What Is the Middle Income Trap, Why do Countries Fall into It, and How Can It Be Avoided?

Abstract

The risks of falling into the Middle Income Trap have increasingly become a focus of discussions on the long-term economic and social development prospects of developing countries. These risks, and how to minimize them, are being debated at the highest levels of policy making in some of the fastest growing emerging economies, even while these countries remain a source of envy to the rest of the world. The term Middle Income Trap is by now also being widely used in economic literature as well as business-oriented media. We draw satisfaction from the fact that some of our previous writings (Gill and Kharas, 2008; Kohli et al. 2009) (co-authored with other colleagues) seem to have helped popularize this term. At the same time, we realize that some have interpreted and used the term quite differently from what we had in mind when we first introduced the term Middle Income Trap in our writings and presentations. This article offers our perspective as to what the Middle Income Trap is, why so many countries fall into it, and the key challenges involved in avoiding the trap. With policy makers as its primary audience, the article is deliberately short in length and straightforward in language.

The Middle-Income Trap Definitions, Theories and Countries Concerned: A Literature Survey

“…1 Several years later, Kharas and Kohli (2011) made another quite early contribution by raising the following questions:…”

Deepening Reform for China's Long-term Growth and Development

“…Ma et al (2004) and Kohli (2011) found that this happened for the rupee in the early 2000s. The renminbi gap has narrowed since the GFC, but the rupee gap has widened instead.…”

“…The notion of the middle-income trap was proposed in a World Bank report, An East Asian Renaissance: Ideas for Economic Growth (Gill and Kharas 2008), and in Kharas and Kohli (2011). In these and other works the authors describe the middle-income trap as a situation in which 'countries that avoid the poverty trap and grow to middle-income levels subsequently stagnate and fail to grow to advanced-country levels' (Kharas and Kohli 2011, p. 281).…”

The Practice of Industrial Policy

“…South Africa, despite its membership of the G20 and the BRICS (Brazil, Russia, India, China, and South Africa) group of economies, remains mired in a cycle of low, single-digit GDP growth. This experience can be located within a broader phenomenon first described by Gill and Kharas (2008) and Kharas and Kohli (2011), as representative of a middle-income country growth trap. 3 So why, when South Africa shares so much in common with rapidly growing emerging markets, and has one of the largest and most diversified sub- Saharan African economies, has the country failed to converge …”