The Advanced Middle-Income Challenge and the Future of Bilateral Aid: An Interview with William Cole

February 19, 2020

By InAsia

Development in Asia over the last 50 years has brought unprecedented advances in human welfare, but for middle-income countries seeking to emulate the spectacular rise of the Asian Tigers a generation ago, the transition to upper-income status is far from assured.

Since Gill and Kharas first coined the term middle-income trap in 2007, a growing body of economic research has examined the conditions that cause growth to slow in middle-income countries. Less is known about the political dynamics of middle-income traps and the potential for instability. Meanwhile, the relative prosperity of these countries has called into question the future of bilateral aid.

Later this year, The Asia Foundation and cosponsors the World Bank and Australia’s Department of Foreign Affairs and Trade will host an international conference in Kuala Lumpur to explore the many dimensions of the AMIC challenge. We sat down recently with the Foundation’s William Cole to discuss the Advanced Middle-Income Country Initiative.

InAsia: To start off, Bill, remind us: what are “advanced middle-income countries,” and what is their unique development predicament?

Cole: AMICs are later-stage developing countries, countries with between $4,000 gross national income per capita and about $20,000 GNI per capita. In the Indo-Pacific region, China, Malaysia, Thailand, Sri Lanka, Fiji, and the Maldives have already reached AMIC status. Mongolia, Indonesia, and the Philippines will join this group in the next two to six years, and Vietnam will follow within a decade.

AMICs face a different set of challenges than less-developed countries. At the low end, around 4–5 thousand GNI, you can no longer keep growing just on the basis of cheap labor. You begin to get pinched between less-developed countries with cheaper labor and more-developed countries with greater innovation and higher productivity. The only way forward is to upgrade your economy to attract more innovation-based industries.

“Advanced middle-income countries” have a gross national income per capita of $4,000–$20,000. This definition better predicts a country’s eventual transition to upper-income status than the World Bank’s “upper middle-income” range of $4,035–$12,475.

Fail to do that, and you end up falling back, with slowing growth and rising instability, and that’s what we see across the world in this $4,000 to $20,000 range. In Asia, Thailand is the only AMIC so far that’s experienced serious growth slowdown and rising instability. But if you look across the world—at Latin America, Turkey, Middle East countries like Tunisia—you begin to see that it’s a common pattern: slowing growth and rising instability. Argentina has been an AMIC for 100 years.

The World Bank has a definition of “upper-middle income countries,” UMICs, that runs from about 4,000 to about 12 and a half thousand. But that 12 and a half thousand doesn’t have a lot of meaning outside of the lending practices of the World Bank and some others. We look at 4,000 to 20,000 GNI, because countries that are able to reach that low-end OECD/EU range of around 20,000 GNI, they tend not to fall back.

InAsia: You’ve produced an illustration—it’s an S-curve—that shows the institutional-development demands on AMICs. Where do AMICs have to invest to get out of the middle-income trap?

Cole: In order to get to that initial 4,000–5,000 GNI per capita, all you need is good-enough institutions—the levels of corruption can be relatively high; the infrastructure in general can be fairly poor; you can begin to have these income inequalities and still keep growing. But there’s a point at which you have to move into more productive industries, and that requires comprehensive institutional and policy changes. You’ve got to fix the legal system. You have to upgrade the state’s ability to monitor and regulate. You have to invest heavily in new infrastructure. You have to free up your entrepreneurial class, and you have to be sure that all elements of your society are participating—otherwise, you’re going to be carrying a portion of the population that could be working. You have to build a national innovation system. All of these things are necessary to attract higher productivity, higher technology industries.

In the AMIC phase, developing countries face accelerated demands for institutional reform and development. Those that fail to achieve these reforms can become stuck in the middle-income trap.

InAsia: Now, the four Asian Tigers famously navigated this middle-income transition with flying colors. In light of that track record, isn’t fully developed status something that should just come with time?

Cole: The world has really changed since the period of the Asian Tigers. First of all, export markets are far more complicated. The Tigers faced very little competition from others and wide-open markets in the West. Second, the Tigers were all authoritarian, one-party states. While there are huge advantages to being a democracy, these democratic early-stage AMICs have to deliver sound, long-term policies in an environment of short-term election cycles, rising political competition, and money politics, all exacerbated by social media and advances in technology that make it more difficult to manage the political process. It’s a huge challenge for democracies to get it right, and that’s what we want to concentrate on.

InAsia: What are the stakes in getting it right? How important is this transition to the future of Asia?

Cole: Well, it’s important to the future of Asia, but it’s also important to the future of developed countries. If growth begins to stall and instability begins to rise, you open the door to more illiberal politics. You see more domestic insecurity and instability, and you see greater vulnerability to external meddling. This matters whether we’re talking about these Asian countries as trading partners or as security partners. You can call it the advanced middle-income challenge.

