The Middle-Income Trap 2.0: The Increasing Role of Human Capital in the Age of Automation and Implications for Developing Asia

36 Pages Posted: 23 Oct 2018

See all articles by Linda Glawe

Linda Glawe

FernUniversität in Hagen

Helmut Wagner

University of Hagen (Fernuniversitaet Hagen)

Date Written: June 10, 2018

Abstract

In our paper, we modify the concept of the middle-income trap (MIT) against the background of the Fourth Industrial Revolution and the (future) challenges of automation (creating the concept of the “MIT 2.0”). In particular, we analyze the impacts of automation, artificial intelligence, and digitalization on the growth drivers of middle-income countries and the MIT mechanism. We show that automation reduces the initial growth push for developing countries and leads to an earlier MIT at the lower end of the middle-income range. In addition, once wages start rising, the necessary shift in the growth strategy (from an export-manufacturing based to an innovation-productivity based growth model) is afflicted with higher requirements, particularly regarding human capital. This in turn, will lead to a higher persistence of the trap and it will become more difficult to break out of it. Thus, the MIT 2.0 will be much more challenging than today’s “normal” MIT. Our findings suggest that improving human capital accumulation, particularly the upgrading of skills needed with the rapid advance of automation, will be key success factors for overcoming the MIT 2.0. Against this background, we elaborate the implications for developing Asia regarding their probability to experience an MIT 2.0 (with a special focus on human capital as well as higher cognitive and information communication technology skills).

Keywords: automation, AI, human capital, middle-income trap, developing Asia, economic development, economic growth, employment

JEL Classification: J24, O10, O11, O15, O33, O47, O53

Suggested Citation

Glawe, Linda and Wagner, Helmut, The Middle-Income Trap 2.0: The Increasing Role of Human Capital in the Age of Automation and Implications for Developing Asia (June 10, 2018). Available at SSRN: https://ssrn.com/abstract=3263458 or http://dx.doi.org/10.2139/ssrn.3263458

Linda Glawe (Contact Author)

FernUniversität in Hagen ( email )

Universitätsstr. 11 (TGZ)
Chair of Macroeconomics
58084 Hagen
Germany

Helmut Wagner

University of Hagen (Fernuniversitaet Hagen) ( email )

Universitätsstrasse 41
Feithstrathe 140
D-58084 Hagen
Germany
011-49-2331-987-2640 (Phone)
011-49-2331-987-391 (Fax)

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