The Proportion of People in Low Income Nations Will Probably Drop Two Thirds 1998 to 2008, And Decline Rapidly After That

By Richard Bruce BA, MA, and PhC in Economics

If 2005 trends continue three of the five most populous low income nations, India, Pakistan, and Vietnam, will rise to lower middle income status within the next five years.

Beyond that, there are several reasons to expect many other low income countries to rise to lower middle income status in coming decades.

First, as China, India, Pakistan, Vietnam, and other formerly low income countries move up to more sophisticated industrial goods, low skill labor intensive industries will have to search for new sources of cheap labor. Those low skill labor intensive export industries were key to the rapid growth of the Japan, Hong Kong, Singapore, Taiwan, South Korea, and China. They will probably foster rapid growth in the remaining low income countries.

Up to this point many of those countries could not compete with China and its lethal combination of low wages and relatively high efficiency, but as China's wages rise with its per capita GNP they will be able to take those industries with lower wages.

Already low level industries are fleeing the coastal areas of China. While China as a whole is in the middle of the lower middle income range, some coastal areas are much farther advanced. They are effectively in the upper middle income range.

Some of those industries will simply move into China's interior, but because of China's rapid growth the wages in the interior may soon be too high to compete in the lower level labor intensive industries.

The remaining low income countries will enjoy an advantage that China and other low income countries did not have. While there used to be four or more pairs of hands in the low income countries anxious to sew t-shirts for every back in the high income countries that needed to wear a t-shirt, in the next decade there will probably be a one to one ratio. With a much smaller supply relative to the demand wages will tend to rise for the workers and export earnings will rise for the low income countries.

The increased wages will be good from a humanitarian point of view, but in addition to that the increased export earnings will mean that more capital equipment can be imported., which will further increase economic growth.

Looking further into the future the percentage of population living in high income countries will rise which will increase the economic growth of the low income economies even more.

Some low income countries like North Korea have governments that are so bad that they will keep the new industry out. Other low income countries will be too unstable. But the very fact that the workers in these countries will not be competing will tend to encourage the even more rapid growth of those economies where the governments do have their act half way together. The government of North Korea is bad for its people, for South Korea, Japan, and the United States, but Bangladesh may benefit because North Korea is not setting up factories that make underwear.

But as the more reasonable, open, and stable governments enjoy thriving rapidly growing economies there will be increasing pressure on the remaining governments to get their act together. In the past even those countries that had their act together often did not have impressive growth. This allowed unreasonable men to take over those countries. More and more good behavior will be rewarded and therefore is likely to be more common.

In addition to light industry, the Internet is proving another route out of low income status. Even India is having difficulty finding all the highly talented, intelligent people that the software and other high tech industries want. As a portion of each country's population is likely to have the abilities needed to compete in these high tech fields it seem likely that most poor countries can set up an Internet center where talented, intelligent people can work and bring in foreign exchange. Combined with natural resource exports, and light industry this income may well give them the foreign exchange they need to buy the capital goods that will raise their economies to lower middle income status.

Finally, the rapid growth of the Third World is driving up natural resource prices which will help some low income countries to move out of the low income category.

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