overcoming the middle income trap

7/23/2019 Overcoming the Middle Income Trap

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Overcoming the Middle Income Trap: Can

productivity increase employment?

A Masters Thesis submitted to theUniversity of Applied Sciences (Hochschule fr Technik und Wirtschaft

in partial fulfillment of the re!uirements of theMasters "ro#ram in $nternational and %evelopment &conomics

Submitted by

'essie uth )* )ranadillosS+,-.//-

Submitted to thesis supervisors

"rofessor %r* Heike 'oeb#es"rofessor %r* Ulrich Wur0el

Berlin, Germany

! "uly #$%


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&BST'&CT

The e1istence of the Middle $ncome Trap phenomenon has led many countries to stron#ly advocate

productivity2enhancin# #ro3th strate#ies* Ho3ever4 e1istin# studies in the &U and US4 as 3ell as a

publication from 'ohn Maynard 5eynes in the 678+s4 su##est that too hi#h productivity comes atthe e1pense of employment 9 a scenario that current middle2income countries cannot afford* Usin#

7 out of 68 countries that have mana#ed to escape the trap4 this thesis aims to clarify if such a trade2

off e1ists4 and the reasons for the observed productivity2employment relationship* esults sho3

that 3hile T:" and employment decisions may be directly related4 policy analysis su##ests that

indirect linka#e 3ith other macroeconomic variables have #reater influence on productivity and

employment #ro3th* Thus4 it is completely conceivable that the relationship bet3een the t3o

remain unstable and indeterminate in the future years*


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(&I)*'

elevant portions of this paper may be !uoted or used for other research papers provided that the

proper citation is made; ho3ever4 no photocopies of any section of the thesis 3ill be allo3ed

3ithout consent from the author*

'essie uth )* )ranadillos

+. 'uly


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T&B+* O CO-T*-TSA=STA>T ********************************************************************************************************************************************************************************** T$B ************************************************************************************************************************************************************** .

$$* &?$&W : &@AT&% @$T&ATU& ******************************************************************************************************************* 68

A* There is no lon#2term relationship bet3een productivity and employment********************************* 6-

=* There is a ne#ative lon#2term relationship bet3een productivity and employment ***************** 6,

>* There is a positive lon#2term relationship bet3een productivity and employment ****************** 6.

%* Takea3ays from the studied literature ********************************************************************************************************* 6.

$$$* TH&&T$>A@ :AM&W5 **************************************************************************************************************************** 6C

$?* &M"$$>A@ :AM&W5 *********************************************************************************************************************************** D $M"@$>AT$BS AB% &>MM&B%AT$BS : :UTH& STU%D ********************************* ,8

&:&&B>&S *************************************************************************************************************************************************************************** ,-

A""&B%$F ********************************************************************************************************************************************************************************* ,C


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T&B+* O IG.'*S:i#ure 6E )%" per capita #ro3th (G ****************************************************************************************************************************** C:i#ure


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I/ I-T'O0.CTIO-

A lar#e number of countries have moved from lo3 to middle2income cate#ory4 but only a fe3

mana#ed to make the transition to hi#h2income based on the World =anks country classification6*

Accordin# to The World =ank (s in 67.+4 only68 countries have achieved a hi#h2income status by


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#ro3th* A#Lnor et al* (


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much2talked about in countries that are still in the Middle $ncome Trap4 such as the "hilippines4

>hina4 =an#ladesh4 resultin# in the adoption of Iinclusive #ro3thJ strate#ies*

%ata from the World =ank8sho3 that )%" per capita #ro3th has been hi#her for M$>s than Hi#h

$ncome >ountries (H$>s (fi#ure 6* The proportion of population in M$>s compared to H$>s has

almost doubled in the past ,+ years4 3ith an avera#e increase of 8*< percent per year-4 3hich

su##ests that )%" #ro3th has been much hi#her for M$>s* Ho3ever4 the labor force participation

rate (@:" has consistently declined on avera#e for M$>s4 3hile that of the H$>s has been

increasin# since 677+,* Mean3hile4 the unemployment rate has sho3n a flat trend4 revolvin#

around . percent for the past


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igure #: +abor orce 1articipation 'ate 3le6t5 and .nemployment rate 3right5

SourceE World =ank W%$/

:urthermore4 lookin# at fi#ure 84 it can be observed that the chan#e in the rate of employment2to2

population ratioC

for M$> has #enerally al3ays declined from 677+2


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igure 7: Comparison bet2een the change in *mployed to Total 1opulation 'atio 3in percentage

points, '8S5 and G01 per Capita gro2th rate 3in percent, +8S5 6or MIC and 8IC

SourceE World =ank W%$7

The case of hi#h )%" #ro3th coincidin# 3ith above2avera#e productivity #ro3th and increasin#

unemployment is not confined only to M$>s* While the neoclassical #ro3th models do not reco#ni0e

the e1istence of a lon#2term relationship bet3een productivity and employment4 empirical

evidence from &>% countries have sho3n other3ise (%e Michelis4 &stevPo4 K Wilson4


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$n line 3ith the critical interaction bet3een productivity4 #ro3th4 and employment in overcomin#

the middle income trap4 this paper intends to focus only on analy0in# and ans3erin# t3o main

!uestionsE (6 is productivity #ro3th coincidin# 3ith )%" #ro3th in countries that have mana#ed

to escape the Middle $ncome Trap4 and (


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summari0es the authors conclusions4 and finally4 the policy implications and recommendations are

discussed in section ?$$*


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II/ '*)I*( O '*+&T*0 +IT*'&T.'*

