NEDA warns of the ‘middle income trap’

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Graph20150518The National Economic and Development Authority (NEDA) warned it is crucial for the Philippines to continue upgrading its products and processes in the global value chains to avoid falling into the “middle-income trap.”

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The “middle income trap” is a term used to describe the situation of an economy that has escaped poverty but is still unable to graduate into high-income status due to uncompetitive industries and underdeveloped human capital, among others.

Nine member economies of the Asia Pacific Economic Cooperation (APEC), including the Philippines, are currently classified by the World Bank as middle-income and have remained as such since 1987, when formal income-based classifications began.

In a broader and more detailed description, the Asian Development Bank said middle-income economies are classified into two brackets – lower middle-income, which has gross domestic product (GDP) per capita per year of at least $2,000 (over P88,000) but less than $7,250, and higher middle-income, which has GDP per capita of at least $7,250 (over P322,000) but less than $11,750.

The Philippines is not quite in the lower middle-income category, based on such standards, but nearly there. According to the Philippine Statistics Authority, per capita GDP of the Philippines in 2014 was estimated at P71,867.00 at constant prices, still short of the $2,000 or P88,000 floor for the lower-middle income category.

Nevertheless, the NEDA said the way to avoid the middle-income trap is through focused interventions in small and medium enterprises (SMEs) and with provisions for regulatory efficiency and greater incentives for skills upgrade.

Globalization-related demand
In a recent seminar hosted by the NEDA for experts from APEC middle-income economies, the socioeconomic planning body said governments and the private sector, both corporate and individuals, must continue to innovate and keep up with growing demand associated with globalization to escape the middle income trap.

Inclusive growth lays the economic foundation needed for further investment and innovation, which in turn, are essential for middle-income economies to graduate to high-income status and escape the middle income trap, the NEDA stressed during the APEC seminar on the Middle-Income Trap held in Boracay, Aklan on May 15.

“Foremost, it is necessary to offer a level playing field to ensure inclusivity. This we can achieve by providing for transparency of regulations and credibility of institutions, investing in human capital, and ensuring mobility to equalize opportunities,” NEDA Assistant Director-General Rosemarie Edillon said.

Facilitating the sessions on the lessons from the middle-income trap and implications for structural reform, she said: Reforms in structural policies and regulations, infrastructure, education, and institutions, should be prioritized, as the main challenge really is to ensure that even the poor are able to participate in the growth process.”

It was also intended to serve as a venue to discuss the challenges faced by middle-income economies in sustaining economic growth to become high-income economies.

The seminar on the Middle-Income Trap will serve as an input to future APEC work on the area, especially to the Structural Reform Ministerial Meeting slated for September.

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