The middle-income trap

 The middle-income trap refers to a phenomenon in which countries achieve a certain level of income but struggle to transition to high-income status. It is characterized by a period of rapid economic growth followed by a slowdown or stagnation in income growth, resulting in the country becoming "trapped" in the middle-income range without being able to progress further.

The concept was first introduced by economists in the context of several East Asian countries, such as Malaysia, Thailand, and Indonesia, that experienced significant economic growth and achieved middle-income status but struggled to continue growing at the same pace. These countries faced challenges in diversifying their economies, upgrading industries, and boosting productivity to the levels of high-income nations.

The measure of middle income refers to the level of economic development used to classify countries based on their income per capita. It is typically expressed as Gross National Income (GNI) per capita or income per capita.

The World Bank classifies countries into different income groups based on their GNI per capita. The middle-income category is further divided into lower-middle-income and upper-middle-income based on specific income thresholds. These thresholds are periodically updated by the World Bank to account for inflation and changes in the global economy.

It's important to note that the specific income thresholds for middle-income classification vary over time and differ across regions. These thresholds serve as a general benchmark to understand a country's relative economic development but may not capture all aspects of a nation's economic and social complexities.

There are several factors commonly associated with the middle-income trap:

• Industrial structure: Countries in the middle-income trap often rely heavily on low-cost labor-intensive industries, such as manufacturing and assembly, which may face increasing competition from other low-cost countries or emerging economies.
• Technological capabilities: Transitioning to high-income status requires the development and adoption of advanced technologies and innovation. Countries in the middle-income trap may face difficulties in upgrading their technological capabilities and investing in research and development.
• Education and human capital: A skilled and educated workforce is essential for sustained economic growth. Countries in the middle-income trap may struggle to provide quality education and develop the necessary human capital to support higher-value industries.
• Institutional quality: Good governance, efficient institutions, and a supportive business environment are crucial for attracting investments and fostering economic growth. Weak institutional frameworks can hinder progress and create barriers to economic advancement.
• Income inequality: Rising income inequality can impede economic mobility and social stability. In some cases, middle-income countries struggle to address inequality issues, which can hinder overall economic progress.

To overcome the middle-income trap, countries often need to implement comprehensive economic reforms that address these challenges. These reforms may include diversifying the economy, investing in innovation and technology, improving education and human capital, enhancing institutional quality, and promoting inclusive growth policies.

Almost all countries that reach middle-income status fall into the middle-income trap. Some nations have successfully transitioned to high-income levels by implementing effective policies and strategies to overcome the challenges associated with this phenomenon.