$n 678+4 'ohn Maynard 5eynes 3arned of a ne3 disease 3hich he coined as Itechnolo#ical

unemploymentJ or Iunemployment due to our discovery of means of economisin# the use of labour

outrunnin# the pace at 3hich 3e can find ne3 uses for labourJ (5eynes4 67.8* This describes thefundamental identity of labor productivity as output per 3orker; by 3hich respecification of the

identity usin# lo# appro1imation and simple arithmetic sho3s that a faster labor productivity

#ro3th compared to output #ro3th leads to a reduction in employmentE

ln= ln ln

The identity is further e1tended by ?an Ark K Mc)uckin (6777 to decompose labor input as the

product of 3orkin# hours per person employed4 the employment rate6


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term avera#e level of unemployment is determined by the Istructural and institutional

characteristics of the economyJ* Therefore4 policies leanin# to3ard productivity #ro3th should4 by

no means4 be discredited on account of prospective loss of Nobs in the short run* Similarly4 policies

to increase employment should not be shunned based on fear that it mi#ht slo3 do3n productivity

#ro3th*

$n hopes of providin# some clarity to the comple1 and ambi#uous relationship bet3een

productivity #ro3th and employment #ro3th4 several relevant theoretical and empirical studies

have been summari0ed in the follo3in# subsections of this chapter*

&/ There is no long9term relationship bet2een productivity and employment

Beoclassical #ro3th theory says that there is a temporary tradeoff bet3een productivity and

employment because4 as more labor input is employed4 less capital is available for each person4

therefore reducin# the capital2labor ratio and labor productivity* Ho3ever4 as countries become

more inte#rated4 capital 3ill flo3 from capital2rich countries to capital2scarce countries4 thus

demonstratin# a trend of conver#ence over time* This means that in 3ell2inte#rated capital

markets4 the labor market plays less and less of a role in determinin# labor productivity* $n the

lon#2run4 this Inormali0ationJ throu#h conver#ence leads to the diminishin# tradeoff bet3een

employment #ro3th and productivity (=eaudry K >ollard4


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B/

There is a negative long9term relationship bet2een productivity and

employment

=eaudry K >ollard (


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C/

There is a positive long9term relationship bet2een productivity and

employment

%espite a#reein# to %e Michelis et al* (


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employment is unstable in terms of ma#nitude4 and that medium2 to lon#2term unemployment is

affected by labor market institutions and the demo#raphic structure of a country* :or some studies4

the direction of correlation also depends on the specific time period studied; hence4 identifyin#

structural breaks in the series is vital for further analysis*


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III/ T8*O'*TIC&+ '&M*(O';

This frame3ork starts 3ith a >obb2%ou#las production function similar to ?an der Horst et al*

(obb2%ou#las "roduction :unction is #iven by e!uation 6 3ith a simple al#ebraic

transformation in e!uation


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to the #ro3th in potential output4 and ne#atively related to chan#e in capital2labor ratio and

productivity*

V0 = 8-" 9 8V" 8V0 8:V& 8;V" V7

(&!uation .

$n the above e!uation4 8- is the intercept4 8+ are the parameters 3ith 8 representin# theresponsiveness of employment to chan#es in output4 and technolo#y #ro3s at a pace of a country2

specific trend #E= -


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I)/ *M1I'IC&+ '&M*(O';

The chapter presents the method by 3hich the relationships su##ested in the theoretical

frame3ork may be empirically analy0ed and supported* $t is subdivided into t3o discussion partsE

data and methodolo#y*

&/ 0ata

The data are mainly sourced from the Total &conomy %atabase (T&% and the "enn World Tables

version C*6 ("WT C*6 for a ma1imum ran#e of 67,+2


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V0 = 8-" 9 8V" 8V0 8:V& 8;V" V7(&!uation .

:irst4 a descriptive analysis of the variables of employment and productivity is performedE the lon#2

run trend of each of the variables4 the difference bet3een labor productivity and T:"4 and the

deviations of total hours 3orked from total employment* The difference in employment

measurements infers the chan#es in avera#e hours 3orked per person and the possible

substitution of leisure to 3ork 3hen faced 3ith productivity #ains* :urther analysis of labor

productivity is accomplished by lookin# at trends in the capital2labor ratios to determine if

productivity #ains are due to improvements in human capital or merely as a result of the

substitution of labor 3ith capital in production*

Second4 an analysis of the relationship bet3een chan#es in productivity and employment is done by

focusin# on the productivity2output2employment channel* That is4 theoretically4 an increase in

productivity shifts the production possibility frontier out3ard4 thus increasin# )%" and potential

)%" in the lon# run; 3hich in turn4 influences the demand and supply of labor* Therefore4 an

empirical analysis of the relationship bet3een productivity #ro3th and )%" #ro3th is investi#ated

to Nustify the rationale behind productivity2led #ro3th strate#ies* Ho3ever4 #iven that the link

bet3een )%" #ro3th and employment is unclear4 and the transmission channel comple1 (Ayuso K

@pe02salido4


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)/ '*S.+TS &-0 &-&+


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ne of the possible reasons for the hi#her rate of labor productivity compared to T:" #ro3th is that

the former could be induced by the 3idenin# #ap bet3een employment and capital #ro3th* >apital

deepenin# that is faster than the #ro3th in labor input results in an increase in labor productivity4

even 3ith a sta#natin# T:" #ro3th by mathematical definition* )iven that the observation that T:"#ro3th and labor productivity #ro3th are hi#hly correlated4 this su##ests that the #ro3th in

capital2labor ratio has been relatively flat 3ithin the sample years (as supported by fi#ure .