InAsia: What is keeping AMICs from surmounting this challenge? Is it primarily economic obstacles?

Cole: It’s partly economic obstacles, but the problems are primarily political. As it turns out, it’s the deals that you have to make to get things going in the early stage, when you want to get export manufacturing going with people who are willing to compete in a global market. When it’s time for rapid reforms, these entrenched rentiers are going to say, we’re not going to let that happen, and they have the power and the wealth to slow it down. In both Thailand and Malaysia, for example, things were growing, exports were growing up until the mid 90s, 1997, when they started dropping. It was at that precise point that they needed to take another leap forward in reforms, but those powerful entrenched interests wouldn’t let it happen.

InAsia: At a certain level of prosperity, countries go through “aid graduation.” One could argue they don’t really need the aid anymore; the countries no longer like the conditionalities that come with it, and donor countries have a harder time justifying spending on a country that can now “build its own dams,” as it were. So, what opportunities for effective development assistance does The Asia Foundation see among AMICs?

Cole: Well, currently there aren’t any good models for how to get through this phase. In many ways, these countries are developing best practices along the way. What’s needed isn’t a lot of money to pay for things like demonstration projects or capacity building. All of those challenges are handled by the country itself. What AMICs need from us is for us to act as catalysts and facilitators of change. Some of the international financial institutions—the World Bank, the ADB—are beginning to think more in terms of knowledge transfer. One of the best examples is one of our partners, the World Bank Knowledge and Research Hub in Malaysia. Another example is the Australian government’s Department of Foreign Affairs and Trade. DFAT is beginning to recognize that these countries in the AMIC phase still face a lot of reform challenges. The Australians are probably the most advanced in this because there are so many AMICs beginning to emerge in Asia, and that’s Australia’s back yard. The Asia Foundation has been a partner of DFAT in that process, but there need to be others.

InAsia: With the entrenched political interests that are a natural byproduct of the preceding stages of development, who is your client? Is there a position outside of the existing structure of political settlements from which you can be effective, or are you inevitably a partner of one party among the many contending parties in the national picture?

Cole: That’s a good question. It’s always possible to find reformers in government, but then other elements are highly conservative and entrenched, and it becomes very difficult. You can work with NGOs, but NGOs don’t make the decisions, they just influence the decisions. You can work with the private sector, but the private sector has some interests that are collective and others that are special interests of particular firms. You can also work with academics and policy centers. Sometimes they know exactly what needs to be done and the research and the thinking that supports it, but other times they miss the boat.

The answer really is that our client is the host-country population, and our partner that we work with can be all four of these: sometimes reformers in government, sometimes reformers in the private sector, the best of civil society, and think tanks.

Often what the Foundation is doing is convening across these sectors. AMICs are dealing with an immense array of challenges, so they may be missing some critical things. We can bring in the best thinking in the world about particular problems: the problem of automation, problems of climate change, problems in dealing with Belt and Road Initiative loans and avoiding debt traps.

InAsia: What’s the takeaway message for people concerned about development in Asia?

Cole: The critical thing is that AMICs are moving too slowly. There’s a series of trends that will make it much harder in another 10–20 years to keep making progress. These include climate change, rapidly advancing technology, graying populations, and the rise of China. These trends will begin to converge in the next decade or two, increasing the challenges that these countries face and chewing up the attention and the political capital of leadership. At the rate of growth that the Tigers achieved, 8–10 percent, you could get through the AMIC phase in 20 years. But at the 4–6 percent growth rate of today’s AMICs, it’s going to take 50 or 60 years, so the challenges that are coming over the next 10 to 20 years could become a perfect storm.

InAsia: This would be a good time say a few words about the international conference planned for later this year.

Cole: Sure. The Advanced Middle-Income Challenge conference will bring together about 120 policy influencers from AMICs in the Indo-Pacific, from Latin America, and some from Turkey and Eastern Europe. We’ll also have participation from DFAT, the World Bank, the ADB, and various think tanks.

We have three objectives for the conference: to raise awareness of the scale and interconnections of these various challenges; to bring together the best thinking on institutional development and reform, building a national innovation system, those kinds of things; and to jumpstart a dialogue among these AMICs themselves—primarily within the Indo-Pacific, but eventually worldwide.

The future of advanced middle-income countries is absolutely central to the future of development in Asia, and, in fact, to the world, and there still are no clear models for how to solve these problems. The conference is a critical moment when we can bring a lot of people together to think along these lines.

William Cole discusses Advanced Middle-Income Countries:

William Cole is The Asia Foundation’s senior advisor for program strategy. He can be reached at [email protected].

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