Significance of innovation policies: Lessons for countries caught in the middle income trap

Abstract

Over the past 50 years, low-income countries have increased their national incomes by shifting their production from the agricultural sector in which the efficiency of labor and capital is low to the manufacturing sector in which efficiency is higher. However, underemployment in the rural regions has decreased in parallel to the attainment of the middle-income level by these countries, wages have increased, and the level of international competitiveness has decreased. The countries which could not increase the level of productivity through innovation could not succeed in passing from the middle-income to the high-income level. Therefore, these countries have fallen into the middle-income trap because of their failure to compete with the developed countries regarding innovative products, which require a high level of skill, and with the low-income countries where the labor cost is low regarding labor-intensive products. The purpose of this study is to discuss the policy alternatives required to be followed by developing countries and to expose the inadequacy of the neoclassic approach on which the industrialization strategy is based in the light of the experiences of the countries that have discarded the middle-income trap. The eastern Asian countries that have managed to exceed this middle-income trap have based that achievement on effective industrial and technological policies. For that reason, an examination of the experience of especially Asian countries is very important from the point of view of the countries that intend to get rid of the middle-income trap.