The Political Economy of Middle‐Income Traps: Is South Africa in a Long‐Run Growth Trap? The Path to “Bounded Populism”

• Published date: 01 March 2016
• Date: 01 March 2016
• Author: John M. Luiz
• DOI: http://doi.org/10.1111/saje.12117

THE POLITICAL ECONOMY OF MIDDLE-INCOME TRAPS:

IS SOUTH AFRICA IN A LONG-RUN GROWTH TRAP?

THE PATH TO “BOUNDED POPULISM”

JOHN M. LUIZ

*†

Abstract

The current literature on middle-income traps has been dominated by economists who have relied

on economic explanations mainly around stages of development and the structural transformation

of economies. But there is an equally vigorous literature from political science which speaks to the

political economy of transitions. Welook at the dynamics of how economic modernisation triggers

structural changes with winners and losers and how this is reflected in the polarisation of the

political sphere amongst middle-income countries. This paper asks the question of whether South

Africa is an archetypical example of a country stuck in a trap and how this has affected the policy

choices that it has made. South Africa needs to move up the value chain with a viable value

proposition, and this requires a very different policy set and human capital plan.

JEL Classification: O10, O40, P48

Keywords: Middle-income traps, emerging markets, South Africa, long-run growth

1. INTRODUCTION

The past decade has seen the proliferation of research attempting to explain middle-income

traps (MITs) both conceptually and empirically. This work exists alongside an even larger

body of papers which suggests a changing geo-economic momentum with middle-income

countries (MICs) becoming future engines of economic growth. Various scenarios have

been modelled to illustrate what the future composition of world gross domestic product

(GDP) will look like and almost all of these capture a very different world orderwith today’s

MICs soaring up GDP rankings. How do we reconcile these diverging narratives? It is of

cause possible for both of these to be realised.The momentum being experienced by today’s

emerging markets may push them into the top echelons of size while future growth

slowdowns may prevent them from reaching the high-income per capita range. This

implies that while they may see significant changes in GDP that the GDP per capita may

still find it hard to transcend the range implied by the traps.The current literature on MITs

has been dominated by economists who have relied on economic explanations mainly

* Corresponding author: Professor, Graduate School of Business, University of Cape Town,

Private Bag X3, Rondebsoch, Cape Town, 7701 ZA South Africa. E-mail: john.luiz@gsb.uct.ac.za

†Graduate School of Business, University of Cape Town. Presidential address delivered at the

2015 biennial conference of the Economic Society of South Africa, held at the University of Cape

Town, 2-4 September 2015. The paper was completed while I was a Visiting Scholar at the

University of Macerata, Italy.

The support of the Oppenheimer Memorial Trust and the National Research Foundation is

gratefully acknowledged. The usual disclaimer apply.

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around stages of development and the structural transformation of economies. But there is

an equally robust literature from the other social sciences, particularly political science,

which does not necessarily use the same nomenclature but nonetheless speaks to it in a

language of the political economy of transitions. This is appropriatebecause a characteristic

of MICs, which is often underplayed, is the fact that a large proportion of them have been

undergoing simultaneous political and economic transitions and liberalisation. In very

broad terms (with exceptions), we saw the start of these transitions in East Asia and Latin

America in the mid-1980s and early-1990s, in Eastern Europe with the fall of the Berlin

wall in 1989, in parts of South East Asia and Sub-Saharan Africa in the 1990s and 2000s,

and then more recently in North Africa with the tumultuous Arab Spring uprisings.These

transitions are in various states of consolidation and stable systems are yet to arise in some

of these cases.

Surprisingly, relative to other emerging markets, we have seen very little analysis

addressing the issue of whether South Africa’s anaemic economic performance (which

stretches back to the mid-1970s with a few exceptional outlining years) can be explained

within the parameters of the MIT literature. This paper asks the question of whether

South Africa is, in fact, an archetypical example of a country stuck in a MIT. What can

South Africa learn from other countries marooned in these zones of stagnation? How does

this work affect our understanding of the long-term phases of economic stagnation in

South Africa, and what are the policy implications which arise? It adopts a comparative

political economy perspective and positions the South African experience within that

middle-income literature.

2. AN ECONOMIST’S PERSPECTIVE ON MIDDLE-INCOME TRAPS

MICs, by definition, are countries in transition between low and high-income status. As of

July 2014, the World Bank’s analytical classification of the world’s economies based on

estimates of gross national income (GNI) per capita is as follows: low-income economies

are defined as those with a GNI per capita, calculated using the WorldBank Atlas method,

of $1,045 or less; middle-income economies are those with a GNI per capita of more than

$1,045 but less than $12,746; high-income economies are those with a GNI per capita of

$12,746 or more. Lower middle-income and upper-middle-income economies are

separated at a GNI per capita of $4,125. Using this classification, 79 countries qualify as

high income, 102 as middle income and 34 as low income. Within the middle income

group, it is equally split at 51 each within the upper and lower middle categories.

MITs refer to the experience of countries which achieved high economic growth rates

in the past but which have become marooned in this middle-income zone that has seen

their growth rates decline and them struggle to transition to high income status.

Eichengreen et al. (2013:2) analyse the incidence of growth slowdowns in fast-growing

MICs, and find dispersion in the per capita income at which slowdowns occur.They find

two modes, one in the $10,000-$11,000 range and another at $15,000-$16,0000 in

2005 purchasing power parity dollars. At these points, the growth rate of GDP per capita

slows from 5.6% to 2.1%. They argue these growth slowdowns are essentially

productivity growth slowdowns – with a drop in total factor productivity growth

accounting for about 85% of the absolute reduction in the growth rate (Agenor and

Canuto, 2012:5-6). Felipe et al. (2012:45) argue that a country is in an MIT if it has been

longer in the middle-income group than other countries have on average. They calculate

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