Indevelopment economics, themiddle income trap is a situation where a country has developed until GDP per capita has reached a middle level of income, but the country does not develop further and does not attain high income country status.[1] The term was introduced by theWorld Bank in 2007 who defined it as the "middle-income range" countries withgross national product per capita that has remained between $1,000 to $12,000 at constant (2011) prices.[2]
The term was coined by economistsIndermit Gill andHomi Kharas in 2007 when they were working on the ground strategies forEast Asian economics in theWorld Bank report "An East Asian Renaissance: Ideas for Economic Growth".[3][4]
According to the concept, a country in the middle-income trap has lost its competitive edge in the export of manufactured goods due to rising wages, but is unable to keep up with more developed economies in thehigh-value-added market. As a result,newly industrialized economies such asSouth Africa andBrazil have not, for decades, left what the World Bank defines as the 'middle-income range' since their per capitagross national product has remained between $1,000 to $12,000 at constant (2011) prices.[1] They suffer from low investment, slow growth in thesecondary sector of the economy, limited industrial diversification and poor labor market conditions and, increasingly, aging populations.[5]
SociologistSalvatore Babones and political scientistHartmut Elsenhans call the middle-income trap a "political trap" as economic methods to overcome it exist. However, few countries use them because of their political situation. They trace the causes of the trap to the structural problems and the inequalities generated in the early development process. According to them, the wealthy elites then follow their interests by bargaining for a strong currency which shifts the economy's structure towards the consumption of luxury goods and low-wage labor laws, which prevents the rise of mass consumption and mass income. They argue that countries can escape the middle-income trap by investing in physical and human infrastructure, enforcing social policies like higher minimum wages, and having a weak currency that makes exports competitive and stimulates domestic employment.[6][7]
According toAsian Development Bank, avoiding the middle-income trap requires identifying strategies to introduce new processes and find new markets to maintain export growth. It is also essential to increase domestic demand because an expandingmiddle class can use its increasing purchasing power to buy high-quality, innovative products and help drive growth.[8] The biggest challenge is moving from resource-driven growth based oncheap labor and cheap capital to highproductivity andinnovation, which requires investments in infrastructure and education—building a high-quality education system that encourages creativity and supports breakthroughs in science and technology that can be applied back into the economy.[9] Diversifying exports is also considered important to escape the middle income trap.[10]
According toThe Economist basing on data from theWorld Bank, from 1960 to 2022, only 23 economies have been said to have escaped the middle income trap, most notably theFour Asian Tigers ofHong Kong,Singapore,South Korea,[11] andTaiwan,Seychelles inAfrica,Poland inCentral Europe, as well asSaudi Arabia in theMiddle East.[12][13]
Significant debates exist regarding the empirical validity of the "middle-income trap."[14]
Other economists either find that there is no middle income trap[15] or claim thatdebates about a "middle-income trap" appear anachronistic: middle-income countries have exhibited higher growth rates than all others since themid-1980s.[16]
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