INDEX

1. Setting the context and defining the scope

2. Elaborating problem statement
3. South Koreas successful transit through middle income.
4. Discussing China and the middle income trap by comparing with South Koreas
success, and suggesting how globalization will affect the Chinese miracle
5. Conclusion

Chapter 1
Setting the context and defining the scope
Many countries have successfully transited from low income economies to middle income
economies, thus uplifting a huge population above the poverty line. The transition from middle
income to high income though has been elusive. Out of the identified 110 middle income
countries in the 1960s, only 13 have transitioned into the high income economies1. This so
called middle-income trap has been a peculiar feature in the post Second World War era
economies.
Structure and Scope of the report:
The report starts by describing the concept of a middle income trap and lays the template to
identify the countries in the middle income trap. Further to which, the report discusses the case
of South Korea which successfully transited into the high income category, and then uses the
pointers from China 2030: Building a Modern, Harmonious, and Creative High-Income
Society (World Bank Document)2 . The report proceeds to compare South Korea with the
economic environment of China. In the final chapter, a study of parameters from the policy
changes is done with reference to Globalization. The paper also introduces a new concept called
PwC ESCAPE Index.
a. The growth timeline:
Low income countries are predominantly agrarian and have a large part of labor pool working
in agriculture as well as a large proportion of the GDP coming from agrarian activities. As the
economy progresses and more investments are made into capital goods, the agrarian population
is trained to work on capital goods and thus the resources are shifted to more productive
industries. As the general population productivity increases, so do the income levels in the
agrarian sector. Further to which an economy transits into a lower middle income economy. In
this stage a simple manufacturing sector is typically set up with an expert foreign assistance
and the economy flourishes on the basis of availability of cheap labor. As the country
progresses, and an elaborate infrastructure is built (again under learning and technology
transfer from foreign industrialized countries), the country passes through the middle income
phase. At this time, a further increase in income levels to pass into the high income group
becomes a bit challenging. This transition demands a specialized labor pool in technology and
management to produce high quality goods. Innovation is required to boost the worker
productivity and compete with other high income level nations.
It can best be explained that at this point, the growth due to transfer of resources to more
productive industries is complete, and the income level and wages are such that the country
cannot compete with low income cheap labor countries. These countries also find it difficult to
compete with high income innovation and technology management driven countries. This
required transition, or rather the failure to do so is referred to as the middle income trap.
It needs to be acknowledged that incomes (Gross National Income per capita) in low or middle
income countries less than the High Income countries, have to grow at rates higher than the
1

2 The Economist, The middle-income trap 2012

(http://www.economist.com/blogs/graphicdetail/2012/03/focus-3)
2
China 2030 : Building a Modern, Harmonious, and Creative High-Income Society [prepublication version]. (n.d.). Retrieved June 13, 2016, from
https://openknowledge.worldbank.org/handle/10986/6057

income per capita in high income countries to catch up with the high income group. A failure
to grow at these rates is inferred to as an indication that the country is trapped in middle income
group.
b. Setting a template for middle income trap
To define the middle income trap, we identify two terminologies independently.
1. Middle Income economies3 are defined by the country classifications by World Bank which
are revised on 1st of July every year on the basis of the Gross National Income per capita as
calculated by the World Bank Atlas Method.
Classification according to the World Development Indicators 2015: (Table 1)
Income level (GNI Per capita in 2013)
Classification
Less than 1045 $
Low Income Economies
1045 $ to 12746 $
Middle Income Economies
Greater THAN 12746 $
High Income Economies
*4125 $ separates the Low Middle Income and High Middle Income Economies.
2. Trap: J. Felipe, A Abdon and U Kumar in Tracking the middle income trap: What is it, who
is in it and Why? (April 2012) propose that, the threshold number of years a country spends
in the middle income category to be classified as being in the middle income trap can be
determined from the historical data about the median number of years that countries have
spent in middle income groups to transit into high income categories. This threshold has
been calculated as 28 years in lower middle income and 14 years in upper middle income
groups. This translates into growth rates of at least 4.7% per annum and 3.5% per annum to
avoid falling into the upper middle income trap.
For illustration, consider (table 2) the calculation of middle income trap countries and their
growths and potential growths as carried out by Felipe, Abdon and Kumar (April 2012) 4
(Table 2)
Country
Region
2010 GDP Years in Years as
Average
No of years to
per capita
Lower
Upper Middle Growth
reach
(1990 PPP Middle Income until
(%) 2000- 11750 $ (High
$)
Income 2010
2010
Income)
Malaysia
Asia
10567
27
15
2.6
5
Uruguay
Latin Am
10934
112
15
3.3
3
Venezuela
Latin Am
9662
23
60
1.4
15
Saudi Arabia Middle East 8396
20
32
0.9
37
Syria
Middle East 8717
46
15
1.7
18
As it can be clearly seen in the table above, Venezuela and Saudi Arabia have been in the lower
Middle Income and Upper Middle income for a while, and the growth rates have been next to
modest. It will take Venezuela and Saudi Arabia 15 and 37 years respectively to breach the
high income threshold income level of 11750 $.
Keywords: Middle Income Trap, PwC ESCAPE index.
3

