical tests based on PENN World Table data are offered.

This is a preview of subscription content, log in via an institution to check access.

Access this chapter

Chapter
USD 29.95
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
eBook
USD 119.00
Price excludes VAT (USA)
  • Available as EPUB and PDF
  • Read on any device
  • Instant download
  • Own it forever
Softcover Book
USD 159.99
Price excludes VAT (USA)
  • Compact, lightweight edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info
Hardcover Book
USD 159.99
Price excludes VAT (USA)
  • Durable hardcover edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info

Tax calculation will be finalised at checkout

Purchases are for personal use only

Institutional subscriptions

Notes

  1. 1.

    I am grateful to the editors of this volume, Tamas Gerőcs and Judit Ricz; to Jongkyu Lee (Korea Development Institute); and to Elodie Douarin (University College London) for insightful comments and discussion of the themes of this chapter, which helped me to clarify several ideas. Needless to say, all remaining errors are mine.

  2. 2.

    The two most successful countries: this claim is based on the following statistic. I scaled GDP per capita by its mean for both 1953 (first year data is available from PENN Tables) and for 2019 (last year available). Next, I used these two data points to calculate percentage change. Ordered by magnitude, the first three countries are: Taiwan, South Korea, and Thailand. At the bottom end of the spectrum, Democratic Republic of Congo takes the lowest position, Venezuela is second lowest, and Nicaragua just above.

  3. 3.

    Correspondingly these global mean values were $6456 in 1953 and $29,132 in 2019; expressed in 2017 constant prices, and based on the same sample of countries for which the datapoints were available for both years.

  4. 4.

    China now reached the group of high middle-income countries, as classified by the World Bank (see https://datahelpdesk.worldbank.org/knowledgebase/articles/906519-world-bank-country-and-lending-groups, accessed on the 17th of August 2022). But is has not been there long enough to assess how it will perform at this level. Saying that, unquestionably, China is a case of a highly successful move from low income to medium income group. On my ranking of the long-run success stories of development (see Footnote 3), it takes 4th place (followed by Ireland and Japan). I will return to the discussion of China in “The Example of the Soviet Economic Model” Section, contrasting it with Soviet Russia.

  5. 5.

    There was an unprecedented human cost of the industrialisation, which was to much extent concealed, and ignored by those who praised the Soviet development model. The great hunger inflicted on Russian-occupied Ukraine caused around four million of deaths in 1932–1933 (Appelbaum, 2017). Twenty years later, Chinese Communists replicated the same policies, generating far larger number of deaths, during the Great Chinese Famine of 1958–1961 (Dikötter, 2017). Moreover, as demonstrated by Cheremukhin et al. (2013) using a synthetic control model, collectivisation that restored a system of serfdom in the Soviet countryside to squeeze surplus from the farmers was not a necessary condition for rapid industrialisation. Industrialisation happened elsewhere, including Japan, without such human cost.

  6. 6.

    There was also effort to restrict transfer of advanced technology with miliary use to the Soviet Block, led by the United States. Seventeen developed countries were members of the Coordinating Committee for Multilateral Export Controls. Enforcement was problematic, albeit one well known case, when two companies were sanctioned for delivering advanced military technology to Russia is that of Japanese Toshiba and Norwegian Kongsberg in early 1980s (Fitzpatrick, 1988).

  7. 7.

    A comparison between Soviet Russia and China is illustrative. In 1991, the first year for which comparable data for both countries is available from World Bank, the ratio of merchandise trade to GDP in China was already 35%. In contrast for Soviet Russia it was 18%, about half lower.

  8. 8.

    There were exceptions in the Soviet Block. Hungary is an example of a reform programme, that led to some reorientation of the planning priorities.

  9. 9.

    Please note, that we consider the rule of law, and a democratic political regime as closely connected, even if not the same conceptually. Please see Mickiewicz et al. (2021, esp. Section 3.3) on conceptual differences and measurement.

  10. 10.

    The classic account of the importance of the social coalitions is in Moore (1993[1966]). This theme is applied to the question of middle-income trap by Doner and Schneider (2016). They use the term ‘upgrading coalitions’.

  11. 11.

    A question to consider is endogeneity. The dependent variable, annual rate of growth is a highly volatile contemporary one. It may have a slight trend-build in, but the latter should be to some extent captured by a complete set of annual dummies. Also, time-invariant heterogeneity is absorbed by fixed effects. Income per capita and institutional indicators are lagged one year, and there are both characterised by strong inertia and path dependence, accumulating past developments.

  12. 12.

    For the classic distinction between the totalitarian dictatorship and the autocracy, see Friedrich and Brzezinski (1965).

