How an Economic Growth Path Can Lead to High Income

Called one of Latin America’s poorest countries during the 1960s, now the Dominican Republic’s 50-year growth path is taking it straight toward the United States.

As a result, the middle income trap might not ensnare the Dominican Republic.

The Dominican Republic’s Economy

While we certainly cannot be certain of what will happen during the next 40 years, we can look back.

According to the IMF, the Dominican Republic’s “convergence velocity” has accelerated from a 3 percent average per decade during the past 50 years to an 8 percent average more recently. As a result, by 2063, the IMF says that they, having become a high income country, will converge with the United States.

They attribute the Dominican Republic’s recent economic growth to services, tourism, and expansionary fiscal policy. They tell us that their economy has moved to more of a balance among agriculture, manufacturing, and services.

Also, the Dominican Republic’s exports have become more diversified:

Our Bottom Line: The Middle Income Trap

The World Bank first told us about a middle income trap during 2006. Most simply defined, the middle income trap explained why an emerging economy might never emerge. Countries that are ensnared by a middle income trap are unable to move up to the World Bank’s high income group of nations.

By the numbers, the lower middle income countries have a per capita GNI (gross national income) that ranges from $1,036 to $4,045. At the next step on the ladder, middle income is from $4,046 to $12,535. Meanwhile, with the World Bank’s threshold for high income at $13,845, at $9,050, the Dominican Republic is getting closer.

As countries that made the leap from middle to high income, South Korea took 23 years, Taiwan, 27, and Singapore 29. But it can be tough. In the beginning it’s relatively easy to shift from the farm to the factory. A country can produce textiles or shoes or clothing, keep wages low, and exports cheap. Then though rising wages, insufficient innovation, and inequality can constrain the growth momentum.

According to the IMF, the Dominican Republic is poised to make the leap.

My sources and more: Thanks to Marginal Revolution for alerting me to the Dominican Republic’s convergence with the U.S. Next, for more detail, this IMF and this World Bank report had the details as did this list of their stats.. I also hope you will take a look at our econlife post on China and the middle income trap. In addition, my statistics are from Macrotrends and the OEC.

Please note that today’s “Bottom Line” includes several sentences from past econlife posts.