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igure !: &nnual gro2th rate o6 capital9labor ratio, $>%$9#$$

-15

-10

-5

0

5

10

15

20

50 55 60 65 70 75 80 85 90 95 00 05 10

Year % Change KLRATIO_ESPYear % Change KLRATIO_GRCYear % Change KLRATIO_HKYear % Change KLRATIO_IRLYear % Change KLRATIO_JPNYear % Change KLRATIO_KORYear % Change KLRATIO_PRTYear % Change KLRATIO_SGPYear % Change KLRATIO_TWN

SourceE Authors o3n computation usin# "WT data

B/

G01 gro2th and 1roductivity gro2th

vercomin# the middle income trap has been much accounted to the successful #ro3th take2offs

induced by continuous and stron# productivity #ro3th* While the #ro3th rate of )%" and

productivity are volatile from 67,+2


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C/

1roductivity gro2th and employment gro2th: a @uantitative and @ualitative

analysis

:or all nine countries4 avera#e annual labor productivity #ro3th has been above 8 percent* Aninterestin# difference is that of employment and total hours 3orked4 particularly bet3een countries

3ithin &urope and Asia (fi#ure C*

The four &U countries had the lo3est4 ho3ever still positive4 lon#2run avera#e employment #ro3th

rate amon# all the countries in the sample* &1cept for $reland 3ith a +*+6G avera#e #ro3th rate4 the

other three &U countries had a ne#ative avera#e chan#e in total hours 3orked* These t3o indicators

interpreted to#ether imply that the ne#ative rate of chan#e in total hours 3orked 3as caused by a

si#nificant contraction in annual hours 3orked per employed person in the &U countries*

$ntuitively4 this su##ests that the increase in productivity has led &uropean 3orkers to substitute

more leisure to 3ork* :urthermore4 it also su##ests that the result of a study of the relation

bet3een productivity heavily depends on the choice of variables 9 i*e*4 usin# total hours 3orked or

annual hours 3orked per person as the measure of employment may result in a trade2off

relationship; 3hereas the use of persons employed may produce positive correlations*

@ookin# at trends in the Asian countries4 positive productivity #ro3th corresponded 3ith an

increased number of persons employed and increased total hours 3orked4 e1cept for Hon# 5on#*Botably4 the #ro3th rate of employed persons is hi#her than total hours4 su##estin# that annual

hours 3orked per person employed also trended do3n3ard over time4 but the rate of decline is

much less than that of the &uropean countries* An a##re#ate analysis of the lon#2run relationship

bet3een productivity #ro3th and employment #ro3th in Asian countries su##est a positive

correlation4 but a closer look at yearly data points for each of the t3o variables sho3 that the

relationship is uncertain4 and almost undecipherable*


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igure A: &verage labor productivity gro2th, T1 gro2th, gro2th in total hours 2ored, and gro2th in

employed persons, $>%$9#$7#!

SourceE T&%

:i#ure 7 belo3 sho3s the correspondin# percent chan#e in employed persons 3ith the percent

chan#e in T:"* The scatter plot for Asian countries sho3s a some3hat positive trend4 ho3ever4 the

#oodness2of2fit is unsatisfactory; 3hile that of the &uropean countries does not sho3 any

conclusive trends* The lack of trend simply could be e1plained by the len#th of the sample period

(.+ years4 3here political re#imes and maNor economic policies have influenced productivity and

employment4 at times independently4 thus makin# the relationship unstable* That is4 for certainperiods in time4 the relationship is clear4 but not persistent in the lon#2run*

The ne1t section of this chapter takes a closer look at the stability of the relationship and the maNor

economic breakpoints that may have caused the shifts in the relationship*


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igure >: T1 gro2th and *mployment gro2th 3*uropean countries +8S, &sian countries '8S5,

$>%$9#$$

-12

-8

-4

0

4

8

12

-10 -5 0 5 10 15 20

(Year % Change RTFPNA_ESP,Year % Change EMP_ESP)(Year % Change RTFPNA_GRC,Year % Change EMP_GRC)(Year % Change RTFPNA_IRL,Year % Change EMP_IRL)(Year % Change RTFPNA_PRT,Year % Change EMP_PRT)

-10

-5

0

5

10

15

20

25

-10.0 -7.5 -5.0 -2.5 0.0 2.5 5.0 7.5 10.0

(Year % Change RTFPNA_HK,Year % Change EMP_HK)(Year % Change RTFPNA_JPN,Year % Change EMP_JPN)(Year % Change RTFPNA_KOR,Year % Change EMP_KOR)(Year % Change RTFPNA_SGP,Year % Change EMP_SGP)(Year % Change RTFPNA_TWN,Year % Change EMP_TWN)

SourceE "WT

0/

Instability and causes o6 instability in the relationship

:i#ures 6+ and 66 present the results of the C2year rollin# 3indo3 correlation bet3een the #ro3th

rates of productivity (labor productivity and T:" and the number of persons employed* )ro3th intotal hours 3orked 3as also correlated 3ith T:" #ro3th and produced the same results*


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igure $: A9year rolling 2indo2 correlation#Abet2een employment and labor productivity

