These Middle Income Countries Are Poised To Become Rich

6/02/2014 @ 9:29PM

In the lexicon of the World Bank, countries like China and Brazil are actually considered upper middle income.  After all, it’s a big world, and most of the world is still low income so that brings the middle closer to $10,000 a year.  But a few developing nations in this group will rise up, their society will grow richer, the middle and working class making what is considered poverty wages in the U.S. will be on par with their richer brethren in Europe and Japan.
Sorting through 215 countries tracked by the World Bank, senior research analyst Ehiwario Efeyini of U.S. Trust Bank of America BAC +1.04% Wealth Management did an exercise in top down dirt digging looking for the new one-percenters.  Efeyini considered three attributes while making his call. These attributes included already being a middle to high middle income country; a high level of governance; and improvements to corporate and securities monitoring agencies post-2008 financial crisis.  Those who conformed made the semi-finals.  This drew up a list of 14 names: Brazil, Chile, Malaysia, Mexico, Serbia, Macedonia, Montenegro, Poland, Botswana, Costa Rica, Antigua and Barbuda, Seychelles, Tonga and Mauritius. They included Antigua in their new rich list, but by World Bank standards, the tax haven island nation is already there even with a GDP per capita of just under $13,000.
Efeyini then assessed the potential for each to graduate to high-income by its applicability to any of the five transition models that have helped other nations make this transition in the recent past.  This means that they are either World Trade Organization members or are members of economic organizations with other countries; rich in natural resources and have a focus on indigenous tech rather than tech imports to build out its knowledge-base, high skill, high pay job market.
And the winners are!
High Probability         Medium Probability         No Chance
Mexico                                        Brazil                                         Costa Rica
Chile                                             Serbia                                        Tonga
Malaysia                                     Montenegro
Poland                                         Macedonia
Mauritius                                   Botswana
Seychelles
Countries can rapidly move away from subsistence levels of income simply by using the factors of production more efficiently, but after the low-hanging fruit have been picked it is harder to sustain a high growth rate. At this stage, the conditions need to be created for a more competitive, entrepreneurial, productive and, ultimately, higher-income economy. However, not all economies make the transition, with many falling into the so called “middle income trap”, says Efeyini.
“In a word, governance is the perennial issue that separates emerging from developed and low- or middle- from high-income economies,” Efeyini says.
High income countries are not without their faults.  All have open markets while only a few countries U.S. Trust expects to climb the wealth ladder have tradeable markets.  Mauritius has a stock exchange, but it’s not an easy market for investors to put money to work. For instance, there’s no Mauritius exchange traded fund. Retail investors are locked out and need to find mutual funds that have diversified into Mauritius securities.
Consider this: back in 1996, Mexico had a GDP per capita equal to that of China of today, roughly $6,200.  About 20 years later, Mexico’s GDP per capita is $9,741. Over that period, the MSCI Mexico index rose 518% compared to the S&P 500′s rise of 200.8%. Imagine where Mexico equities will be when the country is producing enough wealth to bring GDP per capita up to Spain’s level of $29,000.
If Efeyini is correct, and these countries increase their wealth in the years ahead, it can only do wonders for assets held in those countries.
According to the World Bank, there are 74 high income nations and territories, including the U.S. Virgin Islands, Hong Kong and both French and Dutch St. Martin in the Caribbean.   All told, high income nations have a population roughly the size of India, 1.3 billion, and run $49.7 trillion of world GDP based on 2012 dollars.  That’s more than double the $22.9 trillion of  wealth produced by middle and low income countries.