Long-term GDP Growth And Middle-Income Trap

You should answer all questions. The sources for your data should be referenced. The best answers will also draw clearly on relevant theoretical frameworks which should be clearly referenced. Your answer should look to document the scale of the issue in the country you examine and come to a clear conclusion about the likely forward path and the consequences of that outcome.

A) What evidence is there that the advanced economies are experiencing a permanent slowdown in their trend rate of growth rather than just a temporary slowdown?

B) What is a middle income trap and what evidence is there that emerging market economies are likely to get stuck in one?

C) What are the implications of your answers for businesses and investors in the GCC?

Secular stagnation and declining long-term growth rates

After the global financial crisis of 2008, the growth rate of advanced economies has been increased slightly, since 2012.  However, they remain unable to achieve the pre-crisis growth levels as before and enhancing economies have still faced a lower rate of growth (Antolin-Diaz, Drechsel and Petrella 2017). In this context, a debate has occurred that whether this slowdown of world economic growth is temporary phenomenon of financial crisis or extension of long-term trend that appeared before financial crisis.

Secular stagnation:  As growth expectations of developed countries have continuously remained high, it has led economists to give focus on secular stagnation (Montier and Pilkington 2017). Secular stagnation can be occurred due to two efficient causes, those are, insufficient investment or temporary aggregate demand shortage and failure of supply side. After analysing the long-term GDP growth trend of advanced economies with the help of developments of dynamic factor models, real time estimation of long-run GDP growth rates can be obtained.

It can be stated from figure 1 that a constant decline in long-term GDP growth rates is not a sudden impact of financial crisis of the year 2008. This scenario can be described more clearly by the G7 as a whole rather than individually, as this trend has more variation for individual countries (Data.worldbank.org 2018). The slowdown tendency of all G7, in average, can be traced by decreasing trend of both labour productivity growth and population growth, which have led the long-run GDP growth almost half during 1970 to 2014(Gordon 2017).

The factor models are innovative by its nature as they permit the long-term growth rate to vary over time rather than remaining constant. These methods can help to predict the future changes of GDP growth trend strongly (Antolin-Diaz, Drechsel and Petrella 2017). Economists can further track the long-term GDP growth rate on a regular basis by applying those methods, which is useful for policy makers and investors. Moreover, economists sometimes assume that for developed countries, this long-run growth rate may be constant roughly, as labour productivity is going to be increased by 2% per annum due to given technology and for stable population growth (). For example, the long-run growth rate of the U.S was calculated as about 3.25% prior to 2000 where previous studies have showed one downward break regarding growth of productivity after 1973 (Murray 2017).

There are some other developed countries, where decreasing trend of long-run growth can be seen for longer time compare to other countries and those situations have occurred in different times. Hence, this continuous declining trend of growth rate of countries under G7 is a surprise, as many economists usually believe the long-run growth as stable including few breaks due to changing pattern of technology (Potrafke 2017).  However, this downturn in the growth process becomes almost unstoppable trend even after omitting the differences between countries.

Factors responsible for declining growth rates

The decreasing long-run growth rate of G7 can be divided based on two causes (Antolin-Diaz, Drechsel and Petrella 2017). Firstly is has happened due to continuous decrease in population growth and for decline in productivity growth of labour.

In figure 2, the continuous slowdown trend of population growth has been shown. It can be stated that this population growth rate for the G7 has declined from 0.6% per annum in the beginning of 1980s to 0.3% in 2014. This trend can decrease further in future.

In the above figure, the data of decreasing trend of labour-productivity growth has shown. From this figure, it can be states that there are two phases of deceleration. The first phase of deceleration has occurred in 1970s in Japan and Europe while the second phase has appeared almost everywhere in 2000 (Census.gov 2018).

Thus, it can be concluded that this slowdown of long-run growth trend in developed economies can be seen as permanent impact rather than temporary affect due to financial crisis.

