Emerging economies are often entrapped in what policymakers and economists have defined as middle-income traps.Haggard (S. 2018) describes the middle-income trap as the slowing down or stalling after reaching the middle-income level. One of the major concerns has been on whether emerging economies can overcome this trend or jump directly to the next economic level. Different scholars have come up with theories explaining middle-income traps and what can be done to overcome this trend. This paper reviews some of the theories addressing middle-income traps with the goal of determining whether they are efficient in solving the middle-income trap in emerging economies.
Proponents of the marketcraft theory argue that markets are created through human interactions. They view markets as institutions established through social activities. In the Marketcraft Thesis, Vogel (2018, p. 2) denies the existence of free markets. He argues that “markets need rules to protect people and environment from collateral damage…” Vogel’s primary argument is that the market can be controlled to promote the welfare of people. If this theory is correct, then the concept of free markets can be forcefully overcome when governments intervene to alleviate the situation. Everything in the market operates on rules and regulations. If governments can regulate stock markets, they can also monitor the economy by improving the economic outputs with the goal of lifting emerging economies from the middle-economic trap to the next level of development.
In the second chapter of Vogel’s book of market crafting, he argues that markets do not operate on laws and regulations alone.Emerging markets need to develop reforms in their policies with the goal of increasing economic outputs that propel them out of the middle-income traps. Vogel (S., 2018, p. 7) argues that a market is constituted by integrated systems such as banking, corporations, private developers, and labor markets. These systems are modifiable when they decide to pursue the interest of the country. Each of these systems purses independent interests that make the market work. For instance, corporations seek to maximize the shareholder value, just like the labor markets that defend the rights of workers. The government plays a hand in all of these entities. As a result, the government can modify its intervention and help the country overcome the middle-income trap.
The theory of political and economic liberalization proposes the role of wealthy employers in raising wage incomes with the goal of transforming theeconomic value of their countries. The primary argument that proponents of liberalization maintain is that capitalism is that markets can be modified with the goal of improving the economic output from emerging economies (Thelen, K., p. 5). I think that this theory is essential in addressing economic inequalities in solving the issue of the middle-income trap.Just as Thelen (2014) argues, capitalists play a significant role in limiting economic growth and development. However, when modified to work in the interest of the country, workers can earn higher salaries that later help in creating financial stability.
Another theory proposed by Kelly (R. 2016, p. 5) is that industrial policies can help in solving the middle-income trap. Proponents of this theory believe that developed countries used industrial policies to move from one level of economic income to the next. The problem is that developed markets do not allow emerging economies to follow a similar path. As a result, emerging economies are disadvantaged because they are not allowed to apply the same policies that developed economies have been using. The only way that can help developing countries attain economic stability is to apply policies that will enable the private sector to work with the government with the goal of raising their economies.
In championing for industrial policies that enhance economic development, Kelly (R. 2016, p. 5)explains that developing economies should revise their own tax rules wherever they think that they are harming their economies. Proponents of this policy argue that middle-income economies should open up their markets for foreign investors. If industrial policies discourage investments, governments can alter their industrial policies to lure foreign investors who would later propel the country to the next economic level. The main issue that arises with this theory is that developed countries have set international standards to regulate global markets. I think that this theory cannot facilitate a solution to the middle-income trap. Any decision that seeks to interfere with the tax rules with the goal of favoring the parent country may be a misleading intervention, considering that markets work in a connected system. Some decisions may end up causing irreparable damages to the economic system.
This review indicates that markets are not free entities. The problem of the middle-income trap can be overcome when the government intervenes to help solve the problem. The main issue is that economies work as an interconnected system. Any modification in one country has a significant impact on the global market. Even though the literature indicates that market demands can be modified, there are concerns that governments have to take into consideration.This explains why the middle-income trap persists, in spite of governments having the ability to intervene and solve the problem.
Haggard, S. 2018.Developmental states. Cambridge: Cambridge University Press.
Kelly, R. 2016. What a way to make a living? Using industrial policy to create more and better jobs.Action Aid.
Thelen, K. 2014. Varieties of liberalization and the new politics of social solidarity.Cambridge University Press.
Vogel, K., S. 2018. Chapter One: The marketcraft thesis. In Marketcraft howGovernments Make Markets Work.Oxford Scholarship Online.
Vogel, K., S. 2018. Chapter two: The elements of marketcraft. In Marketcraft how Governments Make Markets Work. Oxford Scholarship Online.
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