According to UNCTAD, income traps arise when the structural changes needed to speed up and sustain economic growth for countries climbing the development ladder become increasingly challenging/UNCTAD
NAIROBI, Kenya, Jul 20 – Despite a decline in extreme poverty, many developing countries have been unable to climb the economic ladder and remain trapped in the low or middle income bracket.
This is according to an analysis by the United Nations Conference on Trade and Development, which states that wider development gains have stalled while income traps remain difficult for billions of people.
According to UNCTAD, income traps arise when the structural changes needed to speed up and sustain economic growth for countries climbing the development ladder become increasingly challenging.
“Income traps can however be avoided; consider the experience of East-Asian economies such as Hong-Kong and the Republic of Korea, and more recently China and Malaysia which were able to do so,” says UNCTAD.
For those economies, new production and export capacity was chronologically developed in industries – for example iron, steel and electronics – using skills and capabilities transferred from existing industries. “They also had the comparative advantage defying intervention of policymakers.”
The analysis further shows that the income gap between developing countries and the developed member countries of the Organization for Economic Cooperation and Development in the last 25 years has persisted in many cases while growing wider in others. It has also reduced at an annual rate faster than 1 percent in only nine economies. “This highlights the lack of convergence with leading economies.”
As far as convergence is concerned, South and South-East Asia countries have experienced relatively fast convergence.
However, many countries in North Africa, Middle East and Latin America have not made much progress – with the exception of Chile and Mauritius.
“In 2014, around half of developing countries had a per capita income lower than 15 percent of OECD average. For these countries, catching up with leading economies remains decades away even if they were able to replicate the stellar performance of an economy such as that of the Republic of Korea,” says the analysis.
The analysis recommends countries that have been unable to catch up to shifting workers from underemployment in agriculture to export-oriented urban manufacturing.
Additionally, it recommends for better technology to be adopted to replace the traditional methods especially in manufacturing.
“Developing countries must therefore progressively acquire the capabilities needed to develop new products and production techniques or adopt advanced technologies developed abroad.”
