Middle-income countries, home to 6 billion people today, face a race against time. Many of these nations have set ambitious goals for themselves: to reach high-income status within the next two to three decades. Achieving this will not be easy. Since the 1990s, only 34 middle-income economies have managed to accomplish this feat. Meanwhile, the remaining 108, as of the end of 2023, have become stuck in what is known as the “middle-income trap.” Since 1970, the average income per capita in middle-income countries has never exceeded 10% of the per capita income level in the United States.
Sustaining economic growth and overcoming the middle-income trap has become increasingly difficult for developing countries. Under current conditions, developing nations will face even greater challenges in transitioning to high-income status due to rising debt, an aging population, and increasing protectionism in advanced economies. The World Development Report 2024 offers practical solutions to overcome these obstacles.
The World Bank has published a new report highlighting a significant challenge facing many developing nations: the “middle-income trap.” This trap refers to a situation where a country ceases to achieve sustainable economic growth after reaching a certain level of per capita income, hindering its transition to advanced economy status.
The middle-income trap is a term used to describe an economic condition where a country stagnates after achieving a certain level of economic growth and fails to transition to the stage of advanced economies. In other words, the country becomes “stuck” at a middle-income level per capita, unable to make significant strides in its economic and social development.
The middle-income trap represents one of the most significant challenges facing many developing nations on their path toward sustainable development. After these countries achieve noticeable economic growth and transition from low-income to middle-income status, they often find themselves unable to make significant progress in their economic and social development, becoming stuck at a middle-income level per capita. In this article, we will explore the concept of the middle-income trap, its causes, effects, and how to overcome it.
Firstly: Definition of the Middle-Income Trap
According to the latest World Bank classification, the middle-income category includes 108 countries with an annual per capita income ranging between $1,136 and $13,845. These countries play a pivotal role in the global economy, contributing about 40% of global output, and are home to more than 60% of the world’s population living below the poverty line. They also account for over 60% of total global carbon dioxide emissions.
As developing economies grow, their economic structures change, leading to shifts in growth drivers. Generally, economic growth begins to slow when per capita income reaches about 11% of the per capita income in the United States (approximately $8,000 today), which is usually the start of the upper-middle-income phase. This slowdown in growth is a natural consequence of changing production factors.
The World Bank coined the term “middle-income trap” in 2007 to describe this phenomenon. Despite this, the number of economies that have managed to overcome this trap in the past 34 years does not exceed 34.
Studies show a strong relationship between the complexity of a country’s export basket and its income level. However, middle-income countries face increasing challenges that hinder their achievement of sustainable growth. The average growth rate in these countries has significantly declined over the last two decades, due to factors such as geopolitical tensions, protectionism, and climate change. Despite these challenges, increasing export complexity remains a crucial factor for achieving sustainable economic growth in these countries.
Secondly: Causes Behind the Middle-Income Trap
There are several reasons why countries fall into the middle-income trap. Key among them is a lack of innovation, as many middle-income countries lack an environment that encourages innovation, research, and development, limiting their ability to produce high-value-added goods and services. Additionally, reliance on raw material exports makes middle-income countries vulnerable to global market fluctuations and declining commodity prices, coupled with weak infrastructure, which increases production costs and reduces competitiveness. Furthermore, poor economic management due to corruption and misallocation of resources hampers economic growth. Income inequality also negatively affects the business environment.
How Can This Trap Be Avoided?
Countries can escape the middle-income trap by adopting a three-pronged strategy (3i strategy) that enables them to transition to high-income status. This strategy involves three stages (Investment + Infusion + Innovation).
These stages are applied according to the level of development a country is going through. Low-income countries may focus solely on policies designed to increase investment—Stage 1 (Investment). However, once they reach the lower-middle-income bracket, they need to expand their policies to include Stage 2 (Investment + Infusion), which involves importing technological advancements from abroad and integrating them into various sectors of the economy. At the upper-middle-income level, countries should then shift to the final stage, which is Innovation (Investment + Infusion + Innovation). In the innovation stage, these countries will not merely import ideas and global technologies but will lead the way.
In addition to this strategy, middle-income countries should take a set of other measures, such as:
- Encouraging innovation: Creating a conducive environment for innovation by supporting research and development, protecting intellectual property, and simplifying bureaucratic procedures.
- Diversifying the economy: Reducing reliance on raw material exports and focusing on manufacturing and high-value-added services.
- Improving the quality of education and training: Investing in education and training to develop the workforce and increase productivity.
- Combating corruption: Fighting corruption and enhancing transparency and accountability to build trust in government institutions and attract investments.
- Adapting to climate change: Investing in renewable energy and energy efficiency to reduce carbon emissions and adapt to the impacts of climate change.
In conclusion, the middle-income trap is an inability to manage the economic transformation process and move beyond the middle-income category. Progress is not solely about achieving rapid economic growth and catching up with wealthier nations or building institutions. It requires collective action aimed at improving the quality of education, enhancing labor productivity, raising levels of innovation, research, and development, and generally advancing up the global value chains.
