ASIAN PRODUCTIVITY ORGANIZATIONOVERCOMING THE MIDDLE-INCOME TRAP

PREPARED BY
Dr. Kenichi Ohno
Professor, National Graduate Institutefor Policy Studies (GRIPS), Japan

Contents
 Middle income traps—definition, some data and ideas Two required policy areas—growth policy and social policy Creation of competent and clean technocrats
 The need for policy learning—learning HOW rather than WHATThe key message:
Growth slowdown at middle income must be avoided by learning how tomake effective policies to enhance private dynamism. This requires a strong
and persistent political will, a comparative and systematic perspective, and acreation of technocrats who draft and execute developmental policies. These
conditions must be prepared by the top national leader. Random muddlingthrough to cope with problems at hand is not enough.

Speed of Catching Up: East Asia
Per capita real income relative to US(Measured by the 1990 international Geary-Khamis dollars)

Sources: Maddison Project Database 2020; for the ROC: the Central Bank of the Republic of China.

Latin America
Per capita real income relative to US(Measured by the 1990 international Geary-Khamis dollars)

Source: Maddison Project Database 2020.

Russia and Eastern Europe
Per capita real income relative to US(Measured by the 1990 international Geary-Khamis dollars)

Source: Maddison Project Database 2020.

South Asia
Per capita real income relative to US(Measured by the 1990 international Geary-Khamis dollars)

Source: Maddison Project Database 2020.

Africa
Per capita real income relative to US(Measured by the 1990 international Geary-Khamis dollars)

Source: Maddison Project Database 2020.

Why do Nations Diverge?
Per capita
incomeRising skills, technology,
knowledge, innovation
Country that creates internal
value through human capital
upgradingHigh

To middle income trap
MiddleCountry that grows by given
advantages only – natural
resources, trade opportunity,
FDI, ODA, big projects, asset
bubbles; Little creation ofinternal value

Initial growth byliberalization,
privatization,
integration
Low
10-20 years

Critical point
in history

TimeThe Phase Shift

From Light Manufacturing to High-tech Industries
Light manufacturing
 In the early stage, labor-intensive low-technology sectors such as garment,
footwear, food processing, electronic assembly (PCs, phones) dominate.
 Domestic value creation is low. A large amount of unskilled (female) laboris needed. Few engineers and technicians are required.
Japan underwent this transition around the 1920s, and Republic ofKorea and Republic of China in the 1970s. However, many developing
countries are unable to cross this threshold (middle income trap).

Technology-based industries
 Establishment of high-tech, value-creating sectors such as metal,
machinery, chemicals, IT and high-tech industries requires technology
learning and retention of highly skilled engineers (without job hopping).
 Policy must assist technology acquisition, investment, finance, etc. Due toscale merit, large monopoly tends to emerge.

Liberalization,
privatizationand integration
are generally
sufficient

Effective policy
intervention to
upgrade private
capacity isessential

Middle Income Trap: My Definition
 A middle income trap is a situation where an economy is stuck at income dictatedby given resources and initial advantages, and cannot rise beyond that level:
growth is given, not created.
 Growth based on FDI, aid, big projects, natural resources, or locational
advantages will eventually end. The true source of development is value creation
by domestic citizens and enterprises.
 Countries may reach middle income by liberalization, privatization and global
integration, but reaching higher income requires strong policy effort to stimulate
private dynamism, not laissez-faire.

Nations are Not Equal and Policy Quality Matters Development performance differs greatly across nations. Some nations quickly
reach high income while others slow down or stagnate at low or middle income.
 Diverse performance reflects differences in private dynamism and policy quality—not amounts of aid, trade, FDI, natural resources, big projects, history ofcolonization, initial difficulties, etc.
Economic performance = Private dynamism + Policy quality+ External factors
 In the long run, external shocks fade out and private dynamism dominates. Policy
quality is important in enhancing private dynamism.
 The lack of policy quality is the main cause of a middle income trap (or any otherlong-term growth problem).

Two Policies are Required Middle income traps may occur for two main reasons:(i) the lack of growth momentum (insufficient industrial promotion)(ii) inability to cope with new problems generated by rapid growthor both.
 To avoid a middle income trap, government must competently execute twopolicies: growth policy and social policy.

