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Since the 1990s, just 34 out of 142 middle-income countries have successfully reached high-income status.
This year, the World Bank published its World Development Report 2024. It describes what developing economies must do to avoid the ‘middle-income trap’: a term that was first coined in 2007 in another World Bank report that identified the need to regenerate economic growth in middle-income countries in East Asia, Latin America, and the Middle East . Now, the term is applied to over 100 countries globally, including major economies such as China, Brazil and South Africa.
The 2024 Report suggests that these countries have slow growth because they are continuing to utilise strategies that lifted them from low-income status to middle-income status. These strategies, which primarily depend on capital accumulation, have little to no impact on economic growth once a country has reached middle-income level. The report highlights that if capital endowments were the only difference between middle-income and high-income countries, the GDP per capita of the average middle-income country would be three-quarters of that of the USA. Instead, median GDP per capita of middle-income countries have remained below 10 percent of the USA’s since 1970. The report suggests the need for infusion of foreign technologies and ideas and more innovation to regenerate economic growth in ‘trapped’ middle-income countries.
It also blames unfortunate global circumstances. The report suggests that the world is at a ‘historic crossroads’, pointing to heightened geopolitical tensions, rising populism, government debt, and climate change, which restrict foreign trade and investment, government action, and increase financial costs. As a result, economic growth is constricted, and development in middle-income countries is harder than ever.
It could be argued, however, that this ‘middle-income trap’ is a myth. The idea of a ‘trap’ has been researched, analysed and debated for decades, with the criteria for classing a middle-income country as ‘trapped’ constantly varying and experts often coming to opposing conclusions.
In the 2024 World Bank Development Report, a middle-income country was classed as ‘trapped’ if it didn’t change from middle-income to high-income in the sample time-period – 1990 to present. This doesn’t consider if countries just had steady growth throughout this time, shifting from lower-middle-income country to upper-middle-income country, such as in the case of Colombia, which ranged from a GDP per capita of 1467.5USD in 2019 to 6,979.7USD in 2023, and Turkey, which climbed from 2773.3USD in 1990 to 12,985.8USD in 2023. Both of these countries remained as middle-income countries, but their steady growth suggests their economic development is not trapped at all.
The report also doesn’t consider if economies experienced crises that set them back. Kazakhstan’s economy suffered greatly during the 2008 global financial crisis, and between 2013 and 2016 when there was a global oil price shock. The country is still developing rapidly now, suggesting that economic growth there is not trapped, it will just take longer for the country to reach high income status.
The 2024 World Bank Development Report is only one example of analysis of the ‘middle-income trap’. Experts have been debating and researching the reasons for the trap for decades, and many cases come to varied conclusions. Felipe, Kumar and Abdon (2012) don’t blame reliance on capital accumulation, but a lack of a diverse export basket. Academics like Acemoglu suggests that rather than focusing on the infusion of foreign technologies, the selection of high-skill managers and firms is more important.
Perhaps it is more important to diagnose the cause of low economic growth in each middle-income country individually, rather than grouping all ‘trapped’ countries together. For example, for Kazakhstan to reach the status of a high-income country, it should start to move away from reliance on oil, which is vulnerable to dramatic changes in price. China needs to focus on improving domestic demand to improve job markets and increase household consumption. This will reveal whether there really is one ‘trap’ that all middle-income countries fall into due to the same reason, or if only some are experiencing slow growth, and for different reasons.
Ultimately, what is important is that policymakers in middle-income countries are informed and make decisions that are most effective at increasing economic growth. According to the World Bank, middle-income countries are home to 62% of the world’s poor population. For this poverty to be eradicated, economic growth must occur, and any relevant research is going to help with reaching this goal.
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