IMF Flags Risk of ‘Middle-Income Trap’ in Emerging Asia

By Kevin Lim 29 April 2013

SINGAPORE — Middle-income Asian economies enjoy better growth prospects than countries in other parts of the world but they must improve government institutions and liberalize rigid labor and product markets if they wish to reach the level of developed countries, the International Monetary Fund (IMF) said on Monday.

“Emerging Asia is potentially susceptible to the ‘middle-income trap,’ a phenomenon whereby economies risk stagnation at middle-income levels and fail to graduate into the ranks of advanced economies,” IMF said in its latest Regional Economic Outlook for Asia and the Pacific.

“MIEs [middle-income economies] in Asia are less exposed to the risk of a sustained growth slowdown than MIEs in other regions. However, their relative performance is weaker on institutions,” the international funding agency said.

The IMF said India, the Philippines, China and Indonesia needed to improve their economic institutions while India, the Philippines and Thailand are also exposed to a larger risk of growth slowdown stemming from subpar infrastructure.

The report defined institutional strength as demonstrating higher political stability, better bureaucratic capability, fewer conflicts and less corruption. Malaysia and China were the highest-ranked developing Asian countries in a chart measuring institutional strength while Indonesia, India and the Philippines were at bottom.

For many developing Asian economies, there remains ample room for easing stringent regulations in product and, in some cases, labor markets, the fund added.

The IMF said various statistical approaches indicate that trend growth rates have slowed in both China and India. For China, trend growth appears to have peaked at around 11 percent in 2006-07, while India’s trend growth is now around 6-7 percent compared with about 8 percent prior to the financial crisis.

“By contrast, trend growth for most Asean countries seems to have remained stable or to have increased somewhat, with the notable exception of Vietnam,” the fund said.

Asean is the acronym for the 10-member Association of Southeast Asian Nations whose members include Indonesia, Thailand, Malaysia, the Philippines, Vietnam and Burma.

The IMF, which recently cut its 2013 and 2014 growth forecasts for Greater China, India, South Korea and Singapore but raised its outlook for Malaysia and the Philippines, nevertheless sounded generally positive about near-term prospects.

“Growth in Asia is likely pick up gradually in the course of 2013, to about 5.75 percent, on strengthening external demand and continued robust domestic demand,” it said, adding the risks to the global economy have lessened mainly because the risk of an acute euro area crisis has diminished while the US ‘fiscal cliff’ has been alleviated for now.