Growth and Social Policy: East Asia’s Success Pattern
Economic growth
START
Emergence of
new problems

Growth policy bydevelopmental stateSocial stability &popular support
Exit: 20-30
years later

FINISHMore democratic
high-income society

Emerging middle class,demand for participation,
culture of solving disputes
by votes and negotiation,
not by violence

Income & wealth gaps,
environmental damage, congestion,
cultural change, land & stock
bubbles, macro instability,
materialism & corruption…

Social policy
Warning: if growth policy or social policy
is missing or insufficient, the nation may
fall into a middle income trap.

Growth PolicyIndustrial Policy Quality
 International comparison of industrial policy—examining policy making capacities
in Asia and Africa.
Asia—Vietnam, Singapore, Republic of China, Republic of Korea, Malaysia,
Thailand, Indonesia, India, Cambodia, Sri Lanka, Myanmar
Africa—Ethiopia, Rwanda, Mauritius, Mozambique, Zambia, Tanzania, Ghana,
Uganda, South Africa, Kenya, Djibouti
 In policy quality, Asia is not always superior to Africa. Some African countries
such as Mauritius and Rwanda practice better industrial policy than Vietnam orIndonesia.
 To a comparative eye, difference in policy quality is obvious and very clear. But
this fact must be conveyed by some quantitative indicators.

5 – Excellent
4 – Good
3 – Moderate
2 – Some
1 – Little
0 – Nothing or worse

How Do You Measure
Industrial Policy Quality?
(Tentative method)
Policy areas

Functional aspects

1. Industrial human resource
2. Domestic enterprise development
3. Business climate
4. Power & logistics
5. Export promotion
6. Strategic FDI marketing
7. Industrial parks
8. Supporting industries & FDI-local firmlinkage
9. Productivity, technology & innovation
10.Standards & testing

1. Policy ownership
2. Vision & commitment of top leader(s)3. Policy drafting procedure
4. Authority & capacity of policy organizations
5. Mindset & competency of implementing
officials
6. Budgeting & staffing
7. Inter-ministerial coordination
8. Involvement of key non-official stakeholders
9. Monitoring & evaluating mechanisms
10.Impact on the real economy

×The Scorecard for Vietnam
Date: May 2015 (based on policy research 1995-2015)

Notes:- Evaluation: 0 (non-existent or worse), 1 (little), 2 (some), 3 (moderate), 4 (good), 5 (excellent).
- Evaluation of policy prepared and implemented by government only; results obtained by private effort, international cooperation or external conditions are not included.
- Letter grades: A+ (4.5 or above), A ( <4.5), B (<4), C (<3), D (<2), F (<1).

The Scorecard for Ethiopia
Date: May 2015 (based on policy research 2008-2015)

Notes:- Evaluation: 0 (non-existent or worse), 1 (little), 2 (some), 3 (moderate), 4 (good), 5 (excellent).
- Evaluation of policy prepared and implemented by government only; results obtained by private effort, international cooperation or external conditions are not included.
- Letter grades: A+ (4.5 or above), A ( <4.5), B (<4), C (<3), D (<2), F (<1).

Industrial Policy Quality:
Summary of 13 Economies
Log of per capita income(Correlation = 0.815)

Singapore
Japan
ROK
ROC
Malaysia
Mauritius
ThailandIndonesia

India

Vietnam
RwandaCambodia

Ethiopia

Industrial policy quality score

Observations
 Governments are not created equal. There is a huge gap in industrial policy
quality from excellent to poor.
 Industrial policy quality and income level are positively correlated (0.815). Thissuggests, but does not prove, causality.
 Within each country, policy quality is similar across different components. If one
policy or ministry is bad, others are also likely to be bad. There is a common
policy culture prevailing in the entire government.

The Smile Curve

Or how much value are you creating in the Global Value Chain?

Latecomers usually start from simple cutting, sewing, assembly, etc. From there, Malaysia once had astrategy to go up (improve productivity) and go sideways (capture upstream & downstream activities)
called “Manufacturing Plus Plus”. Many upgradings are needed to achieve this.

