We've set a trap – 27 ways in which emerging market countries might reveal themselves to be vulnerable to the middle-income trap. In our baseline forecast, Russia, Brazil, Hungary and Croatia all fail to converge further towards US income levels over the coming decade. Our granular analysis suggests that, at their current stage of development, Argentina and several South East Asian economies could also be vulnerable to a significant slowdown.
The middle-income trap is an elusive concept with no consensus over its precise meaning. We interpret the phenomenon as where growth slows sufficiently to bring to an end the process of convergence to the higher-income levels of the US.
While our central view is that the vast majority of emergers will converge further towards US income levels over the coming decade, history provides a stark warning. We set out the empirical features of the countries that have fallen victim in the past; the structural deficiencies that explain why; and a raft of indicators to highlight potential warning signs, without undue reliance on any single imperfect metric.
In our scorecard, Central and Eastern Europe economies fare well, consistent with improved growth performance in our baseline relative to recent history.
Elsewhere, the scorecard highlights numerous structural deficiencies – including in most of South East Asia, where more than a third of metrics are flashing red. That is true even in Indonesia and Philippines, which grow rapidly in our baseline forecast.
Moreover, the experience of the Asian tigers that escaped only serves to underscore the potential vulnerability of the poorest performers to the middle-income trap.
This matters for markets. While the full consequences of a country falling victim to the middle-income trap would only be felt over the long term, it would still have important implications for financial variables (such as equity returns) over shorter horizons – an issue we will be exploring in future for the Global Scenarios Service.