1.2

0.8

0.4

0.0

0.4

0.8

5 0 5 5 6 0 6 5 7 0 7 5 8 0 8 5 9 0 9 5 0 0 0 5 1 0

ROLL8EMP_ESP

-1.2

-0.8

-0.4

0.0

0.4

0.8

5 0 5 5 6 0 6 5 7 0 7 5 8 0 8 5 9 0 9 5 0 0 0 5 1 0

ROLL8EMP_GRC

-1.2

-0.8

-0.4

0.0

0.4

0.8

5 0 5 5 6 0 6 5 7 0 7 5 8 0 8 5 9 0 9 5 0 0 0 5 1 0

ROLL8EMP_HK

-.8

-.4

.0

.4

.8

5 0 5 5 6 0 6 5 7 0 7 5 8 0 8 5 9 0 9 5 0 0 0 5 1 0

ROLL8EMP_IRL

-.8

-.4

.0

.4

.8

5 0 5 5 6 0 6 5 7 0 7 5 8 0 8 5 9 0 9 5 0 0 0 5 1 0

ROLL8EMP_JPN

-1.2

-0.8

-0.4

0.0

0.4

0.8

5 0 5 5 6 0 6 5 7 0 7 5 8 0 8 5 9 0 9 5 0 0 0 5 1 0

ROLL8EMP_KOR

1.2

0.8

0.4

0.0

0.4

0.8

5 0 5 5 6 0 6 5 7 0 7 5 8 0 8 5 9 0 9 5 0 0 0 5 1 0

ROLL8EMP_PRT

-1.2

-0.8

-0.4

0.0

0.4

5 0 5 5 6 0 6 5 7 0 7 5 8 0 8 5 9 0 9 5 0 0 0 5 1 0

ROLL8EMP_SGP

-1.2

-0.8

-0.4

0.0

0.4

0.8

5 0 5 5 6 0 6 5 7 0 7 5 8 0 8 5 9 0 9 5 0 0 0 5 1 0

ROLL8EMP_TWN

SourceE Authors o3n calculation usin# T&% data*

igure $$: A9year rolling 2indo2 correlation#>bet2een employment and T1

0.8

0.4

0.0

0.4

0.8

1.2

5 0 5 5 6 0 6 5 7 0 7 5 8 0 8 5 9 0 9 5 0 0 0 5 1 0

ROLL8EMP_ESP

-1.2

-0.8

-0.4

0.0

0.4

0.8

5 0 5 5 6 0 6 5 7 0 7 5 8 0 8 5 9 0 9 5 0 0 0 5 1 0

ROLL8EMP_GRC

-0.8

-0.4

0.0

0.4

0.8

1.2

5 0 5 5 6 0 6 5 7 0 7 5 8 0 8 5 9 0 95 0 0 0 5 1 0

ROLL8EMP_HK

0.8

0.4

0.0

0.4

0.8

1.2

5 0 5 5 6 0 6 5 7 0 7 5 8 0 8 5 9 0 9 5 0 0 0 5 1 0

ROLL8EMP_IRL

-.8

-.4

.0

.4

.8

5 0 5 5 6 0 6 5 7 0 7 5 8 0 8 5 9 0 9 5 0 0 0 5 1 0

ROLL8EMP_JPN

-0.8

-0.4

0.0

0.4

0.8

1.2

5 0 5 5 6 0 6 5 7 0 7 5 8 0 8 5 9 0 95 0 0 0 5 1 0

ROLL8EMP_KOR

1.2

0.8

0.4

0.0

0.4

0.8

5 0 5 5 6 0 6 5 7 0 7 5 8 0 8 5 9 0 9 5 0 0 0 5 1 0

ROLL8EMP_PRT

-1.0

-0.5

0.0

0.5

1.0

5 0 5 5 6 0 6 5 7 0 7 5 8 0 8 5 9 0 9 5 0 0 0 5 1 0

ROLL8EMP_SGP

-1.0

-0.5

0.0

0.5

1.0

5 0 5 5 6 0 6 5 7 0 7 5 8 0 8 5 9 0 95 0 0 0 5 1 0

ROLL8EMP_TWN

SourceE Authors o3n calculation usin# "WT data*


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The inflection points in the #raphs are paired 3ith policies implemented around the same time4 as

an attempt to shed li#ht to 3hat may have tri##ered chan#es in the behavior of firms in employin#

3orkers and investin# in increased technolo#y* The follo3in# !ualitative analysis sho3s that maNor

policies and events such as the chan#e in political structure (i*e*4 democrati0ation and the move to

capitalism4 trade liberali0ation and #lobal inte#ration4 macroeconomic shocks (i*e*4 oil crises4

e1ternal and fiscal imbalance4 and productivity2enhancin# strate#ies (i*e*4 transitionin# to

production of hi#her value2added products emer#e as stron# influences to the movement of

productivity #ro3th and employment #ro3th*

The follo3in# subsections discuss each of the countries more in depth*

Table $: Summary o6 the ey policies and events, points o6 in6lection, and the direction o6 correlation bet2een

productivity gro2th and employment gro2th in *uropean countries

Country Key policy/event Year of

inflection

Correlation

(EMP, LP)