Export Value Structure
Vietnam: Overall export sector, 2015
Additional value created abroad byforeign buyers & distributors (unknown
to Vietnam)

Source: Khoi & Chaudhary (2019).

Vietnam’s B + C are considered too small; expanding them requires stronger domestic exporters,
domestic inputs, and domestic human resources. Establishing international brands, shifting to highend products, and capturing international distribution are also desirable (but difficult).
Bangladesh, a large garment exporter, reports that A was 36% of total export value of garment in
2018-19 (Bangladesh Bank). This means B+C+D was 64%, similar to Vietnam.

Ethiopia FDI Policy Report (Jan. 2022)
Three Part Strategy for FDI-led Industrialization

Social Policy

Coping with Income Gaps

Income Equalization or Polarization?
Some societies experienced income equalization during high growth while others
faced income polarization.
 Economies that had equal or equalizing income during high growth:
Japan (1950s-60s), Republic of Korea (1970s-80s), Republic of China (1960s-80s).
 Economies that had unequal or polarizing income during high growth:
China (after 1980s), Thailand, Philippines, Malaysia, (Indonesia, Vietnam)
These different results stem from both market forces and policy actions.

Gini Coefficient (0 – perfect equality, 1 – perfect inequality)%

Low, Stable or Declining

Persistently High or Rising

Source: World Bank’s combined and standardized Gini data, http://data.worldbank.org/data-catalog/all-the-ginis.

Japan: Rapidly Rising Productivity and Wages
 During the high growth era (1955-1970), both labor productivity and wages roseabout 10% per year. Social stability and labor discipline were maintained. Virtually
all people felt that they belonged to the middle class.
 Policy-based income redistribution—thegovernment offered subsidies, pricecontrol, agricultural protection, public
investment, etc. to rural areas.
Urban taxes were channeled to build
railroads, highways, ports and airports
in rural constituencies.

ROK: Saemaul Undong and Regional Equalization
 In 1970, President Park Chung-hee launched Saemaul Undong (New Village
Movement) to narrow the gap between cities and villages.
 It was a top-down order. All villages were given resources, training and instruction.
They were evaluated by their action and performance.
 Some criticized this movement as forced political propaganda. But it brilliantly
succeeded in eliminating urban-rural gaps. Some rural regions became richer thanSeoul.
Inequality Indicators: Regional Incomes Converged
Note: Data covers regional per capita
GDP of 17 cities & regions of Republicof Korea.
Source: Huh Mun-Gu, "Changing
Inter-regional Income Disparities in
Korea: A Gross Regional Domestic
Product Analysis," Osaka Prefectural
Univ. (1995).

ROC: Land Reform and SME Dynamism
 Land reform was successfully carried out in 1949-1953 to eliminate thelandowning class and generate incentive to small farmers.
 Taiwanese SMEs were very dynamic and served as the main engine of growth. In
1981, SMEs’ share of export was 68.1%.
 SME Administration under the Ministry of Economic Affairs conducts active SME
support covering management, finance, incubation, regional clusters, etc.

Leadership andTechnocrats

Critical Importance of Leadership A national leader who is wise, strong, action-oriented and respects democraticrules is crucial. He or she is the primary force in changing goals, rules, behavior
and institution.
 Professional and dedicated technocrats must support this leader. Both are needed
for successful development.
 It is difficult to foster or install a competent leader. But once such a leader is in
power, he or she can create competent technocrats (cf. Republic of China in the
1950s, Republic of Korea in the 1960s).

Creation of Competent and Clean Technocrats
Ed Campos —World Bank’s East Asian Miracle Report 1993 (Chapter 4); The Key to
the Asian Miracle 1996 (co-author)
East Asia’s high performing economies attained shared growth because theirgovernments deliberately created three necessary conditions.
1. An inclusive mechanism to let all citizens participate in growth (education,
land reform, rural development, strong SMEs, etc.)
2. Productive government-business relationship based on shared information,
mutual respect and joint decision making.
3. Competent economic technocrats who pursue welfare for all rather than selfinterest.
Countries that seriously make these institutional efforts can achieve shared growth(institutions can be created, not given).

