Four ways South Africa can avoid the ‘Middle-Income Trap’

In an article last month in WSJ Blogs on the Four Ways Asia Can Avoid the ‘Middle-Income Trap’, Martin Vaughan notes the IMF's suggestions for the rapidly-growing Asian economies that are at risk of falling victim to the middle-income trap (MIT).

The MIT is a situation where rapid economic growth results in rising wages and a manufacturing industry that is no longer competitive on the global stage. These countries lag the developed economies, but have limited opportunities of extricating themselves from the situation. Wikipedia describes the typical characteristics of countries trapped in middle-income status as:
(1) low investment  ratios; (2) slow manufacturing growth; (3) limited industrial diversification; and (4) poor labour market conditions

South Africa is a perfect example of a country that has succumbed to the MIT, so I found the WSJ Blog both interesting and useful from a South African perspective. How can we benefit from these suggestions?:

1. "1. Invest in infrastructure. IMF analysis suggests that subpar infrastructure
   is a key factor that can check an emerging economy’s growth. India, the
   Philippines and Thailand are particularly exposed in this area and should focus
   on building new and upgrading existing public transit systems, freight channels,
   ports and energy infrastructure."

Although South Africa has recognised this as a critical factor in advancing the economy, progress to date has been notably limited. We saw a massive spurt ahead of the 2012 Soccer World Cup, as we raced to complete the stadia and a few other projects on time, but we seem to have stalled since then. Speak to anyone in the construction industry, from quantity surveyors to builders, and the story is the same: the anticipated government infrastructure spending is failing to materialise.

"2. Guard against excessive capital inflows. Money flows from abroad can
energize an economy and give domestic consumption a boost, but can send an
economy south if investors retreat in a hurry. Policy makers should have
macro-prudential controls in place to mitigate potential rapid outflows."

There are essentially two types of foreign investment into a country: portfolio investment (buying equities and bonds as a passive investor) and foreign direct investment (FDI) (buying at least 10% of a company - a strategic stake - and playing a more participative role in that investment). Portfolio investment is less desirable, as explained by the IMF, investors often withdraw their assets "in a hurry"; FDI, by contrast, is more prized given that it is less volatile. But, there are problems with FDI too: income on those assets leaves the country as "income payments" on the current account and can intensify a current account deficit. So South Africa needs to assess the capital flows and their potential impact carefully.

"3. Boost spending on research and development and post-secondary education.
Both are needed to foster the innovation that’s a hallmark of advanced
economies. Malaysia and Thailand have the highest college enrolment rates among
emerging Asian economies, but China is rapidly catching up, according to IMF
data. China far outstrips other developing Asian countries on R&D, with 2009
spending at more than 1.5% of GDP."

Improving ALL education is critical for South Africa's potential to succeed. There are numerous surveys and rankings which reveal SA's complete inadequacy in literacy and numeracy. And in SA this is not restricted to the tertiary phase, but it goes all the way to the foundation phase. I would suggest that this is the single most significant step that SA could take to avoid the middle-income trap.

"4. Get more women into the workforce and raise the retirement age. Aging
populations are a problem in much of Asia. Governments can take steps to reduce
“dependency ratios” by raising the age when workers are eligible for pensions
and encouraging girls to enter university and vocational training."

While South Africa does not have the same problem of an aging population, our population growth rate has shrunk to below 1% p.a. In addition, South Africa has bucked global trends by reducing the age for men to receive a state old age pension from 65 to 60, in line with that for women, putting us in danger of rising dependency ratios. Worryingly, it will be extremely difficult to reverse this move, even in the medium term.