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The middle income trap is an economic development situation in which a country that attains a certain income (due to given advantages) gets stuck at that level.^[1] The term was introduced by the World Bank in 2006 and is defined by them 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.^[2]

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".^[3]

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 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.^[1] 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.^[4]

Sociologist Salvatore Babones and Political scientist Hartmut Elsenhans call the middle-income trap a "political trap" as ways to overcome it exists. 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. ^[5]^[6]

From 1960 to 2010, only 15 out of 101 middle-income economies escaped the middle income trap, including Japan and the Four Asian Tigers: Hong Kong, Singapore, South Korea and Taiwan.^[7]

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 can use its increasing purchasing power to buy high-quality, innovative products and help drive growth.^[8]

The biggest challenge is to move from resource-driven growth based on cheap labor and cheap capital to growth based on high productivity and innovation. 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.^[9] Diversifying exports is also considered important to escape the middle income trap.^[7]

Criticism

Significant debates exist regarding the empirical validity of the “middle-income trap.”^[10]

Other economists either find that there is no middle income trap ^[11] 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.^[12]

References

^ ^a ^b Graphic detail Charts, maps and infographics (2011-12-22). "Asias Middle Income Trap". Economist.com. Retrieved 2014-08-11.
^ "The middle-income trap turns ten". World Bank. 26 August 2015. Retrieved 9 March 2021.
^ [https://openknowledge.worldbank.org/bitstream/handle/10986/6798/399860REPLACEM1601OFFICAL0USE0ONLY1.pdf?sequence=1&isAllowed=y, page 17
^ "Indonesia risks falling into the Middle Income trap". Adb.org. 2012-03-27. Archived from the original on 2014-07-30. Retrieved 2014-08-11.
^ Babones, Salvatore (2015-12-01). "Escaping the middle-income trap". {{cite journal}}: Cite journal requires |journal= (help)
^ Babones, Salvatore; Elsenhans, Hartmut (2017). BRICS or Bust?: Escaping the Middle-Income Trap. Stanford: Stanford University Press. ISBN 978-0-8047-9989-8.
^ ^a ^b Shek, Colin (23 May 2019). "Aiming for the Top: Can China Escape the Middle Income Trap?". Cheung Kong Graduate School of Business (CKGSB).{{cite web}}: CS1 maint: url-status (link)
^ "Seminar on Asia 2050". Adb.org. 2011-10-18. Retrieved 2014-08-11.
^ Asia 2050: Realizing the Asian Century. Adb.org. 2013-05-09. Retrieved 2014-08-11.
^ Roach, Stephen S. (2022). Accidental Conflict: America, China, and the Clash of False Narratives. New Haven: Yale University Press. p. 91. ISBN 978-0-300-26901-7. OCLC 1347023475.
^ Bulman, David; Eden, Maya; Nguen, Ha. "Transitioning from low-income growth to high-income growth: is there a middle-income trap?" (PDF). Asian Development Bank.
^ Patel, Dev; Sandefur, Justin; Subramanian, Arvind. "The New Era of Unconditional Convergence". Center For Global Development.

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 == 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 [[Value chain|high-value-added]] market. As a result, [[Newly industrialized country|newly industrialized economies]] such as [[Economy of South Africa |South Africa]] and [[Economy of Brazil | 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.<ref name="economist" /> 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.<ref>{{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 }}</ref>
+Sociologist [[Salvatore Babones]] and Political scientist [[Hartmut Elsenhans]] call the middle-income trap a "political trap" as ways to overcome it exists. 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. <ref>{{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 |language=en}}</ref><ref>{{Cite book |last=Babones |first=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}}</ref>
 From 1960 to 2010, only 15 out of 101 middle-income economies escaped the middle income trap, including [[Japan]] and the [[Four Asian Tigers]]: [[Hong Kong]], [[Singapore]], [[South Korea]] and [[Taiwan]].<ref name=":0">{{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/|url-status=live|website=Cheung Kong Graduate School of Business (CKGSB)}}</ref>