WASHINGTON, D.C. – Middle-income countries are in a race against time to break through the so-called “middle-income trap” and achieve high-income status. This critical challenge was the focus of the latest World Bank Group’s World Development Report, as discussed in the #ExpertAnswers series with Somik Lall, Senior Advisor to the Chief Economist at the World Bank.
The Middle-Income Trap
Since the 1990s, many countries have managed to rise from low-income levels and eradicate extreme poverty, creating the impression that the past three decades have been successful for development. However, this perception is based on low expectations from a time when more than two-thirds of the world’s population lived on less than a dollar a day. By the end of 2023, 108 countries, including China, Brazil, and South Africa, were classified as middle-income, housing 6 billion people—75% of the global population. These nations generate 40% of global GDP and account for more than 60% of carbon emissions, with two-thirds of their populations living in extreme poverty.
Understanding the Challenge
Somik Lall highlighted that despite optimism in government halls, the transition from middle-income to high-income status has been elusive for most countries. Over the last 50 years, the median income of middle-income countries has remained below a tenth of the United States’ median income. The economic structures of growing economies change, necessitating different policies and institutions, which many countries struggle to implement.
Growth Strategies: The Three I’s
The World Development Report outlines three growth strategies to help middle-income countries escape the trap:
Investment: Initially, countries focus on investing in private capital, education, and infrastructure.
Infusion: As investment returns diminish, economies need to incorporate global ideas and diffuse them locally.
Innovation: Finally, countries must combine investment and infusion with innovation to sustain growth.
Countries need to make these “gear changes” to recalibrate economic policies in line with the structures of a high-income economy.
Efficient Use of Resources
Lall emphasized the importance of viewing large firms and small firms as symbiotic rather than predatory. By focusing on value added rather than firm size, and by promoting social mobility rather than merely addressing inequality, countries can harness the potential of both incumbents and entrants. This approach can lead to better economic outcomes.
Success Stories
Korea serves as a prime example of a successful transition. In the 1960s, Korea was one of the poorest countries but has since become one of the most affluent. The country encouraged its companies to learn from global leaders and fostered innovation by offering incentives for acquiring and adapting foreign technologies. Similar strategies have been adopted by countries like Chile and Poland, and are now being tried by India and China.
Conclusion
The World Bank’s World Development Report provides valuable insights into how middle-income countries can overcome the middle-income trap. For a deeper dive into these strategies and more, the full report is available on the World Bank website.
As countries navigate the complexities of economic growth and development, the insights from this report offer a path forward to achieving high-income status and addressing pressing global challenges.