  13. 13.

    A complete discussion of the factors of growth in Korea is beyond the scope of this chapter. One should also add engagement in international trade, in contrast with North Korean policies of import substitution. For a more complete discussion, see: Lee (2022), who, among others, also points to exceptionally long working hours in South Korea, which were associated with tight labour market and opportunities for career development.

  14. 14.

    This is not to say that political institutions are exogenous, but rather that once adopted they create strong path-dependency. In the case of Korea, the ultimate exogenous factor was political geography that is proximity to neighbouring China. The Chinese and Russians helped to install and stabilise the Communist regime in the North, pouring resources over the border, albeit they failed in their effort to overrun the whole country during the Korean War.

  15. 15.

    Historical examples abound. I will point to one well-documented study. Beauvois (2003) presents political, economic, and social reality of Ukraine in early nineteenth century, then under control of the Tzarist regime in Moscow. The latter was not shy of planning mass-scale ethnic cleansing, but lack of effective state implied these imperialist, nationalist fantasies were only implemented one hundred years later, when Soviet Russia built effective state structure and turned Ukraine into a colonial heart of darkness (see Appelbaum, 2017).

  16. 16.

    The strategies adopted by Communists to consolidate and entrench the totalitarian regimes shared a lot in common with Fascists. Burleigh (2000) emphasises the central role of the systematic destruction of the rule of law.

  17. 17.

    I leave aside the question of resource curse. Resource-abundant countries may provide a local oligarchy with means to support organised violence against their population at much earlier stage of development. Congo, again, may be an example (on the role of natural resources in Congo, see Kenyon, 2018).

References

  • Acemoglu, D., Aghion, P., & Zilibotti, F. (2006). Distance to frontier, selection, and economic growth. Journal of the European Economic Association, 4(1), 37–74.

    Article  Google Scholar 

  • Acemoglu, D., Naidu, S., Restrepo, P., & Robinson, J. A. (2019). Democracy does cause growth. Journal of Political Economy, 127(1), 47–100.

    Article  Google Scholar 

  • Acemoglu, D., & Robinson, J. (2012). Why nations fail. Profile Books.

    Google Scholar 

  • Aghion, P., & Bircan, C. (2017). The middle-income trap from a Schumpeterian perspective. ADB Economics Working Paper Series, No. 521.

    Google Scholar 

  • Applebaum, A. (2017). Red famine: Stalin’s war on Ukraine. Penguin Books.

    Google Scholar 

  • Barro, R. J. (1991). Economic growth in a cross section of countries. The Quarterly Journal of Economics, 106(2), 407–443.

    Article  Google Scholar 

  • Baumol, W. (2010). The microtheory of innovative entrepreneurship. Princeton.

    Book  Google Scholar 

  • Beauvois, D. (2003). Pouvoir russe et noblesse polonaise en Ukraine 1793–1830. CNRS-éditions.

    Google Scholar 

  • Burleigh, M. (2000). The third Reich. Macmillan.

    Google Scholar 

  • Cheremukhin, A., Golosov, M., Guriev, S., & Tsyvinski, A. (2013). Was Stalin necessary for Russia's economic development? Working Paper No. 19425. National Bureau of Economic Research.

    Google Scholar 

  • Dikötter, F. (2017). Mao’s great famine. Bloomsbury.

    Google Scholar 

  • Doner, R. F., & Schneider, B. R. (2016). The middle-income trap: More politics than economics. World Politics, 68(4), 608–644.

    Article  Google Scholar 

  • Douarin, E., & Mickiewicz, T. (2017). Economics of institutional change. Palgrave Macmillan.

    Book  Google Scholar 

  • Estrin, S., Korosteleva, J., & Mickiewicz, T. (2013). Which institutions encourage entrepreneurial growth aspirations? Journal of Business Venturing, 28(4), 564–580.

    Article  Google Scholar 

  • Feenstra, R. C., Inklaar, R., & Timmer, M. P. (2015). The next generation of the Penn World Table. American Economic Review, 105(10), 3150–3182.

    Article  Google Scholar 

  • Fitzpatrick, D. J. (1988). Of ropes, buttons, and four-by-fours: Import sanctions for violations of the COCOM agreement. Virginia Journal of International Law, 29, 249–288.

    Google Scholar 

  • Freedom House. (2021). Freedom in the world. https://freedomhouse.org/report/freedom-world

  • Friedrich, C. J., & Brzezinski, Z. (1965). Totalitarian dictatorship and autocracy. Harvard University Press.

    Google Scholar 

  • Fukuyama, F. (2012). The origins of political order: From prehuman times to the French revolution. Profile Books.

