What is the middle-income trap?

Reports show that economic reforms in extreme poverty countries have helped to narrow down the gap with more developed countries. However, another problem is emerging, known as the middle-income trap, which is slowing and sometimes preventing further growth in these countries. What is it and what causes it? Read the article and find out.

What is the middle-income trap?

The concept of the middle-income trap describes a situation where a selected country has experienced significant progress and economic growth but struggles to achieve the status of a highly developed country. This is particularly evident when the middle class, despite development, is unable to achieve higher incomes.

Causes of the middle-income trap

The most common reasons for the emergence of the middle-income trap include:

• The reluctance of certain groups in the country to make political and economic changes – both politicians and citizens,
• The field of research and development is underfunded or uses outdated technology,
• Declining birth rate,
• Fewer and fewer economically active people (e.g. due to an aging population),
• Speculative bubbles in the market,
• Corruption in politics and business transactions, which also has a negative impact on economic growth,
• The uneven development of individual areas (e.g. concentration on one region only).

High costs of ongoing changes in the country create additional barriers.

GNI per capita

The economic indicator that allows us to determine which countries are in the middle-income trap is the value of gross national income per capita (GNI per capita). According to the World Bank Group’s guidelines for 2022-2023, the following is approved:

• Low-income economy – per capita income of up to $1,085 in 2021,
• Lower-middle income economy – per capita income between $1,088 and $4,255 in 2021,
• Upper-middle income economy – per capita income between $4,256 and $13,205 in 2021,
• High-income economy – per capita income of $12,206 and above.

How to avoid the middle-income trap?

The way to maintain an upward trend in per capita income and economic development is generally to keep a balance between supply and demand. Depending on the country, there may be specific political, social, economic, and cultural conditions, so it is impossible to develop a universal strategy. However, we can distinguish a few measures that may prove effective, and these are:

• Developing a knowledge-based economy,
• Simplifying bureaucracy, which will affect the efficiency of emerging businesses,
• Developing technical, social, telecommunication, and transportation infrastructure,
• Facilitating citizens’ access to knowledge, innovation, and technology,
• Developing a detailed strategy and action plan to achieve high-income country status,
• Focusing on the export market and trade expansion,
• Investing in education that will lead to innovation development,
• Reducing government’s interference in economic processes,
• Shaping international integration with other countries.

Barriers to escape from the middle-income trap

Achieving the status of a developed country is not an easy task, and there are many factors that prevent this goal from being achieved. These may include:

• Lack of investments,
• Poor asset management,
• Difficulty in saving,
• Consumer debts – debts held by individuals in the form of loans (mortgages, student loans, etc.), credit card debts. These prevent people from saving and investing,
• Political instability,
• Economic growth slowdown,
• Escalation of social conflicts due to conflicting interests of different social groups,
• Lack of social mobility – difficulty in moving up the hierarchy, changing social positions.

Summary

Fighting the middle-income trap is crucial to improving the well-being of society in a given country, so it makes sense to adopt policies that promote economic growth and development. This is not an easy task, as it often requires fundamental changes in terms of modernizing the economic and political systems. A good way to do this is to observe other countries’ strategies, evaluate their effectiveness, and, if possible, implement them at home.

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