Correlation

(EMP, TFP)SPAI 1950-1973 .l Mila!ro .panol late 1950 - -

1962

1968 - -

1975-1986 *ranition to #emocracy 1973

1982 - -

1986 on+ar# .)ropean .conomicComm)nity (..C" 1992 - 2001 - -

!"EECE re-1973 erio# o i! !ro+t an# lo+

inlation

.arly 1950 - -

1967

1970 - -

ot-1974 *ranition to #emocracy an#

#eterioration o macroeconomic it)ation

1978 -

1981 - -

2009

I"ELA# 1950-1960 *aperin!-o o eneit rom

in#)trial protectionim

1949 -

1960

1960-1973 an#onment o protectionit

policie an# tra#e lieraliation

1966 - -

1968 -

1973 - -

,ate 1970-1986 erio# o i! ical #et

an# )nemployment

1981 -

1984 - -

1987-2006 Celtic *i!er .ra 1987 -

1990

2007 /net o te %loal inancial Crii 2007 -

P$"T%!AL 1950-1973 erio# o i! !ro+t an# 1949 - -


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Country Key policy/event Year of

inflection

Correlation

(EMP, LP)

Correlation

(EMP, TFP)rapi# in#)trialiation

1974-1990 *ranition to #emocracy an#

tr)ct)ral can!e

1991 -

1990 on+ar# erio# o economic

#iic)lty

1998 -

2003

SourcesE Authors o3n computation usin# T&% and "WT data4 ==>4 and other authors cited in the individual

country te1ts that follo3*

$/ Spain

A closer look at Spains #ro3th decomposition bet3een 67,+ and ommunity (&&>8+

(67C. on3ards*

igure $#: Spains average productivity gro2th and employment gro2th &y inflection point' fro te rollin*

correlation

SourceE Authors o3n computation usin# T&% and "WT data

a. 1950s-1974: El Milagro Espaol

Spain e1perienced hi#h productivity4 hi#h employment #ro3th durin# this period4 3ith the former

reachin# its hi#hest avera#e bet3een 67.


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in 67.C267/han#es in the composition of capital that affect the amount of services provided by capital stock to production4 reflected in the chan#ein the #ap bet3een capital input and capital stock


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rather than historical inflation to break the inertia (Sun# K Won#4 in 67C.4 T:" #ro3th had started to taper off and to moderate*

The prospect of Spain Noinin# the &conomic and Monetary Union (&MU and hi#h yields in Spanish

bonds led to lar#e inflo3s of capital4 albeit the !uality of capital did not rise above historical trend

(67C.2T technolo#ies* Also in this period4

labor market dere#ulation4 increased female participation rate4 and inflo3 of immi#rants increased

employment* Similar to capital #ro3th4 labor !uality barely made a contribution to the #ro3th of

labor input* =oth capital and labor #ro3th mana#ed to offset slu##ish T:" #ro3th after 67C.

("rados et al*4 onver#ence aimed to reduce public deficit accordin# to the Maastricht Treaty4 (


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#/

Greece

The )reek economy can be separated to t3o maNor periods or Ithe t3o faces of 'anusJ(Alo#oskoufis4

677,E pre267/8 and post267/8 attributed to the move from dictatorship to democracy in 67/- and

the apparent deterioration in macroeconomic situation after 67/84 3hich fully manifested aroundearly 67C+s* Maddison (


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savin#s rates and forei#n capital that afforded firms a hi#h rate of capital accumulation until 67C64

and aided the boost in productivity* The political re#ime also prioriti0ed infrastructure and

industriali0ation throu#h ta1 and credit policies (Alo#oskoufis4 677,* %urin# this time4 the labor

union4 >onfederation of )reek Workers ()S&&4 3as still controlled by the #overnment4 and the

unemployment rate remained lo3*

b. $ost-1974: Transition to democrac and deterioration o, macroeconomic sit"ation

Since its peak in the late 67.+s4 productivity #ro3th continuously slo3ed do3n4 eventually havin#

more fre!uent and lar#e contractions from 67/- on3ards* $n the same year4 the #overnment

implemented policies that 3ere leanin# to3ards employment protection and inflation control*

)reece 3as declared a democracy in 67/-4 and several maNor chan#es follo3ed suitE (6 the

e1chan#e rate policy moved from pe##ed2to2the2dollar to an accommodatin# pe#4 (


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revised and revalidated4 and its deficit 3as found understated* $t4 then4 entered into a crisis 3ith a

balloonin# public debt4 a credit ratin# do3n#rade4 and the announcement of a strict pro#ram to cut

public spendin#*

T:" #ro3th from


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and an even more rapid increase in imports of capital and consumer #oods led to a balance of

payment crisis4 3hich then caused about 68 percent of the population to emi#rate*

b. 1960s-197+ bandonment o, protectionist policies and trade liberali2ation

"roductivity #ro3th reacted positively to policies implemented in the early 67.+s* Similar to Spain

and )reece4 it peaked around late 67.+s and declined in the mid 67/+s4 Nust 3hen employment

#ro3th picked up*

Sean @emass4 3ho 3as appointed as Taoiseach88 in 67,74 advocated economic moderni0ation*

Under his leadership4 $reland abandoned protectionist policies4 en#a#ed in an :TA 3ith U5 in 67..4

implemented 0ero ta1 rate on manufacturin# e1ports4 and Noined the &U in 67/8* Unlike )reece4

these policies4 includin# the liberali0ation of forei#n o3nership of companies4 increased the stock of

:%$ in manufacturin# e1ports4 and diversified its e1ports* They also increased productivity #ro3th

even hi#her than the protectionist era4 as 3ell as manufacturin# employment #ro3th* =arry (


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37

d.

