New ADB Chief: Middle Income Trap is a Sham

Based on empirical studies, the new ADB chief proclaims the Middle Income Trap a “myth”

From Asian Nikkei:

The so-called middle-income trap, in which certain countries appear stuck at a middle level of development, is a sham, the new chief economist of the Asian Development Bank says.   

Although it has no formal definition, the "trap" is characterized by the inability of middle-income countries to advance to high-income status. In contrast, low-income economies are said to be able to easily move up to middle-income status and high-income countries are likely to sustain prosperity

"I have looked at the data -- this is ongoing research still -- but the data suggest to me that this is largely a myth: the notion of the middle-income trap," Shang-Jin Wei said in an interview with the Nikkei late last week…

Wei's assertion came after he looked at the economic growth history of "all countries in the world." He grouped them into five brackets: high-income, middle-income, low-income, poor, and extremely poor. He then looked at how they developed starting from 1960 and then 10, 20 and 50 years after.

In any bracket, Wei said, some countries advanced, some dropped, while some stayed the same, suggesting that there is nothing special with the middle-income level.

In 2012, I averred that the Middle Income Trap theory has only been an invention by interventionists or has signified a statist tool, and therefore a myth.

This is an example of how macro statistics can be used to mislead people. Countries essentially don’t fall into “traps”, it is the individual who make or unmake their respective wealth.

What truly restrains people from advancing is when productive resources are diverted into non-productive use. That’s basic, and is a matter of the law of opportunity costs or the law of scarcity.

And what induces non-productive use of resources are insatiable government spending, the welfare state, bloated bureaucracy and trade restrictions, anti-competition laws, bubble policies (or policies which induces consumption), inflationism (QEs) and all sorts of market distorting interventionism. Yes, all of them are interconnected…

In short, the more intervention, the lesser the capital accumulation or reduced economic growth. When politicians become greedy enough to divert much wealth into policy driven consumption activities then productivity diminishes. And that's where the so-called statistical 'trap' comes in.

Theory now supported by evidence.