development economics Development economics is a branch of economics that deals with economic aspects of the development process in low- and middle- income countries. Its focus is not only on methods of promoting economic development, economic growth and structural c ...

, the middle 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 it does not attain high income country status. The term was introduced by the

World Bank The World Bank is an international financial institution that provides loans and Grant (money), grants to the governments of Least developed countries, low- and Developing country, middle-income countries for the purposes of economic development ...

in 2007 who defined it 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 amount of factor incomes earned by the residents of a country. It is equal to gross domestic product (GDP), plus factor incomes received from n ...

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

Origin of the term

The term was coined by economists Indermit Gill and Homi Kharas in 2007 when they were working on the ground strategies for

East Asia East Asia is a geocultural region of Asia. It includes China, Japan, Mongolia, North Korea, South Korea, and Taiwan, plus two special administrative regions of China, Hong Kong and Macau. The economies of Economy of China, China, Economy of Ja ...

n economics in the

report "An East Asian Renaissance: Ideas for Economic Growth".

Dynamics and avoidance

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. Its Provinces of South Africa, nine provinces are bounded to the south by of coastline that stretches along the Atlantic O ...

and

Brazil Brazil, officially the Federative Republic of Brazil, is the largest country in South America. It is the world's List of countries and dependencies by area, fifth-largest country by area and the List of countries and dependencies by population ...

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 In macroeconomics, the secondary sector of the economy is an economic sector in the three-sector theory that describes the role of manufacturing. It encompasses industries that produce a finished, usable product or are involved in constructi ...

, limited industrial diversification and poor labor market conditions and, increasingly, aging populations. Sociologist Salvatore Babones and political scientist

Hartmut Elsenhans Hartmut Elsenhans (13 October 1941 – 18 January 2024) was a German political scientist. He was an emeritus professor of International Relations at the Universität Leipzig, University of Leipzig. Biography Hartmut Elsenhans was born in Stuttgar ...

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. According to

Asian Development Bank The Asian Development Bank (ADB) is a regional development bank to promote social and economic development in Asia. The bank is headquartered in Metro Manila, Philippines and maintains 31 field offices around the world. The bank was establishe ...

, 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 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. C ...

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

and

innovation Innovation is the practical implementation of ideas that result in the introduction of new goods or service (economics), services or improvement in offering goods or services. ISO TC 279 in the standard ISO 56000:2020 defines innovation as "a n ...

, 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. Diversifying exports is also considered important to escape the middle income trap. According to ''

The Economist ''The Economist'' is a British newspaper published weekly in printed magazine format and daily on Electronic publishing, digital platforms. It publishes stories on topics that include economics, business, geopolitics, technology and culture. M ...

'' basing on data from the

, from 1960 to 2022, only 23 economies have been said to have escaped the middle income trap, most notably the

Four Asian Tigers The Four Asian Tigers ( the Four Asian Dragons or Four Little Dragons in Chinese and Korean) are the developed Asian economies of Hong Kong, Singapore, South Korea, and Taiwan. Between the early 1950s and 1990s, they underwent rapid industrializ ...

Hong Kong Hong Kong)., Legally Hong Kong, China in international treaties and organizations. is a special administrative region of China. With 7.5 million residents in a territory, Hong Kong is the fourth most densely populated region in the wor ...

Singapore Singapore, officially the Republic of Singapore, is an island country and city-state in Southeast Asia. The country's territory comprises one main island, 63 satellite islands and islets, and one outlying islet. It is about one degree ...

South Korea South Korea, officially the Republic of Korea (ROK), is a country in East Asia. It constitutes the southern half of the Korea, Korean Peninsula and borders North Korea along the Korean Demilitarized Zone, with the Yellow Sea to the west and t ...

, and

Taiwan Taiwan, officially the Republic of China (ROC), is a country in East Asia. The main geography of Taiwan, island of Taiwan, also known as ''Formosa'', lies between the East China Sea, East and South China Seas in the northwestern Pacific Ocea ...

Seychelles Seychelles (, ; ), officially the Republic of Seychelles (; Seychellois Creole: ), is an island country and archipelagic state consisting of 155 islands (as per the Constitution) in the Indian Ocean. Its capital and largest city, Victoria, ...

Africa Africa is the world's second-largest and second-most populous continent after Asia. At about 30.3 million km2 (11.7 million square miles) including adjacent islands, it covers 20% of Earth's land area and 6% of its total surfac ...

Poland Poland, officially the Republic of Poland, is a country in Central Europe. It extends from the Baltic Sea in the north to the Sudetes and Carpathian Mountains in the south, bordered by Lithuania and Russia to the northeast, Belarus and Ukrai ...

Central Europe Central Europe is a geographical region of Europe between Eastern Europe, Eastern, Southern Europe, Southern, Western Europe, Western and Northern Europe, Northern Europe. Central Europe is known for its cultural diversity; however, countries in ...

, as well as

Saudi Arabia Saudi Arabia, officially the Kingdom of Saudi Arabia (KSA), is a country in West Asia. Located in the centre of the Middle East, it covers the bulk of the Arabian Peninsula and has a land area of about , making it the List of Asian countries ...

in the

Middle East The Middle East (term originally coined in English language) is a geopolitical region encompassing the Arabian Peninsula, the Levant, Turkey, Egypt, Iran, and Iraq. The term came into widespread usage by the United Kingdom and western Eur ...

Criticism

Significant debates exist regarding the empirical validity of the "middle-income trap." 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 and avoidance

Criticism

See also

References

Further reading