#GNW2015: Escaping the Middle Income Trap

March 6, 2015

On the last day of #GNW2015 in South Africa, Global Network students looked at how other emerging economies have raised their standards of living.

How did South Korea go from one of the poorest countries in the world to an economic powerhouse? The country’s economic policies moved the country from low-income to middle-income, and then from middle-income to high-income, in a span of 50 years.

As part of students’ final day here at the University of Cape Town Graduate School of Business’s Global Network Week, titled “Economics of Emerging Markets,” students looked at examples around the world of countries trying to raise their standard of living. The class included discussions on Botswana, Argentina, South Korea, and South Africa, but the Korean model is one of the most interesting, according to Prof. John Luiz, who teaches international business strategy at the school.

The Korean government focused its economic policies on specific markets to escape the “middle-income trap,” in which a country’s growth remains stagnant and keeps incomes fixed at a certain level. Korea encouraged the growth of specific sectors—including automotive technology, electronics, and now luxury goods—to attract consumer spending, Luiz said.   

“This was a very deliberate plan. They’re not ignoring incentive structures, but they’re trying to manipulate them,” Luiz said.

Has that model translated to Africa? Yes and no.

Botswana, which lacked its own internal infrastructure, formed a diamond-mining conglomerate with De Beers in the 1970s.

The agreement used a sliding scale, in which De Beers initially took in most of the profits, building infrastructure in exchange for mining rights. As the diamond market grew, the scale slid in favor of the country, providing a larger share of the wealth.

Today, the Botswana government owns about 15% of the company worldwide, and the country has a $7 billion sovereign wealth fund, managed by Goldman Sachs. That wealth allows the country to begin preparing for when the minerals start to diminish.

“It has allowed Botswana to stop selling diamonds when the prices go down,” Luiz said. “This has been a very well-managed country, but their biggest problem has been a lack of diversification. That can mean trouble.”

Matthew O’Rourke is blogging this week from the University of Cape Town’s Global Network Week module on emerging markets.