The middle income trap is an

economic development In the economics study of the public sector, economic and social development is the process by which the economic well-being and quality of life of a nation, region, local community, or an individual are improved according to targeted goals and ...

situation in which a country that attains a certain income (due to given advantages) gets stuck at that level. The term was introduced by the

World Bank The World Bank is an international financial institution that provides loans and grants to the governments of low- and middle-income countries for the purpose of pursuing capital projects. The World Bank is the collective name for the Inte ...

in 2006 and is defined by them as the 'middle-income range' countries with

gross national product The gross national income (GNI), previously known as gross national product (GNP), is the total domestic and foreign output claimed by residents of a country, consisting of gross domestic product (GDP), plus factor incomes earned by foreign ...

per capita that has remained between $1,000 to $12,000 at constant (2011) prices.

Origin of the term

Economists Indermit Gill and Homi Kharas coined the term at World Bank in 2006 when they were working in the ground strategies for Eastern Asian economics. MIT is a new phenomenon and was first mentioned in 2007 in Gill and Kharas's World Bank report "An East Asian Renaissance: Ideas for Economic Growth".

Dynamics

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 the high-value-added market. As a result, newly industrialized economies such as

South Africa South Africa, officially the Republic of South Africa (RSA), is the Southern Africa, southernmost country in Africa. It is bounded to the south by of coastline that stretch along the Atlantic Ocean, South Atlantic and Indian Oceans; to the ...

and Brazil have not, for decades, left what the World Bank defines as the 'middle-income range' since their per capita

has remained between $1,000 to $12,000 at constant (2011) prices. They suffer from low investment, slow growth in the secondary sector of the economy, limited industrial diversification and poor labor market conditions and increasingly, aging populations. From 1960 to 2010, only 15 out of 101 middle-income economies escaped the middle income trap, including

Hong Kong Hong Kong ( (US) or (UK); , ), officially the Hong Kong Special Administrative Region of the People's Republic of China (abbr. Hong Kong SAR or HKSAR), is a city and special administrative region of China on the eastern Pearl River Delta i ...

, Japan,

Singapore Singapore (), officially the Republic of Singapore, is a sovereign island country and city-state in maritime Southeast Asia. It lies about one degree of latitude () north of the equator, off the southern tip of the Malay Peninsula, bor ...

South Korea South Korea, officially the Republic of Korea (ROK), is a country in East Asia, constituting the southern part of the Korean Peninsula and sharing a land border with North Korea. Its western border is formed by the Yellow Sea, while its eas ...

and

Taiwan Taiwan, officially the Republic of China (ROC), is a country in East Asia, at the junction of the East and South China Seas in the northwestern Pacific Ocean, with the People's Republic of China (PRC) to the northwest, Japan to the nort ...

Avoidance

Avoiding the middle income trap requires identifying strategies to introduce new processes and find new markets to maintain export growth. It is also important to increase domestic demand, because an expanding

middle class The middle class refers to a class of people in the middle of a social hierarchy, often defined by occupation, income, education, or social status. The term has historically been associated with modernity, capitalism and political debate. Com ...

can use its increasing purchasing power to buy high-quality, innovative products and help drive growth. The biggest challenge is to move from resource-driven growth based on cheap labor and cheap capital to growth based on high

productivity Productivity is the efficiency of production of goods or services expressed by some measure. Measurements of productivity are often expressed as a ratio of an aggregate output to a single input or an aggregate input used in a production proces ...

and

innovation Innovation is the practical implementation of ideas that result in the introduction of new goods or services or improvement in offering goods or services. ISO TC 279 in the standard ISO 56000:2020 defines innovation as "a new or changed entit ...

. This 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. Diversifying exports is also considered important to escape the middle income trap.

Criticism

Other economists either find that there is no middle income trap or claim that debates about a “middle-income trap” appear anachronistic: middle-income countries have exhibited higher growth rates than all others since the mid-1980s.

Origin of the term

Dynamics

Avoidance

Criticism

See also

References

Further reading