1987-006 (eltic Tiger Era

$reland prospered from 67C/2ommission attributes this period of prosperity to favorable

demo#raphics for labor force participation4 and hi#her educational attainment of the ne3 entrants

compared to the predecessors*8,

e. 007 lobal inancial (risis

$n


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38

Fi*ure +2- Portu*al.' avera*e prouctivity *ro0t an eployent *ro0t &y inflection point' fro te rollin* correlation


a. 1950s-197+: $eriod o, 'ig' gro)t' and rapid ind"striali2ation

@ike most of the poorest &uropean countries prior to 67,+s4 "ortu#al also e1perienced rapid

#ro3th and conver#ence 3ith the rest of the &U from 67,+s to mid 67/+s* $t has moved from a

closed4 a#rarian economy 3ith lo3 economic #ro3th to an open4 hi#h2#ro3th4 industrial economy

3ithin a short period of time* $n 67.+4 it entered the &uropean :ree Trade A#reement (&:TA 3hich

broadened its e1port base and afforded the economy the hi#hest #ro3th rates in the 3orld durin#

the time* :rom mid267,+s to 67/84 economic #ro3th 3as driven by T:" #ro3th and capitalaccumulation from its rapid industriali0ation4 3hich si#nificantly increased industrial employment

("ereira K @ains4


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39

c.

Earl-1990 on)ards: $eriod o, economic di,,ic"lt

$n the 677+s4 "ortu#al 3as faced 3ith hi#h unemployment4 hi#h emi#ration4 lo3 productivity

#ro3th4 and sta#nation due to fiscal and e1ternal imbalances4 and structural problems attributed to

lo3 rates of human capital accumulation4 the difficulty of adNustin# to the euro 3hich caused slo3

Nob creation and lo3 e1port competitiveness4 diminishin# returns to capital accumulation4 and thedependence on lo32skilled labor* While "ortu#uese e1ports did have more technolo#ical content 9

from 677+2


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40

Country Key policy/eventYear of

inflection

Correlation

(EMP, LP)

Correlation

(EMP, TFP)

in#)trie an# !loal inte!ration 1994 - -

6APA

1950-1973 erio# o i! !ro+t an# pot-

+ar recoery

1952

1960 - -

1964

1968 - -

1971 -

1974

Mi#-1970 to 1980 In#)trial tranition an#

te >?)le@ )il# )p

1984 - -

1990 -

1992 on+ar# *e lot #eca#e

1993

2005 -

2009

K$"EA

1960-mi# 1990 erio# o economic miracle

1950 - -

1976

1984 - -

Mi#-1990 on+ar# +a!e pre)re c)rrent

acco)nt #eicit an# te ian inancial Crii

1992 2006 -

2009

SourcesE Authors o3n computation usin# T&% and "WT data4 ==>4 and other authors cited in the individual

country te1ts that follo3*

%/

8ong ;ong

Hon# 5on#s economic timeline is affected by its o3n domestic policies4 policies from its =ritish

colonial period4 and lar#ely by events and policies in mainland >hinaE (6 be#innin# from the

establishment of the "eoples epublic of >hina ("> and the civil 3ars and 5orean War around

67,+s4 (hina and the Asian :inancial >risis in 677/* "ositive )%" #ro3th4 albeit slo3er in the late

67C+s to 677+s4 can be attributed to T:" #ro3th (as capital and labor #ro3th seem unchan#ed in

the lon#2run and 3as lar#ely affected by mi#ration policies bet3een Hon# 5on# and >hina4 3hich

in turn4 affected the movement of capital4 the share of the manufacturin# sector to #ro3th4 and the

impressive adaptability of Hon# 5on#s entrepreneurs to reco#ni0e and sei0e business

opportunities*


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41

Fi*ure +7- 4on* Kon*.' avera*e prouctivity *ro0t an eployent *ro0t &y inflection point' fro te rollin* correlation


a. 1950s-1980s: $ost-)ar man",act"ring eport miracle

A treaty bet3een =ritain4 Hon# 5on#s coloni0ers pre267,+s4 and >hinas >hin# #overnment

allo3ed free movement of people from mainland >hina to Hon# 5on#* With the civil 3ars and the

establishment of the "eoples epublic of >hina ("> in the 67,+s4 alon# 3ith the unrest caused by

the 5orean War4 a lar#e number of refu#ees4 includin# capitalists and skilled laborers4 have moved

to Hon# 5on#4 thus fuellin# its post23ar4 manufacturin# e1port miracle4 and boostin# Hon# 5on#s

productivity* >hina immediately imposed strict emi#ration restrictions4 3hich 3ere then loosened

after Mao edon#s death in 67/.4 and have a#ain caused an inflo3 of immi#rants to Hon# 5on#*

With hi#h #ro3th and social services in place4 unskilled 3orkers 3ere seen as a liability4 and thus4

Hon# 5on# had to deport many ille#al mi#rants* This 3as supported by >hina by imposin# an e1it

!uota of /, mi#rants per day* As a result4 Hon# 5on#s labor market became hi#hly restrictive4

causin# annual unemployment to increase and many manufacturin# industries to relocate to

mainland >hina (Sun# K Won#4


42/59

42

employment of manufacturin# has also been reduced from -+*< to 66*. percent from 67C-2677/*

)iven that the manufacturin# sector accounted for most of the T:" #ro3th in the 67.+s and 67/+s4

the reduction in its importance has also led to a slo3do3n in T:" and )%" #ro3th startin# in the

mid267C+s ($mai4


43/59

43

a.

1950-1960s: mport s"bstit"tion to eport promotion

There are three key points that aided Tai3an in maintainin# its hi#h productivity #ro3thE (6 its

educated human capital4 (


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44

efforts to invest in education4 3hich 3ent hand2in2hand 3ith their incentives to increase K%4

production !uantity and !uality4 and overall competitiveness* The bud#et for education 3as raised

from < percent in 67,, to ,*< percent of )B" in 67CC (anis4


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45

Fi*ure +9- Sin*apore.' avera*e prouctivity *ro0t an eployent *ro0t &y inflection point' fro te rollin* correlation


a.

