Middle-Income Trap

Otaviano Canuto, Senior fellow, Policy Center for the New South

The “middle-income trap” has become a broad designation trying to capture the many cases of developing countries that succeeded in evolving from low- to middle-levels of per capita income, but then appeared to stall, losing momentum along the route toward the higher income levels of advanced economies. We need to approach middle-income countries as being in a complex transition phase between accumulation and innovation-based economies. Individual middle-income country experiences of falling into a “trap” may be approached as cases of lack of or failing performance in footing the bill in terms of appropriate policies and institutions.

Otaviano Canuto on Commodity Price Cycles

Otaviano Canuto, Policy Center for the New South

Commodity prices go through extended periods during which prices are well above or below their long-term price trend. The upswing phase in super cycles results from a lag between unexpected, persistent, and upward trends in commodity demand, matched with a typically slow-moving supply. Eventually, as adequate supply becomes available and demand growth slows, the cycle enters a downswing phase.

The latest super-cycle of commodity prices, starting in the mid-90s, reaching a peak by the time of the global financial crisis, and getting to the bottom by 2015, can be seen as associated to the developments of globalization that we have already dealt with in this series. More recently, some analysts have spoken that we might be on the verge of a new cycle, super-cycle or not.

Global Current Account Impalances

Otaviano Canuto, Policy Center for the New South

After peaking in 2007 at around 6% of world GDP, global current-account imbalances declined to 3% of world GDP in the last few years. But they have never left entirely the spotlight, albeit acquiring a different configuration from that which marked the trajectory prior to the global financial crisis (GFC).

This is not because they threaten global financial stability, but mainly because they reveal asymmetries in adjustment and post-GFC recovery between surplus and deficit economies, and because of the risk of sparking waves of trade protectionism. They also reveal the sub-par performance of the global economy in terms of foregone product and employment, i.e. a post-crisis global economic recovery below its potential.

Secular Stagnation and the Big Balance Sheet Economy

Otaviano Canuto, Policy Center for the New South

Private balance sheets have risen relative to GDP in advanced economies in the last decades, in tandem with a trend of decline in long-term real interest rates. Asset-driven macroeconomic cycles, along with a structural trend of rising influence of finance on income growth and distribution, have become part of the landscape. Underlying secular trends of stagnation may also be suggested, making the macroeconomic dynamics dependent on the balance sheet economy getting bigger and bigger.

The Pandemic Will Leave Scars on the Job Market

Policy Center for the New South

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All economies affected by the pandemic have something in common. The rate of vaccination of the population—quite different in different countries—has been the main factor determining the prospects for the resumption of economic activity, as it is a race against local waves of transmission of the virus.

Personal contact-intensive services have borne the economic brunt of the pandemic. To the extent that vaccination enables them to restart, one may even be able to witness some temporary dynamism in the sector because of pent-up demand. However, international tourism will not be included at the outset since vaccination will have to reach an advanced level both at the origin and destination of travelers.

But let us not be deceived: the pandemic will leave scars and countries will not return to where they were. There will be a need for retraining and job reallocation for part of the populations of all countries.

The pandemic is leaving a trail of unemployment, particularly affecting minorities, low-skilled workers and, in Emerging Market and Developing Economies, women, who predominantly occupy jobs in contact-intensive services. Figure 1 displays estimates presented in chapter 4 of the IMF April World Economic Outlook released on March 31.

Figure 1 – Average Unemployment Rate Change in Percentage Points
Figure 1: Average Unemployment Rate Change in Percentage Points. Source: IMF (2021), World Economic Outlook, April (ch. 4)

Before the pandemic, it was already known that ongoing technological changes—automation and digitalization—were posing challenges in terms of the need for training or retraining for part of the workforce. Well then! The response of companies and consumers to the pandemic has deepened these trends and is not expected to be entirely reversed.

A February 2021 report by the McKinsey Global Institute estimated that in eight countries (China, France, Germany, India, Japan, Spain, the United Kingdom and the United States), more than 100 million workers will have to find new, more qualified jobs by 2030. This is 25% more than they had previously projected for developed countries. Figure 2 shows their estimates of shifts in occupations by 2030, with a relative rise in healthcare and science, technology, engineering, and mathematics (STEM), while jobs in food service and customer sales and service roles decline. Less-skilled office support roles would also tend to shrink.