MITI and the Japanese Miracle
Chalmers Johnson, Stanford University Press, 1982

 The Japanese economic bureaucracy in the 1960s-70s was different from both theWestern model and communist planning.
 In Japan, the state role in the economy was shared with the private sector. Boththe public and private sectors perfected means to make the market work fordevelopmental goals.
 This pattern proved to be the most successful development strategy, and was
repeated in Republic of China, Republic of Korea, Singapore, etc.
 Japanese analysts believe that government was the inspiration and the cause ofheavy and chemical industry drive and structural transformation.
 MITI said industrial policy “grew” without guiding theory. Only recently,
government tried to rationalize and systematize it.

Why MITI was Effective

Lecture by Masatake Wada, former MITI official during 1966-96 (Feb. 2021)
1. Broad perspective and capacity—MITI’s mandate was wide: industry, trade, energy,
mining, SMEs, investment, technology, intellectual property, etc. Its functions werealso broad: vison-setting, research, consensus-building, law-drafting, implementation,
monitoring, etc. It had broad domestic and worldwide information networks.
2. Clean and good relationship with politics—MITI submitted policy proposals topoliticians who deliberated on them. Politicians also requested MITI to study certain
issues and propose policies. MITI acted as a professional body independent of politics.
3. Thick information network with private sector—MITI and businesses shared thesame awareness and future visions. Industrial policy was a joint work between MITI
and business circles, and this improved policy efficiency.

(Cont.)4. Internal structure—MITI was composed of vertical and horizontal bureaus. The
former were responsible for sectoral issues and the latter managed common issues
across sectors. This mechanism provided good balance. MITI staff rotated every 2-3
years to experience many positions, including overseas placement, to cultivate abroad perspective.
5. Strong motivation of MITI staff—despite low salary, MITI staff were very proud towork on industrialization, which was a big national dream. They were very
concerned about Japan’s future, and organized private study meetings inviting
academic and business people after working hours (no overtime pay). During thecatch-up phase, the national goal was clear and opportunity was immense.

Ministry of International Trade and Industry
Minister
Politically appointed VM

Main Bureaus

Administrative VM

Minister’s Secretariat(incl. Research & Statistics)

Deputy VMs

Int’l Trade Policy Bureau

Special assistants

Int’l Trade Admin. Bureau
Industrial Policy Bureau
Industrial Location &Environment Protection Bureau
Basic Industries Bureau
Machinery & Information Industries
BureauAttached Organizations
and External Bureaus
Agency of National Resources＆Energy
Patent Office
SME Enterprise Agency
Agency of Industrial Science& Technology
Trade & Investment Training
Other

Consumer Goods Industries Bureau
Deliberation Councils
Industrial Structure
Export Insurance
TextilePetroleum
Electrical Works.........

Int’l Trade Transaction
Industrial Location & Water
Product Safety & Household Goods Quality Indication
Aircraft & Machinery Industry
Traditional Crafts Industry..........
Source: adapted from Okimoto (1989), p.117.

MITI’s Policy Making Was Bottom-up
Final report

Deliberation council
Feedback

Briefings, subcommittee reports
MITI research group(subcommittee)

Conduct survey,
compile data

Public relations:Publications
Explanatory meetings
Lectures
Others

Prepare draft
MITI junior staff
study group

Young officials in their 30s actively gathered information and interactedwith stakeholders, thus having substantive influence on final result—unlike in most other countries where young officials only take orders
from above and do what was assigned.

Outside lecturers
Hearings:
Learned individuals
Interested parties
Overseas employees
Local representatives
Others

Source: Ono (1992); original graph was rearranged soreporting direction goes from bottom to up.

Other Technocrats (my experiences) Singapore—officials are young, competent and well paid. They are flexible and do
not engage in bureaucracy. They speak fast and to the point. Meetings are shortand full of information.
 Republic of China—Ministry of Economic Affairs officials are more relaxed thanSingaporeans but equally competent. Their policy is simple and effective(technology institutes, technology projects, science parks, SME promotion)
 Ethiopia—officials are serious learners. A policy mission to Malaysia took notes,
did presentations, had morning meetings at hotel lobby, and worked late at thebusiness center. The team started drafting a new policy on the return flight.
 Country X—a policy mission to Singapore did not show up in the morning. They
went shopping instead. Some members needed English interpretation at meetings.
 Country Y—industrial officials were very friendly and offered many meals and gifts
to us. But their policy content was very weak.

