⛓️ Middle Income Trap | Caught in a trap?

What is the middle income trap and what is it about? What is responsible for the phenomena referred to as this? In which countries has this phenomenon been observed? Does the concept conflict with reality?

▪ What is the middle income trap, and what characterizes it?

The rapid growth in popularity of the term “the middle-income trap” came after it was introduced into discussion in 2007 by two World Bank economists, Indermit Gill and Homi Kharas. The authors tried to explain why some Asian countries stop developing at some point.1 Thus, they encouraged a debate on the desired economic changes in individual countries.

By the “trap” Gill and Kharas meant a case of misdiagnosis when a country was looking for a growth strategy that corresponded to the structural characteristics of the economy. They assumed two variants of the “trap” understood in this way: a) sticking to the growth strategy based on the export of labor-intensive industrial goods, despite the loss of competitive advantage as a result of wage growth, and b) attempt to jump too early to the “knowledge-based economy” despite the lack of the necessary institutional infrastructure.2 I. Gill and H. Kharas believed that middle-income countries that fell into the “trap” are unable to compete both with poor countries with low labor costs and with high-income countries, which are at the fore in innovation. Earlier economic successes were mainly fueled by relatively low wages, urbanization, and the relocation of labor and capital from low-productivity sectors, mainly traditional agriculture, to more productive and industrialized areas of the economy. Additionally, the observed rapid technological leap results only from imitating favorable solutions applied by more developed countries of the region and does not constitute an advantage for the “copying” state.3

There was also an attempt to explain the “trap” on the basis of a quantitative approach, according to which a country has fallen – or may fall — into the middle income trap if: a) its GDP per capita has reached a certain level, b) it has been in a certain range of GDP per capita for a long time, c) the process of its convergence in relation to a selected highly developed country (e.g. the United States4) has stopped.5 By convergence we understand the effect of catching up with highly developed countries by less developed countries, which show faster economic growth than the more developed countries. As a result, in the long run, all societies should live at a similar high level. However, in line with the concept of the “trap”, a country that experienced a relatively high rate of economic growth and stopped at an average level of GDP per capita does not have the potential to transition to the group of higher-income countries.

▪ In which countries has this phenomenon been observed?

The article “Avoiding Middle-Income Growth Traps”, published in 2012, indicated that out of 101 countries that in 1960 were considered middle-income countries, only thirteen advanced to the higher income group. These are: Greece, Ireland, Israel, Japan, South Korea, Mauritius, Portugal, Spain, Puerto Rico, Taiwan, Singapore, Hong Kong and Equatorial Guinea. Many of them have already left this group as a result of the economic collapse (Greece), the fall in oil prices (Equatorial Guinea) or due to economic stagnation (Mauritius). Among the regions that stand out negatively in terms of the number of countries caught in the “trap” are three: Latin America, the Middle East (excluding oil-rich countries) and North Africa.6 As noted by polish economist Anna Zielińska-Głębocka, a high risk of a slowdown appears in countries such as China, India, Malaysia, Indonesia, the Philippines, Thailand and Vietnam; Argentina, Brazil, Chile and Mexico, and in the Arab countries – Jordan, Egypt, Tunisia and Iran. These countries have problems, among others, with the quality of institutions, effective macroeconomic policy, communication infrastructure and foreign trade.7

▪ Doesn’t the concept contradict reality?

However, the question arises whether the concept of the “trap” does not contradict reality? The concept of the “trap” is undermined, among others, by dr Marcin Piątkowski. According to the economist, this is a concept for which there is no scientific evidence.8 Problems are primarily caused by the lack of a single scientific definition of the “trap”, which results in discrepancies in the classification of countries that have been or may be affected by the “trap”. It is not obvious where the boundary lies between middle-income and high-income (as well as low- and middle-income) countries. The wider the thresholds are set, the more countries will “get stuck” in the middle income trap. The adopted division into low, middle and high income countries is conventional, because every year several countries move from one group to another. Moreover, the global crisis, which first affected the highly developed countries, made the concept of the “trap” less useful in describing dilemmas characteristic only for countries at an average level of development. The problem of sustainable growth is always there, not only in the case of middle income. Besides, what may seem as being stuck in a middle-income trap often turns out to be joining highly developed countries, but a slow one. Economic growth and convergence are long-term processes. According to the Center for Global Development report, since the mid-1980s, middle-income countries grew faster than developed countries, and even faster than poor countries.9 As economist Arkadiusz Sieroń notes, GDP per capita as an economic measure does not fully reflect the scale of development and may overestimate the broader civilization distance of middle-income countries from richer countries – in the case of many “non-income” indicators, there is greater convergence.10

Another problem is that certain social groups experience relatively long-term stagnation in real wages, which may lead them to identify their own income “trap” with a “trap” relating to the entire economy. As Robert Barro admits, middle-income traps can be an echo of the poverty trap and a form of criticism of capitalism for the lack of convergence between countries. However, convergence does occur, but between countries with similar institutional conditions.11

▪ Summary

To sum up, the concept of the “trap” is not fully defined, so its accuracy may raise some doubts. However, even if the concept of the middle-income trap is rejected, it should be taken into account that countries are in risk of a significant slowdown in economic growth and stagnation for many years, regardless of which group of countries they belong to. Many of them may find themselves in a demographic, regulatory or political trap, and the only way to overcome these problems is to carry out thorough reforms and conduct responsible macroeconomic policies that will allow to increase the level of prosperity and standard of living of the society, provide protection against economic imbalances and demographic problems.

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Author: Justyna Ziobrowska