Over 100 developing countries including China, India, Brazil and South Africa face several challenges that impact their efforts to become high-income countries in the next few decades in what the World Bank calls the “middle-income trap”.
The ‘World Development Report 2024: The Middle Income Trap’ reveals that as countries grow wealthier, they usually hit a ‘trap’ at about 10 percent of the annual U.S. GDP per person, the equivalent of $8,000 today. The World Bank states that this is in the middle of the range of what it classifies as middle-income countries.
Since 1990, only 34 middle-income economies have managed to become high-income. Notably, more than a third of them were either beneficiaries of integration into the European Union or had previously undiscovered oil.
“The battle for global economic prosperity will largely be won or lost in middle-income countries. But too many of these countries rely on outmoded strategies to become advanced economies. They depend just on investment for too long — or they switch prematurely to innovation,” stated Indermit Gill, chief economist of the World Bank Group and senior vice-president for Development Economics.
Challenges impacting growth
At the end of 2023, the World Bank classified 108 countries as middle-income, each with annual GDP per capita in the range of $1,136 to $13,845. These countries have a population of six billion people, 75 percent of the global population. In addition, two out of every three people living in these countries face extreme poverty. Besides, these 108 countries generate more than 40 percent of the global GDP and more than 60 percent of carbon emissions.
Moreover, they face much bigger challenges than the countries that escaped the middle-income trap, including rapidly aging populations, rising protectionism in advanced economies, and the need to speed up the energy transition.
3i strategy to escape the middle-income trap
In its latest report, the World Bank suggests a “3i strategy” for countries to reach high-income status. Depending on their stage of development, all countries need to adopt a sequenced and progressively more sophisticated mix of policies.
- Low-income countries: These countries can focus only on increasing investment, the 1i phase. However, once they attain lower-middle-income status, they need to shift gears.
- Lower-middle-income countries: These countries need to expand their policy mix to the 2i phase which includes investment and infusion. This phase consists of adopting technologies from abroad and spreading them across the economy.
- Upper-middle-income countries: These economies must shift gears to the final 3i phase which includes investment, infusion and innovation. In the innovation phase, countries no longer borrow ideas from the global frontiers of technology, they push the frontier.
“Success will depend on how well societies balance the forces of creation, preservation and destruction. Countries that try to spare their citizenry the pains associated with reforms and openness will miss out on the gains that come from sustained growth,” stated Somik V. Lall, director of the 2024 World Development Report.
Read: 10 poorest countries in the world in 2024 by GDP per capita
The South Korean experience
South Korea is a standout example of a country implementing the 3i strategy and escaping the middle-income trap. In 1960, the country’s per capita income stood at just $1,200. By the end of 2023, that number reached $33,000.
South Korea began with a simple policy mix to increase public investment and encourage private investment. That transformed in the 1970s into an industrial policy that encouraged domestic firms to adopt foreign technology and more sophisticated production methods. Today, South Korea is home to one of the world’s two largest smartphone manufacturers, Samsung, a global innovator.
Other countries followed similar paths including Poland and Chile.
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