Will income inequality cause a middle-income trap in Asia? Bruegel Working Paper 2013/06, 10 October 2013

The Asian economy is expected to realise favourable growth during the first half of this century, but there is no guarantee. There is a discussion about a ‘middle-income trap’, which refers to a country that has realised rapid growth to become a middle-income country but is unable to grow further. A middle-income trap could occur not only if there is a delay in shifting the economy toward a productivity-driven structure, but also if there is a worsening of income distribution.We consider this in line with the theories of development economics and through a quantitative analysis. The relationship between income inequality and the trap can be explained by the Kuznets hypothesis and the basic-needs approach. Our quantitative analysis supports the Kuznets hypothesis, and indicates that,although a low-income country can accelerate its economic growth with the worsening of income distribution as an engine, a middle income country would experience a decreasing growth rate if it fails to narrow the income gap between the top and bottom income groups. The results also show that the basic-needs approach is also applicable in practice, and imply that the improvement of access to secondary education is important. A sensitivity analysis for three Asian upper-middle-income countries(China, Malaysia and Thailand) also shows that the situation related to a middle-income trap is worse than average in China and Malaysia. These two countries, according to the result of the sensitivity analysis, should urgently improve access to secondary education and should implement income redistribution measures to develop high-tech industries, before their demographic dividends expire. Income redistribution includes the narrowing of rural urban income disparities, benefits to low-income individuals, direct income transfers, vouchers or free provision of education and health-care, and so on, but none of these are simple to implement.

Global and regional financial safety nets: lessons from Europe and Asia. Bruegel Working Paper 2013/06 [07?], November 2013

The Asian financial crisis (1997) and the European crisis (2009) have both contributed to the development and deepening of regional safety net arrangements. This paper analyses the relationships between global and regional financial safety nets, and uncovers the potential tensions and operational challenges associated with the involvement of several institutional players with potentially different interests, analytical biases and governance. The G20 has acknowledged the importance of these new players for the international monetary system, but the principles for cooperation between the IMF and regional financing arrangements are far too broad and ad hoc to contribute to a coherent and effective architecture. This paper tries to establish some lessons learned from the Asian financial crisis in 1997 and the current European crisis in order to enhance the effectiveness, efficiency, equity and governance of these arrangements. In particular, it proposes changes to the IMF articles of agreement to allow for lending or guarantees to regional arrangements directly and it establishes some key desirable features and practices of regional mechanisms that should be adopted everywhere to ensure some global consistency, particularly in the field of macroeconomic surveillance, programme design and conditionality.