The middle-income trap refers a situation where the growth rate of a country declines after achieving the middle-income level and after attaining that level, it becomes impossible for those countries to attain a high-income level (Agénor 2017). The number of countries living within this middle-income group has increased dramatically during last decades due to rapid income growth of Asian economies, especially for China and India. Thus, the concept of middle-income trap implies the situation where the growth rate of GDP per capita declines after a certain point is reached. This has happened due to raising wages and an increasing economic loss due to comparative cost. According to the World Bank, the per capita gross national income (GNP) has fallen within a threshold point between $1026 and $ 12475, based on purchasing power parity of 2011 (World Bank 2018). Those middle-income countries have differed with each other by their size, income level and population and they are divided into two parts, which are lower-middle income and upper-middle income. The chief reason behind this declining growth rate can be represented as the disappearance of factors, which can generate high growth of per capita during the starting phase of rapid development. Moreover, the growth rate of middle-income group countries are slow compare to poor-income countries as imitation is comparatively easy than innovation. Moreover, the difference between middle-income countries with leading countries is low and this further diminishes the scope of catching-up growth.

Middle-income trap and its implications

As a developing continent, global GDP share of Asia has increased drastically over the last 30 years and this statement can be supported by the GDP percentage from the year 1980. In 1980, the share of GDP percentage was 7.5% while it became 10.5% in 1990 and 14.5% in 2000. After three years, that is, in 2013, the GDP share in global economy has become 26% (World Bank 2018). However, policymakers of Asian countries has remained concuss about self-satisfaction and has paid attention on the middle-income trap of Latin America. Developing countries of Asia has faced large economies, that is, USD 23 trillion in 2013, but has remained unable to become rich. Hence, the average per capita income of an individual in developing Asia has remained less than USD 7000 in each year. This figure represents half of the Latin America’s income level. Moreover, Asia has tried to equate their income level with Latin America when it has become stagnated and trapped. After the World War II, growth strategies of Latin America were based on credit-fuelled public sectors and urbanisation (Wang and Wen 2018). However, those strategies have remained unsustainable and for which the real income of individual in those countries have increased consequently by 1% in terms of real capita, over the last 30 years. On the other side, strategies that East Asian countries have adopted to promote them from poor income countries to middle-income ones, have become unable to achieve advanced economies. This question also has become a great issue among economists. There is a huge probability that Asian countries might be trapped by middle-income group and cannot compete with competitors of low-wage group by exporting standardises manufacture (Estrada et al. 2018). There is also another possibility of Asian countries to be trapped in this group and the reason is that Asian countries could not compete with advanced economies based on advanced technology and innovations. In this context, example of Malaysia can be taken. The country has played a vital role as an exporter and has attracted huge amount of foreign direct investment (FDI). Hence, it has ranked 25 in the world for its competitiveness. However, due to Asian financial crisis and an income level equal to that of Latin American, the country’s growth rate has decreased by half. China can be considered as another example. The country is also decreasing and indicating signs of weakness regarding the development projects of local government and housing projects, which have helped the country to develop for over 20 years (Data.worldbank.org, 2018). Hence, these two countries require new strategies to grow further.

Challenges faced by Asian countries

The above figure represents GDP growth rate of China and Malaysia. For this figure, it can be stated clearly that both countries are facing their respective GDP growth trend in a decreasing way.

According to forecast of the Asian development Bank, Asian countries are expecting to develop 6% to 7% growth in upcoming years (Asian Development Bank 2018). However, middle-income traps create gradually over time and these have destroyed economies by absorbing those resources that could be used in way that is more effective.

The economic conditions of Arabian Gulf countries are increasing rapidly instead of unrest and instable condition of their neighbour countries in the Middle East (Sönmez and Sönmez 2017). The Gulf Cooperation Council (GCC) includes those Arabian Gulf countries, namely, Arab Emirates, Kwait, Saudi Arabia, Qatar, Oman and Bahrain. For any business, those member countries of GCC are important for its ambitions and aspirations.  According to the International Monetary Fund (IMF), the GCC have increased their real gross domestic product (GDP) by 24percent even after the financial crisis of 2008 (Albaity and Mustafa 2018). However, the European countries and the United Kingdom have faced an opposite affect at the same time. The reason behind this outstanding growth of those gulf countries are due to their high reserve of gas and oil and due to the high prices, since 2008. The government of those countries have also increased their expenditure by investing on oil and gas reserves to increase infrastructure and social services. Moreover, all countries under GCC have increased their number of population, which indicates adequate lobar force for any business organisation. The labour market is flexible and there are adequate numbers of skilled and unskilled workers in those countries. The most important part regarding a gulf country is its tax system. Most of the countries are exempted from tax system or have fallen under the lower tax jurisdictions. Despite of unstable political condition across the Middle East, all gulf countries at present are enjoying a stable condition.