    Google Scholar 

  • Fukuyama, F. (2015). Political order and political decay: From the industrial revolution to the globalization of democracy. Profile Books.

    Google Scholar 

  • Gerschenkron, A. (1962). Economic backwardness in historical perspective. Harvard University Press.

    Google Scholar 

  • Gill, I. S., & Kharas, H. (2015). The middle-income trap turns ten. World Bank Policy Research Working Paper, No. 7403.

    Google Scholar 

  • Gill, I. S., Kharas, H. J., & Bhattasali, D. (2007). An East Asian renaissance: Ideas for economic growth. World Bank Publications.

    Book  Google Scholar 

  • Glaeser, E. L., La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. (2004). Do institutions cause growth? Journal of Economic Growth, 9(3), 271–303.

    Article  Google Scholar 

  • Hall, P., & Soskice, D. (2001). Varieties of capitalism: The institutional foundations of comparative advantage. Oxford University Press.

    Book  Google Scholar 

  • Hough, J., & Grier, R. (2015). The long process of development. Cambridge University Press.

    Google Scholar 

  • Kehoe, T. J., & Ruhl, K. J. (2010). Why have economic reforms in Mexico not generated growth? Journal of Economic Literature, 48(4), 1005–1027.

    Article  Google Scholar 

  • Kenyon, P. (2018). Dictatorland. Head of Zeus.

    Google Scholar 

  • Kornai, J. (1992). The socialist system: The political economy of communism. Clarendon Press.

    Book  Google Scholar 

  • Lee, Y. S. (2022). State capitalism and the law. In Wright, M., Wood, G. T., Cuervo-Cazurra, A., Sun, P., Okhmatovskiy, I., & Grosman, A. (Eds.). (2022). The Oxford handbook of state capitalism and the firm (pp. 346–364). Oxford University Press.

    Google Scholar 

  • Mahoney, J., & Thelen, K. (Eds.). (2009). Explaining institutional change: Ambiguity, agency, and power. Cambridge.

    Google Scholar 

  • Marshall, M. G., & Jaggers, K. (2020). Polity5 project: Political regime characteristics and transitions, 1800–2018. http://www.systemicpeace.org/inscrdata.html

  • Mickiewicz, T., Stephan, U., & Shami, M. (2021). The consequences of short-term institutional change in the rule of law for entrepreneurship. Global Strategy Journal, 11(4), 709–739.

    Article  Google Scholar 

  • Moore, B. (1993[1966]). Social origins of dictatorship and democracy: Lord and peasant in the making of the modern world. Beacon Press.

    Google Scholar 

  • Morck, R., & Nakamura, M. (2005). A frog in a well knows nothing of the ocean: A history of corporate ownership in Japan. In R. K. Morck (Ed.), A history of corporate governance around the world: Family business groups to professional managers (pp. 367–466). University of Chicago Press.

    Google Scholar 

  • North, D. C. (1990). Institutions, institutional change and economic performance. Cambridge University Press.

    Book  Google Scholar 

  • Pemstein, D., Marquardt, K. L., Tzelgov, E., Wang, Y., Medzihorsky, J., Krusell, J., Miri, F., & von Römer, J. (2022). The V-Dem measurement model: Latent variable analysis for cross-national and cross-temporal expert-coded data. V-Dem Working Paper Series 2022(21). https://www.v-dem.net/media/publications/Working_Paper_21.pdf

  • Persson, T., & Tabellini, G. (2009). Democratic capital: The nexus of political and economic change. American Economic Journal: Macroeconomics, 1(2), 88–126.

    Google Scholar 

  • Schumpeter, J. (2021[1942]). Capitalism, socialism, democracy. Wilder Publications.

    Google Scholar 

  • Sen, A. (2009). The idea of justice. Penguin.

    Book  Google Scholar 

  • Williamson, O. E. (2000). The new institutional economics: Taking stock, looking ahead. Journal of Economic Literature, 38(3), 595–613.

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

Authors

Corresponding author

Correspondence to Tomasz Mickiewicz .

Editor information

Editors and Affiliations

Rights and permissions

Reprints and permissions

Copyright information

© 2023 The Author(s), under exclusive license to Springer Nature Switzerland AG

About this chapter

Check for updates. Verify currency and authenticity via CrossMark

Cite this chapter

Mickiewicz, T. (2023). Middle-Income Trap and the Evolving Role of Institutions Along the Development Path. In: Ricz, J., Gerőcs, T. (eds) The Political Economy of Emerging Markets and Alternative Development Paths. International Political Economy Series. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-031-20702-0_3

Download citation

Publish with us

Policies and ethics