MercoPress. South Atlantic News Agency

World Bank chief economist warns Latam of the “middle-income trap”

Comparative advantages is the path said Justin Lin, WB Chief Economist and Senior Vice President

In what would be his last speech as part of the organization, Chief Economist and Senior Vice President of the World Bank Justin Lin held a conference at the UN’s Economic Commission for Latin American and the Caribbean (ECLAC) in Santiago de Chile.

The conference centred on the challenges Latin America faces, such as leaving the “middle income trap” and coping with the rise of China.

“Latin American countries need to be praised for their economic growth rate, reduction in poverty and improvements in income disparities achieved at the turn of the century,” Lin said. “But unfortunately it is stuck in middle income trap, which is not a good destiny.”

The middle income trap is the phenomenon in which countries achieve a high level of growth due to good luck -- the endowment of natural resources, for example -- and eventually become stuck due to a lack of innovation.

Lin proposed a new economic approach to cope with challenges and utilize the abundant resources available in Latin America in order to spur growth and reduce income disparity in the region.

“We need a new structured economic approach to tap into the great potential of the Latin American countries,” he said. “The gap needs to be closed between high and low income countries.”

Latin America is one of the most economically unequal regions in the world. Chile, for example, is the sixteenth most unequal economy in the world.

Lin’s proposal included a focus on competitive markets advantageous to each country, a forward thinking attitude for technology innovation and a government that promotes growth.

On this first point, Lin emphasized the need for each country to exploit its own comparative advantage, or specialize in the area of production in which it is most efficient in comparison to other countries.

“When comparative advantages are taken advantage of, it can change the fate of a country,” Lin said. “Every country can achieve prosperity.”

In Chile, this would mean a focus on mining, forestry and agriculture, but not industries like textiles or electricity, according to a UN spokesperson. Lin also outlined a plan for attacking regional income disparity by investing in technology.

“Technology changes and structural transformations are the basis for continual improvement in productivity and annual income,” Lin said. “Without that, a lower income country cannot close the gap with a higher income country.”

The last important pillar of Lin’s path to economic development is structural change, which requires government coordination. An example of this would be to provide subsidies for companies wishing to tap into potential economic growth sources like renewable energy.

“Latin American countries need strategies to promote structural changes in their economies. To reach the desired headway, poverty should be lowered by reducing the income gap,” Lin said.

Lin cited the economic performance of China as a favourable model for Chile and Latin America to follow in these areas.

China has maintained an average annual GDP growth rate of 9.9% since 1979, and its economy will continue to grow at an average annual rate of 8% over the next 20 years, according to Lin’s calculations.

By comparison, Chile has averaged an economic growth rate of 4% annually since 1999, according to the CIA World Factbook.

China continues to outdo Latin American economies today. The Panamanian economy, the fastest growing in Latin America, grew 7.5% in 2011, compared to the 9.3% of the Chinese economy. Chile registered a growth rate of 6.5% the same year, and is expected to be lower in 2012.

Nevertheless, Lin was confident that Latin America could achieve a similar growth as China’s, provided it follows the right path.

 

“Countries need to be motivated to change,” Lin said. “A proactive industrial policy, focused on specific sectors… as have already been applied in several East Asian countries, could facilitate the necessary industrial renovation.”

By Jade Hobman – The Santiago Times