Release of World Development Indicators 2015. (2015, July 01). Retrieved June 11, 2016,
from http://data.worldbank.org/news/release-of-world-development-indicators-2015
4
Felipe, J. (2012). Tracking the middle-income trap what is It, who is in It, and why? Manila:
Asian Development Bank.

Chapter 2:
Elaborating problem statement
The study envisages to address a discussion regarding the comparison of the economies of
South Korea and China in context of the middle income trap, and further contemplate upon
the effect of globalization on the middle income trap.
The objective of the study is to address the question of whether globalization will assist
Chinese efforts in overcoming the middle income trap.

Chapter 3
South Koreas successful transit through middle income
Initial Growth:
South Korea was one of the poorest countries after the Korean war with a Gross National
Income per capita (calculated by Atlas Method) to be 110 (Current USD). Throughout this
period, extensive foreign assistance, along with industrialization of the Korean manufacturing
sector spurred a sustained economic growth. Adoption of the outward looking policy and
opening up of the economy has played a significant factor in the economic growth of South
Korea
Unlike many countries currently trapped in the middle income trap (Saudi Arabia, Venezuela,
Indonesia), South Korea was not endowed with natural resources to crank start its journey
towards expansion. It faced problems such as limited natural resources, low savings rates and
a small domestic market. The initial growth strategy was a labor intensive growth through cost
advantages of cheap labor. Government reforms to ensure foreign capital flow, cheap labor
availability and export oriented policies were the cornerstones of the rising Korean Economy.
According to The World Bank data, the GNI Per capita by atlas method (In current USD) stands
at 27090 $, and thus South Korea has transformed into a High Income Country.
The success of the South Korean Economy has more or less relied upon the following factors:
1. Rapid Industrialization through learning process
2. High emphasis on research and development
3. Stress on upgradation of human capital to master the Technology & Management
4. Policy shifts to promote high skill intensive industries as compared to low skill
intensive industries to ensure smooth transition
5. Export Oriented strategies to delink GDP growth from domestic demand
6. Robust Democratic framework
Kenichi Ohno has provided an excellent visual model to represent countries in middle income
group

Middle Income
Trap Line

(Figure 1)

Chapter 4
Discussing China and the middle income trap by comparing
the conditions with South Koreas success.

a. The initial growth of China
In 1979, the GNI Per capita by Atlas method (Current USD) was 90 $5. Since then, the country
has made rapid progress and has reached a level of 6560 $ GNI Per capita by Atlas method
(Current USD) in 2013. This rapid development was due to the fiscal, administrative and social
stability reforms carried out in 1978. At the crux of this extravagant growth is the
decentralization policy of the central government. The Chinese government initiated a
competitive spirit among the Chinese localities. Individual local governments were rewarded
for delivering on key aspects such as growth, Foreign Direct Investment and social stability.
Further key reforms included the integration of the domestic market by making China a single
market place by making it easy for the goods to be transported throughout the country. The
country initially thus could leverage its large domestic markets to exploit economies of scale
and thus flourish. In addition to which, a gradual opening up of the Chinese economy to global
trade has reaped its own benefits by providing China with better technology, management
practices, and opening many doors for Chinese goods to be exported.
Going forward, as china attempts to cruise through the Middle Income Range, it is poised with
the following trends:
1) Slowdown due to exhaustion of growth contribution from shifting of resources to high
productivity industrial jobs.
2) The Aging population will act as a braking force as the dependent population
increases.
3) External current accounts are poised to decline as the exports dwindle with reducing
low labor cost advantage and surging imports due to a sizeable middle class.
4) Reducing the pressure on environmental degradation also means sacrificing on the
pollution intensive firms.
5) Income inequality which has increased over past several decades is showing signs of
moderation, and may gradually decline.
6) Improvement in higher education and research and development
7) Shift of economic activity to inland provinces

Source: World Bank national accounts data, and OECD National Accounts data files.