1950s-1970s: %'i,t ,rom entrepot trade to man",act"ring-dri#en gro)t'Sin#apore shifted from entrepot tradin# as its main economic activity in the 67,+s to3ards

manufacturin# industry4 in order to solve its hi#h level of unemployment* =ecause it needed much

capital to develop such an industry4 it established the &conomic %evelopment =oard (&%= in 67.6

3hose purpose 3as to promote the country as a strate#ic location to set up a lo32cost

manufacturin# base and to coordinate the reali0ation of this tar#et throu#h the development of the

'uron# industrial To3n* This 3as follo3ed by the implementation of the &conomic &1pansion

$ncentive Act in 67./4 3hich provided additional incentives for forei#n corporations to invest4

includin# ta1 incentives that lasted for years* The strate#y has effectively cut production costs by ahyadi4 5ursten4 Weiss4 K Dan#4 on#ress (BTU> in char#e ofoverseein# employment and 3a#e issues* :inancial and transportation institutions 3ere also

nationali0ed to make investment more attractive4 such as the %evelopment =ank of Sin#apore4 and

Sin#apore Airlines* These efforts reduced the unemployment rate to about 8*, percent4 3hile

increasin# the share of manufacturin# to )%" to ahyadi et al*4


46/59

46

b.

1980s: 3oss in competiti#eness d"e to )age press"res and capital in,lo)s

With hi#h rates of capital inflo3s and a ti#ht labor market4 an up3ard pressure on 3orkers 3a#es

3as e1perienced by Sin#apore4 and soon4 it 3as at a cost2competitive disadvanta#e amon# its other

Southeast Asian nei#hbors* Thus4 it decided to shift to hi#her value added industries4 increase the

skill level of the 3ork force4 and move from industry to services4 by investin# heavily in $T2relatedcapacity buildin# and formin# the Bational >omputer =oard (B>= in 67C6* This resulted in an

increase of skilled employees from 66 percent in 67/7 to ahyadi et al*4


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47

Fi*ure +:- 6apan.' avera*e prouctivity *ro0t an eployent *ro0t &y inflection point' fro te rollin* correlation


a.

1950s-197+: $eriod o, 'ig' gro)t' and post-)ar reco#er

Much of the )%" #ro3th and productivity #ains of 'apans economy has been attributed to the

#ro3th in manufacturin#* :rom mid267,+ to 67/+s4 the share of manufacturin# to total )%"

increased from


48/59

48

productivity than inflation from 67.+267/6 and 3as causin# much of the inflation in the years

hence* "rasad (677/ notes that employment has increased in services4 ho3ever4 the share of

manufacturin# employment from 67/+ on3ards has declined4 despite its share of output remainin#

at around 8+ percent* Amon# the hi#h productivity sectors from 67,.267/84 only manufacturin#

sho3ed a positive T:" #ro3th of


49/59

49

Fi*ure 3;- Korea.' avera*e prouctivity *ro0t an eployent *ro0t &y inflection point' fro te rollin* correlation


a.

1960s-mid 1990s: $eriod o, economic miracle

5oreas economic miracle 3as fuelled by its industrial policy in the 67.+s4 mainly throu#h e1port

promotion* Merchandise e1ports increased from < to about 8+ percent of )%" 3ithin t3o decades4

of 3hich the share of manufactured #oods to total merchandise e1ports increased from 8,*onnolly K Di (


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50

At the same time4 5orea invested in primary education4 vocational and technical trainin#s* =y mid2

67/+s4 the economy shifted from production of li#ht manufactures to heavy and chemical

industries* :urther improvements in productivity 3ere supported by the e1pansion in hi#her

education and K% throu#h the establishment of the Bational esearch and %evelopment "ro#ram

in the 67C+s*

b. Mid-1990s on)ards: )age press"res! c"rrent acco"nt de,icits! and t'e sian inancial

(risis

Hi#h2technolo#y production continued in the 677+s4 ho3ever4 domestic 3a#es started to rise4 and

the adverse effects of the industrial policy became apparent4 leadin# to chronic current account

pressures* Accordin# to 5im (


51/59

51

)I/ CO-C+.SIO-

The e1istence of the Middle $ncome Trap and the #ro3in# evidence of the importance of

productivity #ro3th in escapin# this trap have led many researchers and policy2makers to focus on

productivity2enhancin# #ro3th strate#ies* While there is consensus that productivity increases#ro3th4 it does not ensure 3elfare improvements4 as the channel to employment is comple1 and

uncertain*

This thesis aimed to investi#ate the relationship bet3een productivity #ro3th and employment

