04 May, 2021 14:30 am

The trap of the ‘middle-income trap’—Paolo Casadio and Geoffrey Williams

The trap of the ‘middle-income trap’—Paolo Casadio and Geoffrey Williams
MAY 4 — The problem of the so-called “middle-income trap,” which has kept Malaysia among the upper-middle-income countries for many years despite growing faster than most of the high-income counterparts, has been debated for a long time.  The good news is that both the World Bank and the...

We now know, for example, that the underlying potential growth rate in Malaysia is on a downwards trend, hugely accelerated by the recent shocks from Covid-19 which is repeating the negative impact on potential growth that we saw in the Thai baht crisis.This concern has been recognised and supported by Bank Negara in their recent Annual Report estimates that potential growth has fallen by 1.The economic and social cost of substantially lower potential growth are twofold.The second implication of lower potential growth is the further contraction of fiscal space.

When the government targets a fixed level of debt and deficit to GDP, lower potential growth constrains their resources available for economic and social interventions.While lower potential growth is inevitable in the long-run and is typical of mature economies according to World Bank analysis, fresh thinking by mature economists outside of the World Bank suggests that this effect need not and must not happen now and to such an extent.

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