Policy Learning

Policy Learning
The best way to improve policy capability is systematic comparison of international
best (and worst) practices. Use them as building blocks to create one’s own policy.
Policy learning must be vigorous, systematic and with proper local adjustment.
 Distinguish globally common factors and country-specific factors. These two arealways present in any international comparison.
 Build general skill to create policies that fit your country. Don’t copy-and-paste
policies of others.
 Ask the right question. Choose the right benchmark countries. These require
deep knowledge and extensive experience.
 If you don’t know where to start, invite competent foreign experts to guide you
through the initial steps. Regain ownership when you accumulate sufficient
policy skill.

Translative Adaptation—Importation with Local Adjustment
Imported from outside by:
Government policy
Migration, human contact
Trade, FTAs, foreign firms
Official aid and NPOs
World Bank, IMF, WTO, etc.

Keiji Maegawa

economic anthrolopologist,
Tsukuba University

A latecomer is not really weak if it controls
the type, terms and speed of importation offoreign things, using them to stimulate theexisting society for new growth. Even as
foreign elements are added, the basic social
structure remains intact.

Government
must manage

Foreign
Systems

Conflicts andadjustments

Base SocietyInternal systemic evolution

Meiji Japan (Late 19c)—Learning Western Technology
Japan’s initial technology absorption progressed rapidly from easy to complex as
domestic capability steady rose.
Learning took place in the following overlapping sequence:
1. Reading Dutch books
2. Learning from foreign instructors on site
3. Government turnkey projects by contracted foreign teams
4. Sending Japanese students abroad
5. Establishing engineering universities and technical schools
6. Copy production and reverse-engineering from imported machines
7. Selective learning through licensing, technical agreements and joint ventures.

Kobu Daigakko 工部大学校(Institute of Technology)

 1871, Koburyo (Industrial Training School) established by the Ministry of Industry;
1877, renamed to Kobu Daigakko; 1886, merged with Tokyo Imperial University
under the Ministry of Education.
 The first Rector was Henry Dyer, a hired British engineer with a philosophy of“judicious combination of theory and practice.” The six-year program included preparatory course (language & math, 2 years),
specialized studies (2 years), internship at government project (2 years). Top
students were additionally sent overseas with scholarship.
 Courses were: (i) civil engineering, (ii) mechanical engineering, (iii) shipbuilding, (iv)
telecommunication, (v) chemistry, (vi) architecture, (vii) metallurgy, and (viii)
mining. Classes were given mostly in English.
 Top-class engineers were produced to replace foreign advisors.

Koto Kogyo Gakko 高等工業学校(High-level Industrial Schools)

Wagener

Tejima High-level Industrial Schools were proposed by Gottfried Wagener (hired German
engineer) and Tejima Seiichi (Ministry of Education official). The first such School
was established in Tokyo in 1881.
 Students were recruited from chugaku (high school, about age 16-17) throughexam, but best students were accepted without it. Mechanical engineering andchemical engineering were initially offered. More courses were added later.
 Unlike Kobu Daigakko, instructors were all Japanese except Wagener. Tokyo Kogyo
Gakko became the leading institute for supplying industrial instructors, factory
managers, engineers and entrepreneurs.
 Seven more Schools were created in Osaka (1901), Kyoto (1902), Nagoya (1905),
Kumamoto (1906), Sendai (1906), Yonezawa (1910) and Akita (1910).