b. Contrasting the Chinese story with Korean economic growth and assessing effect of
globalization
South Korea has been a country which has grown at a significantly fast rate through its middle
income range and thus avoided the middle income trap. There are multiple similarities between
the Korean Story and the Chinese Story. This section shall examine the same and try to assess
the readiness of the Chinese economy to avoid the middle income trap. We shall discuss these
in concurrence with the six strategies proposed in The World Bank (China 2030: Building a
Modern, Harmonious, and Creative High-Income Society) and conclude by introducing the
PwC ESCAPE index.
1. Structural reforms for a market based economy with sound foundations
a. China: China being in a transition stage to move towards a high income country, needs
to undergo structural changes to make business operations more flexible. The world
bank report highlights the need for the Chinese government to concentrate more on
providing public goods and services and let the private sector take a lead in the rapid
economic growth. Other structural reforms in capital management and land legislation
will also prove to be essential in this journey. Labor reforms will be essential to increase
labor force participation rate and
b. South Korea: In 2000s Korea opened up its markets with the Kim Dae-jung Reforms
and underwent similar reforms throughout its growth phase in particular to boost
foreign investment and draft export friendly policies. Although China, owing to its
massive middle class can concentrate on domestic demand and making inroads into the
mainland consumers. In Korea, about 45% of the work force migrated across the
provinces and thus urbanization was much more rapid.
c. Globalization will play a positive role in making the Chinese laborer more competitive
by exposing the industries to best practices from the world. Similarly, internal
competition has proven to be beneficial to improve the productivity of industries. The
government needs to undertake reforms to open up the market to foreign companies, as
well as to reduce the barriers for entry of new domestic players.
2. Increasing the pace of Innovation
a. China: Being in the middle income zone, China is showing signs of reduced economic
growth contribution from transfer of resources from low productivity activities to high
productivity activities such as industrial work. Aging population and dropping
investment would eventually mean the growth will be driven by innovation. China
invests about 2.016% of its GDP in R&D in contrast to South Korea which spends about
4.292% of its GDP6. Although China leads in the absolute number of intellectual
property rights filed during 2013, South Korea leads in the patent applications per GDP
and patent applications per million population.7
b. South Korea: South Korea has clearly made aggressive advances in intellectual
property rights and R&D Spending. The large 4.292% of its GDP investments in R&D
have definitely lead to a more productive industry, and thus assisting South Korea to
avoid the Middle Income Trap.

6
7

2014 GDP as per the OECD Databank

World Intellectual Property Indicators 2013
7

c. Globalization: Effect of globalization on innovation has been studied by

Gorodnichenko (et. All) in 20098, the conclusion supports the finding from the world
bank report stating globalization leads to attracting multinational innovators which in
turn contribute to a boost in innovation practices. It further supports the fact that
foreign direct investment and foreign competition spurs innovation in domestic firms.
Although, better product market and better business environment do not foster
innovation. In addition to this, the benefits that digital globalization brings of
connecting the local R&D networks to collaborate with research teams across the
world thus, accelerating the research programs, as well as increasing the transparency
in Chinese R&D programs. This transparency, building of trust and collaboration
amongst multinationals will further the process of multinational corporations setting
up R&D Hubs in China.
3. Green Development
It is essential for a country to develop in an environmentally friendly way to grow
economically and to reduce environmental costs.

a. China: Chinese growth over the past couple of decades has been at the expense of
deteriorating environment. Recognizing that such growth is unsustainable, the
government has taken initiatives to emphasize on energy efficiency, efficient resource
allocation and clean industries. Further advancements in these fields are essential to
cut down on environmental degradation related costs, as well as such initiatives will
spur innovation and growth in the nascent field of renewable energy. Significant
factors such as quality of drinking water and CO2 emissions also appear in the PwC
ESCAPE Index.
b. South Korea: South Korea expanded rapidly at the expense of its environment.
Consequently, effluent from sewage and industrial waste has harmed some coastal
and river ecosystems. The government has undertaken policy reforms to reduce air
pollution. South Korea is one of the leading countries to have applied for clean energy
patents.
c. Globalization: Although Globalization has by and far indirectly been negatively
affecting the environmental degradation due to international economic competition,
the balancing dynamics for the same can also be found in the concept of globalization
itself9. Huwart, Jean-Yves and Loc Verdier (2013), provide a classic example of the
same by citing the CO2 Emissions rights trading system which perfectly synergizes the
concept of globalization with an effort to mitigate environmental damage. Similarly,
the benefits of globalization of trade and research also assist the cause of a cleaner
and greener development of economies.
4. Equal opportunity and income equality

