How Can Middle-Income Countries Escape the Middle-Income Trap?

Source – World Development Report 2024: The Middle Income Trap

The World Development Report 2024 takes a deep dive into a critical issue facing today’s global economy: the middle-income trap. This trap ensnares nations that have climbed out of poverty but struggle to achieve high-income status, stalling their economic growth and development.

The Middle-Income Dilemma

In the last three decades, many countries have transitioned from low-income to middle-income status, improving living standards and reducing extreme poverty. However, this success has led to a new challenge. Today, 108 countries are classified as middle-income, but only 34 have successfully advanced to high-income status since the 1990s. This group of successful countries represents less than 250 million people, a fraction of the global population. The median income per capita of middle-income countries has not risen above one-tenth of the U.S. level since 1970, highlighting the difficulty of moving beyond middle-income status.

The Path to High-Income Status

To escape the middle-income trap, the World Development Report 2024 outlines the need for countries to undergo two critical transitions. The first is moving from a “1i” strategy, focused solely on investment, to a “2i” strategy that includes both investment and infusion—importing and diffusing technologies domestically. The second transition, once this stage is mastered, involves adopting a “3i” strategy that adds innovation to the mix.

These transitions require countries to adopt different growth strategies at different stages of development. For low-income countries, the focus should be on increasing investment. As they progress to lower-middle-income status, they must incorporate technology infusion alongside investment. Finally, upper-middle-income countries need to further evolve by integrating innovation into their economic strategies.

Overcoming Barriers to Progress

The report emphasizes that these transitions are not automatic. Middle-income countries face significant challenges, including rising debt, aging populations, growing protectionism in advanced economies, and the pressures of the global energy transition. To navigate these headwinds, countries must implement policies that encourage enterprise, reward talent, and capitalize on crises to drive reform.

Key strategies for overcoming these barriers include:

1. Disciplining Incumbents: Governments must ensure that large corporations, state-owned enterprises, and powerful elites contribute to economic value rather than stifling competition and innovation. This requires robust competition policies that encourage new market entrants and prevent monopolistic practices.

2. Rewarding Merit Activities: Middle-income countries often have limited pools of skilled talent and inefficient mechanisms for utilizing them. To overcome this, these countries need to improve education systems, provide equal opportunities, and establish strong links between local and global institutions to nurture and retain talent.

3. Capitalizing on Crises: Economic and political crises, though challenging, present opportunities to dismantle outdated policies and institutions. By seizing these moments, countries can implement necessary reforms to accelerate their progress towards high-income status. The energy transition, in particular, requires a shift towards more sustainable practices, balancing economic growth with environmental responsibility.

The Road Ahead

The World Development Report 2024 serves as a roadmap for middle-income countries striving to reach high-income status. By adopting a sequenced approach to development, fostering economic freedom, and promoting informed debate, these nations can navigate the middle-income trap and achieve sustained growth. The report underscores the importance of bold leadership and strategic reforms in overcoming the challenges that lie ahead.

As middle-income countries grapple with these complex issues, the insights from the World Development Report 2024 offer a pathway to not only escape the middle-income trap but also to secure a prosperous and equitable future for their citizens.

You can read the full report here.