However, it is difficult for foreign investors to establish their business in GCC as they have restrictions regarding the foreign ownership to protect their local business (Alamri 2017). Those rules have made great barrier for foreign investors at the time of company establishment in the GCC or at the time of investment in established companies of GCC. Gulf countries have implemented those rules regarding the foreign investment to protect their domestic entrepreneurs and to limit the foreign ownership positions. Thus, to invest in GCC, foreign investors can adopt only two methods, which are joint venture with a local company or partnership with a local businessperson. However, it becomes difficult fore foreign investors to gather adequate information regarding a business organisation of GCC because they do not maintain credit report system.

Gulf Cooperation Council countries: Economic conditions and growth opportunities

The largest economy of the GCC is Saudi Arabia, which attracts investors with huge rewards but also gives significant challenges to invest (Miniaoui and Schilirò 2017). Hence, start a business in this country is good for business owners with political stability and strong business activity. However, the country sometimes faces labour shortage in some sectors due to labour migration in an illegal way.  However, doing business in United Arab Emirates (UAE) is fruitful for any business organisation as the country has strong financial centre with standard life style and infrastructure facility. On the other side, doing business in Kuwait is difficult due its geographical boundaries.

At present, business owners and investors are facing new risks for accessing their business in GCC. GCC has introduced the value-added tax (VAT), which can increase the cost of doing business and the cost of living at a higher level, across the GCC (Fatma 2018). After implementing the VAT, business owners could increase the price level to compensate extra cost of business and this might cause inflation. This impact further can affect business owners and investors negatively.

After analysing practical scenario of GCC, it can be stated that doing business and investment in those countries have some positive and some negative impacts. With their strict rules, political conditions, the situation, it will be very challenging for business owners and investors to do any business in those countries.

References:

Agénor, P.R., 2017. Caught in the Middle? The Economics of Middle?Income Traps. Journal of Economic Surveys, 31(3), pp.771-791. https://www.ferdi.fr/sites/www.ferdi.fr/files/publication/fichiers/wp142_agenor-upadte_version-2016-05_0.pdf

Alamri, M.A., 2017. THE ADEQUACY OF THE COMMON LAW OF THE GCC TO PROTECT THE SAUDI DOMESTIC MANUFACTURING INDUSTRY FROM INTERNATIONAL TRADE DUMPING PRACTICES: A CRITICAL EVALUATION OF THE PROTECTION SYSTEM. Global Journal of Politics and Law Research, 5(1), pp.1-15. https://www.eajournals.org/wp-content/uploads/The-Adequacy-of-the-Common-Law-of-the-GCC-to-Protect-the-Saudi-Domestic-Manufacturing-Industry-from-International-Trade-Dumping-Practices.pdf

Albaity, M. and Mustafa, H., 2018. International and Macroeconomic Determinants of Oil Price: Evidence from Gulf Cooperation Council Countries. International Journal of Energy Economics and Policy, 8(1), pp.69-81. https://www.econjournals.com/index.php/ijeep/article/viewFile/5889/3502

Antolin-Diaz, J., Drechsel, T. and Petrella, I., 2017. Tracking the slowdown in long-run GDP growth. Review of Economics and Statistics, 99(2), pp.343-356. https://eprints.lse.ac.uk/86243/1/CFMDP2016-04-Paper.pdf

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Miniaoui, H. and Schilirò, D., 2017. Innovation and Entrepreneurship for the Diversification and Growth of the Gulf Cooperation Council Economies. Business and Management Studies, 3(3), pp.69-81. https://redfame.com/journal/index.php/bms/article/viewFile/2594/2773

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Murray, A., 2017. What Explains the Post-2004 US Productivity Slowdown? (No. 2017-05). Centre for the Study of Living Standards. https://www.csls.ca/reports/csls2017-05.pdf

Sönmez, S.F. and Sönmez, S., 2017. TOURISM, TERRORISM, AND POLITICAL INSTABILITY. Anatolia: Turizm Arastirmalari Dergisi, 28(1), pp.110-137. https://libres.uncg.edu/ir/uncg/f/S_Sonmez_Tourism_1998.pdf

Wang, L. and Wen, Y., 2018. Escaping the Middle-Income Trap: A Cross-Country Analysis on the Patterns of Industrial Upgrading. Federal Reserve Bank of St. Louis Working Paper Series, (2018-001). https://files.stlouisfed.org/files/htdocs/wp/2018/2018-001.pdf

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