Gorodnichenko, Y., Svejnar, J., & Terrell, K. (2009). Globalization And Innovation In
Emerging Markets. Policy Research Working Papers.
9
Huwart, Jean-Yves and Loc Verdier (2013), What is the impact of globalisation on the
environment?, in Economic Globalisation: Origins and consequences, OECD Publishing.

a. China: Income inequality has been said to have a non-linear effect on economic
growth10. Unequal incomes up to a certain extent promote enterprising and growth of
industry through investments by financially strong industry leaders. As it increases
beyond a certain limit, rent seeking behavior causes the industry to get inefficient in
its processes. Further to which, income inequality also leads to other sorts of
inequalities like health, and more significantly education. Inequality has a significant
effect on the growth path especially of middle income countries. (Examples of Middle
Income Trap countries with High GINI coefficient: South Africa 63.4, Brazil 52.9,
Venezuela 46.9) Income Inequality in china, although more than 40 (a barrier set by
word bank) has been reducing over the past couple of years and is a good indication.
b. South Korea: GINI coefficient in South Korea never exceeded 36 throughout the
economic wonder. S. Nazrul Islam (2015)11 argues that economic inequality has a large
bearing on the ability of a nation to avoid the middle income trap. Rather he goes on
to show that a stable GINI coefficient is essential to avoid rent seeking, social unrest
and unbiased governance which are essential for sustained growth especially during
the middle income period.
c. Globalization: N.Chusseau and J. Hellier (2012)12 argue that Globalization through
easier means of education dissemination and through the Stolper-Samuelson effect
reduce the inequality, but on the other side, technology transfer and demand for new
skills in industries tend to increase inequality. These considerations should be thought
of when making the policy decisions.
5. Achieving Mutually Beneficial Relations with the rest of the world:

Significance of The Soft Power in a Globalised world:

a. China: The Chinese miracle owes a lot to the world. The astronomical rise of the
Chinese economy has undoubtedly been fueled by exports. Demand for Chinese
products across the globe has been a result of the low cost production capabilities.
Similarly, China has also assisted the growth of its trading partners. A large chunk of
Chinese growth has been contributed by the Chinese participation in the Global Value
Chain rather than in the complete product design and production lifecycle. A growing
Chinese middle class will also prove to be a major consumer for the rest of the world.
As the country progresses through the middle income range, it is inevitably going to
be more and more linked to the global scenario.
b. South Korea: The Hallyu Wave during the 1990s was an example of the nation
branding exercise carried out by South Korea. As discussed by Regina Kim13 , the more
the significance of nation branding and soft power becomes more evident, South
Korea is engaging into a constructive nation branding exercise to influence the
decisions in global affairs.
10

Middle-Income Trap: Economic Myth, Political Reality - The Asia Foundation. (n.d.).
Retrieved June 11, 2016, from http://asiafoundation.org/publication/middle-income-trapeconomic-myth-political-reality/
11
Will Inequality Lead China to the Middle Income Trap? (n.d.). Retrieved June 11, 2016,
from http://www.un.org/esa/desa/papers/2015/wp142_2015.pdf
12
N. C., & J. H. (2012, May). Inequality in emerging countries.
13
R. K. (n.d.). South Korean Cultural diplomacy and Efforts to Promote the ... Retrieved June
11, 2016, from http://web.stanford.edu/group/sjeaa/journal111/Korea2.pdf

c. Globalization: Globalization could not have a greater positive impact on ease for
avoiding the middle impact trap. China needs to move up the value chain in order to
gain more value from its activities. A consequence of moving up such a value chain is
also developing tensions with other high income economies. This is more evident from
the increasing number of disputes filed against China in the WTO. Increasing exposure
to foreign exchange reserves and increased exposure to volatility in markets due to
globalization is a different challenge in itself. The World Bank Report China 2030
Overview suggests China should play a positive role in global governance, as well as
be a constructive player in assisting development of other countries. This will ensure
an expansion of Chinese soft power and earn goodwill. Globalization is indispensable
for a sustained growth of china into the High Income Countries.

10

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Source: World Bank national accounts data, and OECD National Accounts data files.
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2014 GDP as per the OECD Databank
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Huwart, Jean-Yves and Loc Verdier (2013), What is the impact of globalisation on
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Middle-Income Trap: Economic Myth, Political Reality - The Asia Foundation.
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N. C., & J. H. (2012, May). Inequality in emerging countries.
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R. K. (n.d.). South Korean Cultural diplomacy and Efforts to Promote the ...
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11