ESCAPING THE MIDDLE-INCOME TRAP: THE IMPACTS OF PARTIAL PRIVATISATION ON INDUSTRIAL UPGRADING

Abstract

According to World Bank estimates, out of 101 countries classified as middle-income in 1960, only 13 had graduated to high-income status by 2008. These countries are increasingly unable to compete with low wage economies in manufactured exports, and with advanced economies in high-skill innovations. why have some countries been able to escape from the MI trap and move into high-income status while others have not yet been able to do so? This paper analyses the middle-income trap in terms of the strategies taken by big businesses. It argues that privatization in middle-income countries – before industrial upgrading and having conditions where incumbent political elites are vulnerable to the political challenge of big businesses – creates a business environment that is more conducive to rent-seeking strategies. Businesses that adopt rent-seeking strategies will be less interested in industrial upgrading; hence countries with a greater proportion of rent-seeking big businesses will achieve less success in industrial upgrading, even with similar state efforts. In making this argument, it proposes a political economic explanation for the strategies taken by big businesses, contributing to an emerging nexus of political science and business studies. In addition, it takes into account the sequence of whether privatization or industrial upgrading came first, providing a fresh angle to the more common cross-sectional analyses. It also proposes a conceptualization of MI countries that takes into account its political context where incumbent political elites are vulnerable to the political challenge of big businesses. It should therefore be of interest to policymakers and scholars studying the political economy of innovation and development.