Figure 2 – The mix of occupations may shift by 2030 in the post-COVID-19 scenario
Figure 2: The mix of occupations may shift by 2030 in the post-COVID-19 scenario. Source: McKinsey Global Institute (2021). The future of work after COVID-19, February.

Why? Many of the practices adopted during the pandemic are likely to persist. Where done, consumer surveys indicate that sales via e-commerce, which have grown substantially during the crisis, are not expected to shrink too much. Also, remote work will not be fully reversed, with the hybrid organization of work processes becoming more common. The fact that employees in remote occupations have worked more hours and with greater productivity during the pandemic will encourage continued telework.

McKinsey suggests that changes in “work geography” will have consequences for urban centers and workers employed in services, including restaurants, hotels, shops, and building services—25% of jobs in the United States before the pandemic, according to David Autor and Elisabeth Reynolds (The Nature of Work after the COVID Crisis: Too Few Low-Wage Jobs; July 2020). Indeed, demand for local services in cities has dropped dramatically as remote work has increased, regardless of confinement.

Autor and Reynolds indicated four trends for the world of work after the pandemic. In addition to automation, they highlighted the increase in remote work, the reduction of density of workplaces in urban centers, and business consolidation. The latter is due to the growing dominance of large firms in many sectors, something exacerbated by the bankruptcies of smaller and more vulnerable companies.

All these trends have negative impacts on low-income earners and the distribution of income. They tend to increase the efficiency of processes in the long run, however, leading to harsh consequences in the short and medium terms for workers in personal services, who are generally not present among the highest paid. Workers at the top of the wage pyramid, including professionals in STEM, will see their opportunities grow.

Technological progress is one of the main causes of the increase in income inequality in advanced countries since the 1990s. The acceleration of inequality with the pandemic therefore tends to intensify the challenges. In a way, it can be said that the pandemic is accelerating history, rather than changing it.

The role of public policies will be central in the post-COVID-19 world, both in strengthening social protection—including through unemployment insurance and income transfer programs—and in the requalification of workers. Instead of denying technological advancement, it is better that public authorities help people to adapt, minimizing the resulting scarring.

Otaviano Canuto, based in Washington, D.C, is a senior fellow at the Policy Center for the New South, a nonresident senior fellow at Brookings Institution, an adjunct assistant professor at SIPA – Columbia University, a professorial lecturer of international affairs at the Elliott School of International Affairs – George Washington University, and principal of the Center for Macroeconomics and Development. He is a former vice-president and a former executive director at the World Bank, a former executive director at the International Monetary Fund and a former vice-president at the Inter-American Development Bank. He is also a former deputy minister for international affairs at Brazil’s Ministry of Finance and a former professor of economics at University of São Paulo and University of Campinas, Brazil.

Global Inequality

Otaviano Canuto, Policy Center for the New South

The global trend towards increasing globalization since the 1990s seems to have had two different distributional consequences: income inequality between countries has declined, while economic inequality within countries has increased. However, technological progress has made the biggest contribution to rising income inequality over the past two decades. Domestic policies – fiscal policies, social protection – are the locus where inequality is to be tackled.

China’s Economic Rebalancing

Otaviano Canuto, Policy Center for the New South

China’s growth trajectory in the second decade of the century has been one of a rebalancing toward a new growth pattern, one in which domestic consumption is to rise relative to investments and exports, while a drive toward consolidating local insertion up the ladder of value added in global value chains also takes place. Services should also keep rising relative to manufacturing. Declining GDP growth rates from two digits in previous decades to 6% in 2019 – and likely lower ahead – would be the counterpart to rising wages and domestic mass-consumption, and to the transition toward higher weights of services and high tech.

We point out two major challenges in the rebalancing. First, the transition toward a less investment- and export-dependent growth model has been taking place from a starting point of exceptionally low consumption-to-GDP ratios. Besides high profit-to-wages ratios, low levels of public social protection and spending lead to high household savings. An additional challenge comes from the lack of progress in rebalancing between private- and state-owned enterprises, something that is taking a toll on productivity.

Trade Globalization

Otaviano Canuto, Policy Center for the New South

In the 1990s and 2000s, the world manufacturing production to a substantial extent moved from advanced countries to some developing countries. This was the result of the combination of an increase of the labor supply in the global market economy, trade opening, and technological transformations that allowed for fragmentation of production processes. As a result, foreign trade expanded, and world poverty diminished. Such trade globalization process stabilized in the 2010s and tends to be partially reversed by the new wave of technological changes.

