Only innovation makes the leap from poverty to prosperity

A fascinating post on The Curious Capitalist blog, titled “Escaping the middle-income trap” offers valuable advice to government policy makers when planning for economic development. Kenya’s Vision 2030 proposes to make the economy a middle income country; but what happens when that is attained and the time comes to make the leap to a truly world class high-income economy?

Taking the example of Malaysia and comparing it with South Korea, the writer posits that only innovation will enable a country to break out of the trap and make the big leap to high per capita economy. In fact the writer goes so far as to say that it is easier for a country to make it to the middle income level than it is to transition into the big high income league:

"The concept behind the “middle-income trap” is quite simple: It's easier to rise from a low-income to a middle-income economy than it is to jump from a middle-income to a high-income economy. That's because when you're really poor, you can use your poverty to your advantage. Cheap wages makes a low-income economy competitive in labor-intensive manufacturing (apparel, shoes and toys, for example). Factories sprout up, creating jobs and increasing income ..."

However akin to an engine running on its own momentum, this model of high growth starts to plateau with competitiveness rising as well as labour costs of the highly educated and skilled workforce. Thus the “trap.”

And apart from lowering the entry barriers into business, it is more vital that economies begin to innovate. So not only should technocrats focus on consolidating business licences, reducing taxes and other barriers to enterprise; innovation should be actively promoted. At YIPE we call this the W.A.R factor:

• Promoting Willingness: a scenario where financial institutions recognise the value of new technologies and entrepreneurs are willing to take risks in order to innovate;
• Promoting the entrepreneur’s Ability: by providing a platform where entrepreneurs can grow their social capital by networking amongst other institutional challenges; and
• Facilitating Resource transfer: by lowering the information asymmetry faced in access to credit and technical knowledge.

Read Escaping the middle-income trap here >>>>