MIDDLE-INCOME TRAP: What It Is and What You Should Know

Middle Income Trap

The term “middle-income trap” (MIT) describes developing countries that have experienced strong economic growth and quickly gained middle-income status but have subsequently been unable to surpass that income level and catch up to the industrialized nations. Every country wants to become an industrialized nation, but it’s obviously not as easy as it appears. What causes the middle income trap, and how can every country outgrow this hurdle? That’s what we tend to analyze in this piece. It begins by providing and categorizing the most important empirical data after describing several MIT definitions. After giving a quick overview of the already recognized middle income trap (MIT) nations like China, Nigeria, and so on. The article covers the key explanatory theories, taking into account both the theoretical foundations and the empirically verified triggering conditions.

Middle Income Trap

Some countries experience structural change, growth, and significant decreases in extreme poverty yet struggle to advance from their current position as medium-income countries to high-income fully developed ones. We refer to this situations as the “middle-income trap.”

When GDP growth rates frequently drop-down, a nation may find it difficult to establish and maintain its international competitiveness. Worst still, it’s difficult to break out of this trap. According to a World Bank study, just 13 of the 101 countries categorized as middle-income in 1960 attained high-income levels in 2011.

Techniques for Avoiding the Middle Income Trap

Each nation must find the ideal mix of demand- and supply-side strategies in order to maintain a rise in per capita income and achieve balanced growth generated from both domestic and international markets. This is the secret to getting out of the trap. Since every nation has its own set of economic, social, cultural, demographic, and political factors, there are no exact set of policies that prevent nations from falling into the middle-income trap. However, the following tacticst are quiet effective;

  • The kind of growth that raises a nation’s per capita income above middle-income thresholds and rescues it from abject poverty is not always the same growth that enriches a nation. So identifying these two players, are pivotal to rising above middle trap.
  • One of the main causes of the middle-income trap is a country’s inability to maintain the shift from low value-added to high value-added industries. So every nation neds to keep watch and guard against this.
  • The advantages of cheap labor and the replication of foreign technologies can disappear if middle- and upper-middle-income levels are reached.
  • Focus shifts from a narrow focus on input-driven growth to increasing competitiveness (i.e. just adding more land, labor and capital into the production process)
  • Professor Barry Eichengreen, a renowned economist, found that growth slowdowns frequently occur at per capita incomes of roughly $16,700 in constant world prices for 2005, at which point the GDP per capita growth rate declines by an average of 3.5 percentage points, from 5.6 to 2.1 percent, and many middle-income countries experience them.

Middle Income Trap China

China is plagued by the “middle-income trap,” the belief that developing nations rapidly escape poverty only to become stranded before becoming wealthy. China’s Prime Minister Li Keqiang said in 2016 that the country “must take special care over the next five years to avoid falling into the middle-income trap,” adding that the likelihood of China falling into this trap had previously been estimated at 50% by the time Lou Jiwei was the country’s finance minister.

While working with the World Bank in 2006, two economists named the trap, Homi Kharas and Indermit Gil came up with middle income analysis. What would be considered middle-class income and what would be considered income above it? Mr. Kharas and Mr. Gill used the bank’s income divisions to buttress this.

They were established when the bank drew a line dividing high-income nations from the rest of the world. The line had to fit all of the countries that were at the time considered to have “industrial market economies.” It was derived using 1987 prices and a $6000 per person national income. Just low enough to encompass Spain and Ireland. Currently, that sum is $12,695. It rises in step with the weighted average of prices and exchange rates for the world’s five largest economies: the US, UK, China, the eurozone, and Japan. 80 countries reached that objective in 2020, three fewer than in 2019. As a result of the outbreak, Mauritius, Panama, and Romania were moved to the intermediate division.

Middle Income Trap Theory of Economic Growth

The “middle-income trap” theory of economic growth states that as wages rise, a country’s ability to export low-skill manufactured goods is exhausted before it can build the innovative capacity required to boost productivity and compete with industrialized countries in higher value-chain industries. As a result, there aren’t many chances for advancement, and wages are staying the same.

Middle-Income Trap Countries

The middle-income trap, a significant development concern, affects more than 100 countries, which are home to more than 60% of the world’s poor. The World Bank defines a middle-income country (MIC) as one with a gross national income (GNI) per capita of between $1,036 and $12,535. MICs are one of the income categories the World Bank uses to classify economies for operational and analytical purposes.

