Experts identify key middle-income development challenges

20 Jun 2013

International experts kicked off a series of international policy dialogues on the challenges faced by middle-income countries (MICs) on 13th - 15th of May in Seoul.

At the launch event, co-hosted by the UNDP Seoul Policy Centre, the Korean Ministry of Foreign Affairs and the Korea Institute for International Economic Policy (KIEP), 15 international experts agreed to work together on research projects on enhancing productivity, boosting financial inclusion and other areas.

They also drew initial conclusions on the common challenges faced by MICs.

The following is a summary. Please consult the full paper for more detail.

We need to think more about how we classify MICs

Countries as diverse as South- Sudan, Peru, China, Nigeria, Malaysia and Ghana cannot all be put in one box.

MICs are unique. Each has its own distinct strengths, weaknesees and circumstances.

The current classification is based on GDP per capita. To tackle the development challenges faced by these countries we must look beyond this.

There is no guarantee that MICs will reach high income status

The ‘middle-income trap’ basically boils down to this:

As a country gets richer, wages rise.

It gets more expensive to make simple standardized goods, so business moves production elsewhere.

At the same time, countries don't have the infrastructure. technology and know-how to compete at the hi-tech' end of production.

So they get stuck in the middle.

They lose out to cheaper, low-income countries on the one hand, and lack the ability to compete with the high-tech’, high productivity activities of richer countries on the other.

Reforms must boost productive capabilities and help develop a robust, vibrant and diverse private sector

A coordinated set of reforms must:

  • enhance economic efficiency; 
  • strengthen human and social capabilities; 
  • embrace business’s ability to innovate; and, 
  • make the public sector more efficient. 

Governments have important roles to play

Governments can help set the stage for innovation.

They can help businesses identify areas that will boost the number of people working in high productivity and high-technology activities.

Many MICs have large informal sectors. These may have unrealized potential. And if that is so, how can it best be tapped?

The role of the State in Korea’s middle-income stage offers interesting examples for developing countries.

MICS must tackle inequality and vulnerabilities

Millions have escaped absolute poverty in recent years. Yet MICs still house most of the world’s poor.

Inequality reduces countries potential to grow economically.

The ‘new-middle class’ is nowhere near middle-class by rich country standards.

People earning from $2 to $10 a day are vulnerable to shocks. Many also live where there is no state-sponsored safety net.

Social protection takes up a small portion of GDP in many MICs. Social protection measures (especially social assistance) must be stepped up and fully integrated into overall development strategies.

Targeted social assistance programmes can also create new opportunities for people that will boost wider productivity.

MICs must share more knowledge based on their experiences

Through their own successes and failures, middle-income countries have knowledge, expertise and experience that can benefit others.

‘South-South development cooperation’, including non-financial development assistance, is on the rise.

This trend must be supported and promoted.

While countries can learn from each other’s experiences, ultimately each country should find its own solutions, based on its own circumstances