#ro3th in countries that have mana#ed to escape the middle income trap4 and to shed li#ht to 3hat

many4 includin# 5eynes4 have feared9 if too hi#h productivity may in fact be at the e1pense of

employment #ro3th*

esults confirm that there is a stron# positive correlation bet3een productivity and )%" #ro3th4

but the link to employment #ro3th is unclear; hence renderin# the relationship unstable* That is4

the relationship does not depend on the ma#nitude or the direction of productivity #ro3th4 such

that hi#h productivity does not al3ays #uarantee employment4 3hile contractions also do not

automatically translate to contractions in employment #ro3th* :urthermore4 the policy analysis

sho3s a trend of 3hat tri##ers such chan#es in relationshipE for the &U2member countries4 maNor

chan#es in the behavior of productivity or employment are marked by the post23ar economic

miracle (&uropean )olden A#e4 the move to democracy4 the accession to the &U4 and the )lobal

financial crisis; 3hereas Asian countries chan#es are characteri0ed by the move from labor2

intensive manufacturin# to capital2intensive to hi#h2technolo#y industries* $n the years bet3een

these common economic divisions are more inflection points that4 the author observes4 are not due

to chan#es in macroeconomic policies4 but simply result from the difference in the pace of chan#e in

productivity and employment* These chan#es are4 of course4 affected by macroeconomic policies;

ho3ever4 it seems that productivity chan#es are more #radual4 3hile that of employment #ro3th

are faster and more sensitive to macroeconomic shocks related to inflation4 e1chan#e rate4 and

other indicators such as investor confidence and e1pectations* These chan#es in labor input persist

for a fe3 years or 3hat the author considers as medium2 to lon#2term trend in employment4 and is

supported by the results of the analyses that the labor input #ro3th does not only rely on

population #ro3th and short2run economic shocks4 but also the !uality of labor* $n some countries

in the sample4 this improvement has led to increased participation and !uantity of labor employed*


52/59

52

There are also observable differences in the policies implemented by &uropean countries and Asian

countries* :or all countries4 economic miracles4 or periods of hi#h )%" #ro3th4 hi#h productivity4

and hi#h employment are follo3ed by 3a#e pressures or e1cessive capital inflo3s4 both of 3hich

tend to lo3er )%" #ro3th in the succeedin# years* This confirms the tendency of countries to fall

into the Middle $ncome Trap* $n &uropean countries4 the increase in input prices led to the

deterioration of macroeconomic situation4 thus makin# #ro3th unsustainable as evidenced by the

alarmin# levels of public deficit and debt4 e1ternal imbalances4 currency devaluations4 and

sta#nation; 3hich also partially e1plains the ne#ative avera#e #ro3th in total hours 3orked*

Mean3hile4 Asian countries took the increase in input prices as a si#nal to increase productivity

further in order to e1ceed the increase in costs* )overnment intervention fuelled this productivity2

driven #ro3th by providin# investment incentives to the private sector 9 3hether forei#n or

domestic 9such as ta1 incentives4 IpioneerJ status for forei#n companies4 etc* This4 in parallel 3ith

skills buildin#4 has helped the economy move to hi#her value2added activities more smoothly4 thus

makin# #ro3th more fluid* Thus4 its economic breakpoints do not seem to be defined by shocks4 but

rather by chan#es in policies4 all of 3hich led to sustained productivity4 #ro3th4 and employment*

The author concludes that4 3hile T:" and employment decisions may be directly related as

su##ested by %e Michelis4 &stevPo4 K Wilson (


53/59

53

)II/ 1O+IC< IM1+IC&TIO-S &-0 '*COMM*-0&TIO-S O' .'T8*'

ST.0ollard4 :* (


56/59

56

$to4 T* (677.* 'apan and the Asian &conomies E A I Miracle J in Transition* Brookings Pa+ers onEconomic !ctivity4=4


57/59

57

ubery4 '*4 )rimsha34 %*4 K Smith4 M* (hina :actor* Paci$ic Economic "evie4 )4 * (


58/59

58

&11*-0ID

Table 7: T*0 and 1(T data used

SO.'C* 0&T& .S*0

$/ Total *conomy0atabase 3#$=5 (67,+2


59/59

igure ##: A9year rolling 2indo2 correlation=!bet2een total hours 2ored and T1

-.8

-.4

.0

.4

.8

5 0 5 5 6 0 6 5 7 0 7 5 8 0 8 5 90 9 5 0 0 0 5 1 0

ROLL8_ESP

-1.2

-0.8

-0.4

0.0

0.4

0.8

5 0 5 5 6 0 6 5 7 0 7 5 8 0 8 5 9 0 95 00 0 5 1 0

ROLL8_GRC

-0.8

-0.4

0.0

0.4

0.8

1.2

5 0 5 5 6 0 6 5 7 0 7 5 8 0 8 5 9 0 95 0 0 0 5 1 0

ROLL8_HK

-.8

-.4

.0

.4

.8

5 0 5 5 6 0 6 5 7 0 7 5 8 0 8 5 90 9 5 0 0 0 5 1 0

ROLL8_IRL

-0.8

-0.4

0.0

0.4

0.8

1.2

5 0 5 5 6 0 6 5 7 0 7 5 8 0 8 5 9 0 95 00 0 5 1 0

ROLL8_JPN

-0.50

-0.25

0.00

0.25

0.50

0.75

1.00

5 0 5 5 6 0 6 5 7 0 7 5 8 0 8 5 9 0 95 0 0 0 5 1 0

ROLL8_KOR

1.2

0.8

0.4

0.0

0.4

0.8

5 0 5 5 6 0 6 5 7 0 7 5 8 0 8 5 90 9 5 0 0 0 5 1 0

ROLL8_PRT

-1.0

-0.5

0.0

0.5

1.0

5 0 5 5 6 0 6 5 7 0 7 5 8 0 8 5 9 0 95 00 0 5 1 0

ROLL8_SGP

-1.0

-0.5

0.0

0.5

1.0

5 0 5 5 6 0 6 5 7 0 7 5 8 0 8 5 9 0 95 0 0 0 5 1 0

ROLL8_TWN

SourceE Authors o3n calculation usin# "WT data*

overcoming the middle income trap

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