The Value of Developing Countries (MICs)

MICs play a critical role in preserving the health and prosperity of the global economy. According to the World Bank, developing and growing MICs are beneficial to the rest of the world. A few examples are the eradication of poverty, international trade, the development of sustainable energy sources, the security of food and water, and global cross-border concerns like climate change.

Characteristics of Developing Countries (MICs)

MICs are consist of lower- and upper-middle-income economies. Lower-middle economies range from $1,036 to $4,045 per person, whereas upper-middle economies have per capita GNIs between $3,046 and $12,535. The MICs are a widely varied group in terms of size, population, territory, and income level. Smaller nations with sparse populations, such as Belize and the Marshall Islands, home to all four of the BRIC superpowers—Brazil, Russia, India, and China—make up this group. China and India together account for roughly one-third of the world’s population, making them important players in the global economy.

There are both 53 lower-middle-income economies and 56 upper-middle-income economies. Numerous of the 109 MICs confront extremely diverse problems as a result of their diversity. Providing people in lower-middle-income nations with necessities like electricity and water may be their biggest problem. Perhaps decreasing corruption and improving governance are the major issues facing economies in the upper middle-income range.

Causes of Middle-Income Trap

The term “middle-income trap” refers to a situation where a middle-income country is no longer able to compete internationally in the production of standardized, labor-intensive goods due to relatively high wages, but is also unable to compete effectively on a large enough scale in higher value-added activities due to relatively low productivity. Initially, this was the desire of these countries. Which brings us to what causes the middle income trap in several nations. The informal economy is growing as a result, economic growth is sluggish, and salaries are stagnant or falling.

The following are the potential causes of the middle-income trap;

Maybe not spending enough on human resources

  • Before becoming prosperous, nations may start to develop.
  • Instead of being productivity-driven, early growth is usually input-driven.
  • Technology needs to become more sophisticated.

Rising wages and labor expenses

  • There are fewer workers without jobs.
  • There may not be enough labor, even with rural-to-urban migration.
  • Natural population growth is falling in the demographic change model.
  • Gains in productivity are slowing.

Inadequate social capital and problematic institutions

  • Institutions may not support a dynamic, creative society and economy.
  • Long-term growth may not be facilitated by social capital, particularly in knowledge-based sectors.

challenges to maintaining macroeconomic stability

  • In the major fast-growing countries, high inflation is an issue.
  • Credit bubbles could develop if speculative endeavors take off.

Will the private sector provide enough innovation?

  • Products and services produced through innovation fetch higher prices in global markets.
  • Being inventive is more challenging than simply copying what more developed nations already do.

Which countries are in the middle-income trap?

10 countries (Argentina, Bulgaria, Colombia, Croatia, Greece, Laos, Nigeria, Slovakia, Trinidad & Tobago, and Uruguay) are or will be in the middle-income trap from 1950–2029, with or without the COVID–19 crisis, according to our analysis of long-term catch-up tendencies.

Is the middle-income trap real?

Covid-19, which initially had the greatest impact on poorer countries, helped to close the wealth gap between them in 2020. However, in the long run, its effects might be more detrimental to emerging markets.

What is the Middle-Income Trap in China?

The term “middle-income trap” describes a circumstance in which a country with a middle-income economy is unable to make the switch to a high-income economy because of rising expenses and a loss of competitiveness. Few nations are able to smoothly shift from low to middle to high-income levels.

How do you overcome middle-income traps?

The PRC requires a development plan that enables it to go from a low-cost to a high-value economy in order to escape the middle-income trap.

Which countries avoided the middle-income trap?

Many low-income nations (LICs) have achieved their goal of becoming middle-income nations (MICs). However, only a select handful have been able to maintain themselves all the way to high-income status, most notably in South Korea, Taiwan, and Israel. The remaining countries, like Argentina and South Africa, fall victim to the “middle-income trap.”

What classifies a country as middle-income?

By size, population, and economic level, Middle-Income Countries (MICs) around the world are a heterogeneous bunch.

Conclusion

With the right approach and strategies, most countries in the MIT level will out grow this limitations and become highly industrialized. However, it requires time and effort. It also involve highlighting the causes of the trap and tactically eliminate it completely.

Middle Income Trap FAQs

Who coined the term middle-income trap?

Garret (2004) coined the phrase “middle-income trap” after seeing that growth rates in middle-income nations have been stagnant since the 1980s.

What do middle class families make?

According to Pew, those with a middle income earn between $43,350 and $130,000.

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