Middle income trap

In development economics, 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.{{cite web|author=Graphic detail Charts, maps and infographics |url=https://www.economist.com/blogs/dailychart/2011/12/asias-middle-income-trap/ |title=Asias Middle Income Trap |publisher=Economist.com |date=2011-12-22 |access-date=2014-08-11}} The term was introduced by the World Bank in 2007 who defined it as the "middle-income range" countries with gross national product per capita that has remained between $1,000 to $12,000 at constant (2011) prices.{{Cite web|title=The middle-income trap turns ten|url=https://documents.worldbank.org/en/publication/documents-reports/documentdetail/291521468179640202/The-middle-income-trap-turns-ten|access-date=9 March 2021|website=World Bank|date=26 August 2015|language=en}}

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 Asian economics in the World Bank report "An East Asian Renaissance: Ideas for Economic Growth".{{Citation |last1=Zhou |first1=Shaojie |date=2021 |work=China: Surpassing the "Middle Income Trap" |place=Singapore |publisher=Palgrave Macmillan |language=en |doi=10.1007/978-981-15-6540-3_1 |isbn=978-981-15-6540-3 |last2=Hu |first2=Angang|title=What is the "Middle Income Trap"? |series=Contemporary China Studies |pages=1–32 |s2cid=225018997 |doi-access=free }}{{Cite web |last1=Bulman |first1=David |last2=Eden |first2=Maya |last3=Nguyen |first3=Ha |title=Transitioning From Low-Income Growth To High-Income Growth: Is There A Middle-Income Trap? |url=https://www.adb.org/sites/default/files/publication/224601/adbi-wp646.pdf |access-date=December 7, 2023 |website=Asian Development Bank Institute}}

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 and Brazil have not, for decades, left what the World Bank defines as the 'middle-income range' since their per capita gross national product 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.{{cite web |url=http://www.adb.org/news/op-ed/indonesia-risks-falling-middle-income-trap |title=Indonesia risks falling into the Middle Income trap |publisher=Adb.org |date=2012-03-27 |access-date=2014-08-11 |url-status=dead |archive-url=https://web.archive.org/web/20140730221825/http://www.adb.org/news/op-ed/indonesia-risks-falling-middle-income-trap |archive-date=2014-07-30 }}

Sociologist Salvatore Babones and Political scientist Hartmut 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.{{Cite journal |last=Babones |first=Salvatore |date=2015-12-01 |title=Escaping the middle income trap |url=https://ses.library.usyd.edu.au/handle/2123/14853 |archive-url= |access-date=2023-05-05 |website=Sydney eScholarship repository |agency=}}{{Cite book |last1=Babones |first1=Salvatore |url=https://www.sup.org/books/title/?id=27762 |title=BRICS or Bust?: Escaping the Middle-Income Trap |last2=Elsenhans |first2=Hartmut |date=2017 |publisher=Stanford University Press |isbn=978-0-8047-9989-8 |location=Stanford}}

According to Asian 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 expanding middle class can use its increasing purchasing power to buy high-quality, innovative products and help drive growth.{{cite web|url=http://www.adb.org/news/speeches/seminar-asia-2050 |title=Seminar on Asia 2050 |publisher=Adb.org |date=2011-10-18 |access-date=2014-08-11}} The biggest challenge is moving from resource-driven growth based on cheap labor and cheap capital to high productivity and innovation, 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.{{cite book|url=http://www.adb.org/publications/asia-2050-realizing-asian-century |title=Asia 2050: Realizing the Asian Century |publisher=Adb.org |date=2013-05-09 |access-date=2014-08-11 |last1=Bank |first1=Asian Development }} Diversifying exports is also considered important to escape the middle income trap.{{Cite web |last=Shek |first=Colin |date=23 May 2019 |title=Aiming for the Top: Can China Escape the Middle Income Trap? |url=https://knowledge.ckgsb.edu.cn/2019/05/23/chinese-economy/china-middle-income-trap/ |website=Cheung Kong Graduate School of Business (CKGSB)}}

According to The Economist basing on data from the World Bank, from 1960 to 2022, only 23 economies have been said to have escaped the middle income trap, most notably the Four Asian Tigers of Hong Kong, Singapore, South Korea,{{cite web | url=https://podcasts.google.com/feed/aHR0cHM6Ly9wb2Rlay5uZXQvaW5kZXgucGhwL3plaWhhbi1vbi1nZW9wb2xpdGljcy9mZWVk/episode/aHR0cHM6Ly9tZWRpYXMucG9kZWsubmV0LzU2OS8wYzRmYjQwMGVkOWJhZDE2OWY3MDg2ODRjYTljOWM3ZmRjZWJmY2E1Lm1wMw?sa=X&ved=0CCoQz4EHahcKEwjA_vPt1PaEAxUAAAAAHQAAAAAQbg | title=Google Podcasts }} and Taiwan, Seychelles in Africa, Poland in Central Europe, as well as Saudi Arabia in the Middle East.{{Cite news |title=Which countries have escaped the middle-income trap? |newspaper=The Economist |url=https://www.economist.com/finance-and-economics/2023/03/30/which-countries-have-escaped-the-middle-income-trap |access-date=2023-12-15 |issn=0013-0613}}{{Cite web |date=2023-03-30 |title=Which countries have escaped the middle-income trap? |url=https://finance.yahoo.com/news/countries-escaped-middle-income-trap-095744050.html |access-date=2023-12-19 |website=Yahoo Finance |language=en-US}}

Criticism

Significant debates exist regarding the empirical validity of the "middle-income trap."{{Cite book |last=Roach |first=Stephen S. |url= |title=Accidental Conflict: America, China, and the Clash of False Narratives |date=2022 |publisher=Yale University Press |isbn=978-0-300-26901-7 |location=New Haven |pages=91 |oclc=1347023475 |author-link=Stephen S. Roach}}

Other economists either find that there is no middle income trap{{cite web |first1=David|last1= Bulman|first2=Maya|last2=Eden|first3=Ha|last3=Nguen|url=https://www.adb.org/sites/default/files/publication/224601/adbi-wp646.pdf |title=Transitioning from low-income growth to high-income growth: is there a middle-income trap?|website=Asian Development Bank}} 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.{{cite journal |first1=Dev|last1=Patel|first2=Justin|last2=Sandefur|first3=Arvind|last3=Subramanian|url=https://www.cgdev.org/publication/new-era-unconditional-convergence|title=The New Era of Unconditional Convergence|website=Center For Global Development|date=23 February 2021 }}

Middle income trap

Origin of the term

Dynamics and avoidance

Criticism

See also

References

Further reading