At that time, the term was used to describe countries located mostly in America Latin andThe Middle East, Which have never been able to transform into high-income countries, despite economic growth and declining poverty rates.
Today, the “middle income trap” still weighs on more than 100 countries around the world, according to a report. World Bank About World Development 2024.
But what exactly is the “middle income trap”? And, more importantly, how can countries overcome it – or avoid falling into it altogether?
At the end of 2023, the World Bank classified middle-income countries as economies with a per capita gross national income between $1,136 and $13,845.
Countries within this group can be classified into lower-middle-income countries (per capita GNI between $1,136 and $4,465) and upper-middle-income countries (per capita GNI between $4,466 and $13,845), according to a report by the World Economic Forum, viewed by the Sky News Arabia Economy website.
Today, about 75 percent of the world’s population lives in middle-income countries, including about 66 percent of people living in extreme poverty, according to a World Bank report, which adds that middle-income countries are responsible for 40 percent of global economic output.
According to the World Bank, there are currently 108 countries – including major economies such as China, Brazil, Turkey and India – stuck in the “middle income trap.”
Headwinds
The World Bank report describes:middle income trap“It is a situation where middle-income countries face serious headwinds to economic growth, wage competition and innovation, and often rely on “policies based on superficial measures of economic efficiency.”
These conditions make middle-income countries “particularly vulnerable to early development slowdowns,” the report adds.
In a separate report, it indicates that International Monetary Fund Countries caught in the “middle-income trap” in recent decades have found themselves “caught between rapidly changing advanced technology in rich countries and competition in mature products from poor, low-wage countries.”
The World Bank stresses that the growth prospects of middle-income countries depend on their ability to increase productivity through innovation – a feat that is difficult for many economies to achieve on a large scale.
The organization’s report adds that achieving high-income status in many middle-income countries may take several generations if current economic growth rates continue.
In this context, the Forum report quoted the World Bank’s Chief Economist and a member of the Forum’s Senior Economists Community, Indermit Gill, as saying: “Most middle-income countries remain stuck in an approach that dates back to the last century: policies that focus heavily on attracting investment.
This is equivalent to driving the car entirely in first gear: it will take forever to get to the destination.”
In recent decades, only a few dozen countries have grown from middle-income to high-income countries.
This includes the Kingdom of Saudi Arabia. Saudi Arabia Latvia and Bulgaria andSouth Koreaand others.
What approach is required?
In its report, the World Bank outlines a three-pronged approach that countries can take to avoid the “middle income trap.” The plan includes a strategic calibration of economic policies related to investment, injection, and innovation.
First, low-income countries should focus primarily on increasing investment in the economy. In 2001, for example, Colombia was able to increase investment in the country by implementing various reforms that included reducing government spending, introducing a floating exchange rate, and strengthening the independence of the central bank.
Once a country reaches lower-middle income status, policies must be adjusted to facilitate a mix of investment and injection. In particular, injection should focus on expanding the use of advanced technologies.
After reaching upper-middle income status, countries must complement investment and injection with innovation.
Adding innovation, the report notes, requires “restructuring enterprises, work and energy use again, with a greater focus on economic freedom, social mobility and political competitiveness.”
In a statement to the forum, Gil added that in order to achieve high-income status, governments in middle-income countries must enact competition policies that create a healthy balance between companies ranging from large corporations to startups.
“The benefits will be greatest when policymakers focus less on the size of a company and more on the value it brings to the economy, and when they encourage social mobility for all their citizens rather than focusing on zero-sum policies to reduce income inequality,” Gill added.
Experts point out that achieving sustainable economic development in middle- and low-income countries is no easy task – especially in light of the economic uncertainty that continues to weigh on the global economy.
“Middle-income countries now face much heavier burdens than their predecessors: aging populations, geopolitical and trade frictions, and the need to accelerate growth without polluting the environment,” Gill continued.
However, the World Bank’s World Development Report 2024 says that by defining a new formula to facilitate economic growth, it aims to make “the term ‘middle income trap’ completely obsolete.”
metaphorical concept
For his part, economic expert and chief economist at ACY, Dr. Nidal Al-Shaar, explained in exclusive statements to the Sky News Arabia Economy website that the concept of the “middle income trap” is more of a metaphor than a purely economic one.
He said that there are several factors that keep some countries within a specific range of income levels, including those related to political and social conditions, including the degree of government corruption, in addition to political will.
Al-Shaar added that getting out of this trap requires countries to work on several fronts, stressing the importance of having comprehensive development plans that include economic, cultural and social aspects. He pointed out that some countries were able to overcome this trap thanks to their reliance on education as a key factor for development, such as SingaporeWhile other countries have relied on intensive production, such as South Korea, while others have benefited from their natural resources, such as Egypt And the Gulf countries.
He continued: “There are several obstacles that prevent raising the level of income, the most prominent of which are population density and natural resources,” citing:China India and some Latin American countries are examples of this.
He also pointed out that there are geopolitical obstacles that represent a barrier to countries seeking to escape the middle-income trap, such as Iraq, Syria, Lebanon, and Egypt.Algeria andTunisia And Morocco.
Regarding the World Bank’s “three-tier” program, Al-Shaar pointed out that this program focuses primarily on the economic aspect, as it addresses investment, transportation and innovation as essential factors for achieving development.
But he stressed that these factors must be accompanied by other important factors. He explained that there are countries that tried to start with investment and technology transfer operations, then move to innovation, but they did not succeed for various reasons, citing the experience of Turkey, which started production but did not achieve a qualitative leap as happened in South Korea.
widening gap
On the other hand, the expert in European affairs, Mohamed Ragai Barakat, confirmed in special statements to the “Sky News Arabia Economy” website, that many countries in the world, including rich countries, suffer from the “middle income trap”, in terms of the large gap between the minimum wage and the income of the wealthy, which negatively affects the average income in the country.
“Does a high average income mean that the majority of the population is living in good economic condition?” Rajai asked, noting that the answer is not necessarily positive.
Rajai pointed out that countries are trying to confront this situation by increasing investments, whether governmental or private, in areas such as agriculture and industry, which provides new job opportunities and gives numbers of the population the opportunity to earn an income higher than the minimum wage.
These investments also contribute to raising the national product, in addition to the necessity of adopting modern technology and keeping pace with global developments. He cited South Korea as a clear example, as it suffered from a low average income, but thanks to investments and the use of imported technology, it was able to achieve high economic growth and prosperity.
Rajai added that many countries are now supporting innovation and helping young people establish small companies “Start-ups”. These companies allow a large number of citizens to enter the labor market and achieve an income better than the minimum wage, thus contributing to solving the problem of the “middle income trap”.
