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bne:ChartExecutive Summary:
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Stories in this Dispatch:
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| 1. Russia Leaping over the middle-income trap |
| Renaissance Capital |
| 4 February 2012 We believe Russia will hit the middle-income trap in 2014. Fastgrowing economies eventually slow down as their easy catch-up productivity gains (relative to developed economies) are gradually exhausted. This is not a particularly insightful conclusion, but it does invite a far more exciting question - can we determine exactly when this growth-busting transition occurs? Recent academic research by the National Bureau of Economic Research (NBER) suggests that fastgrowing economies appear to start facing the middle-income trap when their GDP per capita levels reach around $16,000 in constant 2005 international prices. According to our calculations Russia will hit the middle-income trap in 2014. Russias advantages of backwardness are fast slipping away. In the 1950s, economist Alexander Gerschenkron observed that, in the aftermath of World War 2, Japan and Germany were able to rebuild quickly, availing themselves of the latest technologies and industrial processes to reach their goals. This advantage of backwardness also worked well in the case of Russia, which was able to post high growth rates in the post-communist era by simply redeploying its considerable underutilised resources into more productive sectors. However, as the marginal benefit of this more efficient use of resources fades, Russia will be finding it increasingly challenging to escape the middle-income trap, in our opinion. We think the rest of the BRICs may only fall into the middleincome trap in the next decade. Russia is not only dangerously close to that crucial per capita income threshold, but it is also in a much worse comparative position in the BRIC universe. In particular, we estimate China will hit the middleincome trap only in 2020, Brazil in 2024 and India in 2038. Although one should not treat these years as cast in stone since they may vary according to the underlying assumptions about the expected future per capita income growth, the relative position of the individual countries is broadly robust and open to changes in our assumptions ? In the EMEA space, we calculate the CEE economies of Czech Republic, Hungary and Poland surpassed middle-income trap levels in 1997, 2004 and 2008, respectively. For the most part, the CEE countries have indeed behaved like maturing economies, gradually converging towards their more developed western counterparts. After Russia, Kazakhstan is the next EMEA economy to verge upon the middle-income trap in 2014 and 2016, respectively, followed by Turkey in 2019, Ukraine in 2029 and SA in 2035, according to our estimates. We maintain Russias transition from a middle-income to wealthy economy depends on implementing sound macroeconomic policies and achieving higher rates of investment. Approaching the middle-income trap means an economy may no longer rely on copying know-how from richer countries or boosting productivity by shifting additional workers from, for example, agriculture to industry. This could herald not only a slower pace of economic expansion but, more broadly, a more pointed look into how fairly the pain of adjustment is shared in a society. We believe in Russia, avoiding the fast approaching middle-income trap should involve a stronger reliance on higher rates of investment within the framework of an evolutionary transition to a more democratic society. Encouragingly, we have recently seen some signs from an unexpected source that the pitfalls of middle-aged development could be managed just fine. Russian Prime Minister Vladimir Putin recently delivered two big economic speeches that offer reasons for us to be cautiously optimistic about the future. |
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