Can Jamaica escape the World Bank’s Middle-Income Trap?

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Keith Collister .

ON Thursday, October 17, 2024 World Bank marked the Caribbean launch of its 46th annual World Development Report (WDR), called The Middle-Income Trap, by bringing Dr Somik Lall, director of the 2024 WDR and senior advisor to the World Bank’s chief economist, to Kingston.

His key message was that, since 1970, as countries grow wealthier, they hit a “trap” at about 10 per cent of annual US gross domestic product (GDP) per person — the equivalent of US$8,000 — and that the trap has been worsening over the past decade if one excludes China. America’s GDP is used as the benchmark, as only 25 million people worldwide have higher per capita income.

Since 1990, only 34 middle-income economies — less than the population of Pakistan, or 250 million people — have achieved high-income status, and more than one-third of them were either European Union accession countries or oil exporters.

This leaves 108 countries of six billion people (75 per cent of humanit, representing 40 per cent of world GDP) with annual income per capita ranging from US$1,136 to US$13,845, trapped. These countries have two-thirds of the world’s poorest, and contribute two-thirds of the world’s carbon emissions.

In his foreword to the report, Indermit Gill, chief economist of World Bank Group and senior vice-president for development economics, observes that since the World Bank coined the term “middle-income trap in 2007 it has only got more difficult to move from middle- to high-income status.

However, the WDR provides a simple, reliable growth framework for countries to escape the trap, based on three I’s — investment, infusion (bringing new technology from around the world and diffusing it domestically), and innovation.

Gill expands “..too many of these countries rely on outmoded strategies to become advanced economies. They depend just on investment for too long — or they switch prematurely to innovation. A fresh approach is needed: first, focus on investment; then add an emphasis on infusion of new technologies from abroad; and finally, adopt a three-pronged strategy that balances investment, infusion, and innovation.

For Gill, just increasing investment is “a playbook from the last century”, like “driving a car just in first gear and trying to make it go faster”.

To achieve high-income status a middle-income country needs to ramp up the sophistication of its economic structure. A key measure of its sophistication is the complexity of its export basket (not necessarily how diversified). Middle-income countries are now three times more likely to see an economic slowdown than high-income, with economies — not just businesses — becoming more complex as they get bigger, requiring different growth approaches and generally stiffer headwinds to growth created by the “shrinking spaces” of protectionism, rising geopolitical tensions (slowing the diffusion of knowledge), debt, and the rising costs of climate change and action.

One particularly stark chart on Caribbean productivity highlighted by Dr Lall claimed that Jamaica and Barbados had human/produced capital of 91 and 118 per cent, respectively of the US but only 16 and 21 per cent, respectively, of US GDP per worker. The gap in Haiti was by far the widest and Trinidad was the smallest.

Another discouraging table in his presentation showed that between 1990 and 2019, comparing the contributors to growth for Jamaica and Barbados, both had negative total factor productivity (productivity differences driven by technology and management efficiency), although Jamaica was substantially more negative. As Lall notes, a reasonable “capital endowment is not translating into productivity” in Barbados and Jamaica.

Lall outlined the three case studies in the WDR report, highlighting the Republic of Korea, Poland, and Chile.

Korea was among the least-developed countries globally in the 1960s but after an unparalleled, five-decade run of high-output growth reached a per capita GDP of US$33,000 by the end of 2023. Its champion exporter, Samsung, originally made noodles but, like other Korean chaebols, licensed technology from Japan — in their case NEC.

As Korea grew more successful in making TVs, Japan increased the price of licences, but the Government offset this with tax incentives for technology adoption while licences for foreign technology also gave one access to finance. After catching up technologically, Korea’s industrial policy switched to a strategy of encouraging innovation, using their universities to produce the specialised engineering and management skills required.

Lall observes, “You can do all this as long as you compete in global markets, and if you don’t succeed you are not bailed out.” In contrast Brazil, threatened by fear of US firms, put a 10 per cent marginal tax rate on intellectual property, increasing the production of lower-quality patents. Over a 40-year period from 1980, when Korea and Brazil were at a similar level of average productivity relative to the US, Brazil’s labour productivity as a percentage of the US halved to 20 per cent, while Korea’s trebled to 60 per cent.

One strong recommendation from the report is that you can’t skip the painful reforms required to open up to and attract foreign investments (infusion) if you want to move to an innovation economy and thereby get the gains of sustained growth.

Other countries followed similar paths, including Poland and Chile. Poland transitioned from a planned to a market economy — with technological infusion driven by its accession to the European Union — but invested heavily in education on the theory that “when the time is right they will come home as the economy does better”, in the words of Dr Lall. Their diaspora contributed to them, improving their knowledge base.

In Chile, the Fundacian Chile, a private non-profit set up in 1976, promoted technology transfer to domestic ventures, their biggest success being the adoption of Norwegian salmon farming technologies to local conditions, thereby making Chile a top exporter of salmon.

Keith Collister has been a member of the Jamaica Chamber of Commerce Economic Affairs and Taxation Committee for 24 years and is its current chair. He has also been a member of the Private Sector Organisation of Jamaica Economic Policy Committee for the same duration.

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