How Japan Developed Kaizen(Quality and Productivity Improvement)

Phase 1: Introduction (1950s-)• American statistical management (W.E. Deming, J.M. Juran) was introduced to improve
productivity and quality.
• The private sector drove kaizen learning. Efficiency promoting NPOs were created bylarge firms (Japan Productivity Center, JUSE, JMA).
• American style (top-down, statistical) was modified to Japanese style (teamwork,
bottom-up, participatory).
Phase 2: National Diffusion (1970s-80s)• Kaizen spread to all Japan, including SMEs, creating a large number of Quality Control
Circles (QCCs). Energy-saving component was added.
Phase 3: Globalization (mid 1980s-)• Kaizen spread to Asia and the rest of the world, teaching kaizen philosophy and tools
to foreign workers and partner companies.

Three Steps to Learn Foreign Technology
Introduction, Development and Diffusion

US & European
Countries

Private Sector
Organizations

Private Companies(JPC, JUSE, JMA, etc.)•Dispatch of study
missions to US & Europe•Invitation of foreign
advisors•Translation of foreign
literature into Japanese•Study on adaptability of
new technology (bycommittees and working
groups: industry-govt.academia joint research)•Trial application andmodification of technology (pilot projects)•Guidance and advices•Education and training•Qualification andcertification system•Award system•Enlightenment andmovement<To Learn><To Test & Modify><To Diffuse>

Source: Adapted from Tsuyoshi Kikuchi “The Roles of Private Organizations in the Introduction, Development and Diffusion of Production
Management Technology in Japan” (2011).

Japan’s Policy Dialogue with Developing Countries: A Selected List
Country
Argentina

PhasesParaguay

1985-1987
1994-1996(follow up)
1995-1996
1996-1998
1998-1999
1999-2001
1998-2000

ThailandIndonesia
MyanmarMongolia

1999
2000
1999-2002
1998-2001

Indonesia

2002-2004

Laos
Vietnam

2000-2005
2003-present

Ethiopia
Myanmar2009-20112012-20162017-present
2012-2015

Laos

2019-2020

Vietnam

Key members from Japan

RemarkSaburo Okita (former foreign minister, IDCJ); Hirohisa
Kohama (IDCJ), Akio Hosono, Kotaro Horisaka(professors); JICA
Shigeru Ishikawa, Yonosuke Hara (professors); JICA

Agriculture & livestock farming, industry, transport, export promotion (Okita
Report). Follow-up phase studied measures to strengthen economic ties withJapan/East Asia.
Large-scale joint study on macroeconomy, industry (with in-depth studies of
selected sectors), agriculture, enterprise reform, and financial crisis
management (Ishikawa Project).

Kagehide Kaku (DIR), Hidesuke Kotajima (DIR), Akio
Hosono (professor); JICA
Shiro Mizutani (former MITI official); JICA
Shujiro Urata (professor); JICA
Konosuke Odaka (professor); JICA
Hiroshi Ueno and Hideo Hashimoto (ex-World Bankeconomists and professors)
Takashi Shiraishi, Shinji Asanuma, Shujiro Urata(professors); JICA

Economic develoment, competitiveness, and export promotion (including
clusters and agro-industry chain).
Study on SME promotion policy (Mizutani Plan)
Policy recommendations for SME promotion
Agriculture, rural development, industry, trade, finacne, ICT, etc.
Study on economic transition and development

Macroeconomic management, financial sector reform, SME promotion,
private investment promotion, democratization, decentralization, humanresource development
Yonosuke Hara (professor); JICA
Macroeconomy, finance, state enterprises, FDI, poverty reduction.
Keidanren, Japanese embassy, JICA, JETRO, JBIC
Bilateral joint initiative to improve business environment with action plans and2-year monitoring cycles
Kenichi Ohno, Izumi Ohno (GRIPS professors);
Policy methods and organizations, kaizen, export promotion, champion
Japanese embassy, JICA
products, FDI policy and support, SME support, productivity, automotive
assembly, inviting Japanese FDI, etc.
Konosuke Odaka, Shigeru Matsushima, Toshihiro Kudo Supporting economic reform program covering finance, trade, investment,(professors); METI, JICA
SMEs, agriculture, rural development.
Toshiro Nishizawa, Terukazu Suruga, Takuji Kinkyo,
Joint policy research and dialogue for fiscal stabilization, fiscal & debt
Kazue Demachi, Fumiharu Mieno (professors), MOF,
management, resource export, balance of payments, financial system
JICA
development.