It’s Not Too Late! How to Build Wealth in Your 40s

Did you know that one in three older people only begin to start retirement planning two years ahead of time? You can see how this can make planning for retirement stressful, confusing, and can leave a lot to be desired. However, this also means you’re not alone and that building wealth in your 40s isn’t impossible. 

In fact, it’s never too late to begin building wealth and planning for retirement. However, it’s important that you begin with a strategy that makes sense so that you’re not throwing your hard-earned money away. 

Read on to learn how to build wealth in your 40s with our straightforward guide! 

Create an Emergency Fund

Since retirement is still years away, it’s important that you start an emergency fund sooner rather than later. This is where you’ll set aside money that you’ll use only in times of emergency. For instance, if you lose your job and need to pay rent, experience a major health issue, or need to do immediate repairs on your car or home. 

For emergency funds, it’s recommended to put aside enough money that will cover three to six months of living costs. How much you contribute is your own personal choice. If you have multiple streams of income, you may be able to set aside less. 

Deal With Debt

You next need to deal with any debt. With high-interest rates and a tanking credit score, debt can put a hamper on future plans as well as hinder your ability to put money towards retirement if you’re only paying the minimum each month. High-interest debt such as credit cards, loans, and car payments should be dealt with as soon as possible. 

Your mortgage payments may be able to remain the same if you’re near the final years of the mortgage. However, it may be helpful to make extra payments towards your mortgage in the early years in order to reduce your interest payments later on. 

Retirement Plans

Once you have an ample emergency fund and you’ve handled your debt, it’s time to focus on your retirement plans. Regardless of how you plan to spend your retirement, it’s recommended to maximise your employer contributions. You may also want to consider voluntary contributions because you’ll be able to get tax relief on your contributions up to the limit of £40,000.

If you’ve already made the maximum allowable contributions and are still willing and able to pay more, you still have options with the carry forward allowance. This allows you to use any unused allowances from the previous three years in the current year, as long as you were part of a pension scheme during those years. 

If you’re not able to contribute the maximum to your retirement plan currently, we still recommend using a retirement calculator. This helps you visualise your retirement in concrete terms. If you have trouble parting with your income, this may make it easier–you’ll be able to visualise how you’ll be living in 20 or so years! 

Limit Risk

Many people feel the need to take on some investment risk because they want to make up for the lost time. This is because the potential returns are higher, though those returns are far less guaranteed. However, it’s important to limit your risk, as you have far less time to recover from losses. 

A conservative level of risk would be to invest a percentage equivalent to your age in bonds, while the rest goes into stock. However, it’s important to speak with financial planners or accountants before you even begin making investments. They’ll be able to help you decide on how much to invest as well as the risk you’re able to handle. 

Life Insurance

If you don’t have life insurance now, it’s important to get sooner rather than later, as the policies are more affordable the younger you are. Many people have life insurance policies with their workplaces, but if you started with your company years ago, it may be worth speaking with the human resource staff about upgrading your package or policy or add second life insurance.

It’s also important that you add any additional family members or children to your policy. Last but not least, if you don’t go to a doctor every year, you may want to consider no exam policies that aren’t as stringent when it comes to yearly check-ups.

Set Your Priorities

When you start saving for retirement in your 40s, it may feel selfish if you have children or other dependent family members. As your retirement account begins to grow, you may feel the urge to take out some in order to send your children on vacation or help them more with college. However, it’s important to remember that your children still have their lives ahead of them. 

As you get older, it’s important that you’re able to help yourself and your spouse. By saving for retirement and making the right financial decisions, your children won’t have to worry about you as you grow older! 

How to Build Wealth in Your 40s: Start Planning Today 

It’s never too late to start building your wealth or plan for retirement, even when you’re in your 40s. When it comes to financial planning tips, the best takeaway is to start planning your strategy today. For instance, if you don’t have an emergency fund, we recommend starting with this first. 

If you lose your job or you need to make sudden medical payments, you’ll be taken care of with an emergency fund to dip into. Next, we recommend taking care of any high-interest debt that impacts your ability to contribute towards your pension. 

Maximise your contributions as much as possible, and try to visualise your retirement with the help of a calculator. Now that you know how to build wealth in your 40s, you’ll be well on your way to a comfortable retirement. 

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