Escaping the middle income trap – the challenge for emerging markets

John Hawksworth photoAuthor: John Hawksworth, Chief Economist, PwC UK

Over the past decade we got used to thinking of emerging markets as a bloc defined by an acronym – BRICs, E7, N11, CIVETs, MINT etc. – and characterised by generally strong growth prospects.

In practice this was always an oversimplification, as cumulative real GDP growth rates since 2000 in the largest emerging economies have varied greatly, from just 30% for Mexico to over 240% for China (see chart below).

JH chart 2
The events of the past year have brought the differences between emerging markets into starker relief, with former stars such as Brazil, Turkey and India running into considerable market turbulence during 2013 due to concerns about high inflation, rising trade deficits and weak public finances (see Could 2014 be the year the world’s advanced economies get their mojo back? to read about the contrasting fortunes between the emerging and advanced economies that we expect to see in 2014).  To find out how global CEOs are responding to shifts in global economic growth, as well as which emerging countries were their top picks in the coming year, take a look at the results of our 17th Annual Global CEO Survey, from 6.45 pm CET 21 January 2014.

So how can we assess the longer-term prospects for emerging markets? Which have the greatest potential to escape the ‘middle income trap’ and graduate to full advanced economy status over the coming decades? And which might remain stuck in the trap?

Traditional economic measures like GDP growth, investment and inflation are clearly important, but they’re not enough, on their own, to assess the chances of long-term success. We believe that we also need to look at four other key dimensions.

  • First, social progress and cohesion. How healthy and well-educated is the workforce? How fairly are incomes distributed? Do people in the country generally trust each other?
  • Second, take-up of the latest digital communications technologies. This is increasingly critical to business success, particularly for emerging markets that can leapfrog the ‘old school’ technologies that some mature economies may be locked into.
  • Third, strong and reliable institutions. Does the political system provide stability and a legal and regulatory environment that makes it easy to do business and keeps corruption under control?
  • Finally, sustainable growth. Is there adequate energy and water to supply people and businesses in a way that's environmentally sustainable in the long run?

We capture these different dimensions in our new ESCAPE index, which I've previewed in a video here. The index includes 20 quantifiable indicators based on high-quality data sources such as the IMF, the UN and the World Bank.

We cover 42 of the largest economies in the world, from emerging markets in sub-Saharan Africa to high-income countries like the US, UK, Germany and Japan.

What we find is that the advanced economies in North America and Western Europe made progress on our index from 2000 up to 2007, but fell back between 2007 and 2012 as the global financial crisis took its toll, particularly in Southern Europe.

By contrast, while progress slowed briefly during the crisis in some emerging economies, they mostly continued rising after 2007, in certain cases even overtaking some advanced economies by 2012.

Central and Eastern Europe (CEE) has been a star performer, albeit from a low base in 2000. Latin America, the Middle East and Emerging Asia have also risen steadily up the rankings since the turn of the century.

But we do find a lot of variation across individual emerging markets, as discussed earlier. We also find that, while most have made good progress on economic and technological indicators, many have made little or no headway on the social and political fundamentals needed to achieve full advanced economy status in the longer run.

We'll publish our full report, including results for individual countries and indicators, on 5 February 2014.

John Hawksworth is an economist who specialises in macroeconomics and public policy issues. He's Chief Economist in PwC’s UK firm and editor of our Economic Outlook reports. He's also the author of many other reports and articles on macroeconomic and public policy topics and a regular media commentator on these issues.  Read more.


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