Middle income trap

Middle income trap
The middle income trap is an economic development situation in which a country that attains a certain income (due to given advantages) gets stuck at that level. The term was introduced by the World Bank in 2007 and is defined by them as the 'middle-income range' countries with gross national product per capita that has remained between $1,000 to $12,000 at constant (2011) prices.
Origin of the term
The term was coined by economists Indermit Gill and Homi Kharas in 2007 when they were working on the ground strategies for Eastern Asian economics in the World Bank report "An East Asian Renaissance: Ideas for Economic Growth".
Dynamics and avoidance
According to the concept, a country in the middle-income trap has lost its competitive edge in the export of manufactured goods due to rising wages, but is unable to keep up with more developed economies in the high-value-added market. As a result, newly industrialized economies such as South Africa and Brazil have not, for decades, left what the World Bank defines as the 'middle-income range' since their per capita gross national product has remained between $1,000 to $12,000 at constant (2011) prices. They suffer from low investment, slow growth in the secondary sector of the economy, limited industrial diversification and poor labor market conditions and, increasingly, aging populations.
Sociologist Salvatore Babones and Political scientist Hartmut Elsenhans call the middle-income trap a "political trap" as economic methods to overcome it exist. However, few countries use them because of their political situation. They trace the causes of the trap to the structural problems and the inequalities generated in the early development process. According to them, the wealthy elites then follow their interests by bargaining for a strong currency which shifts the economy's structure towards the consumption of luxury goods and low-wage labor laws, which prevents the rise of mass consumption and mass income. They argue that countries can escape the middle-income trap by investing in physical and human infrastructure, enforcing social policies like higher minimum wages, and having a weak currency that makes exports competitive and stimulates domestic employment.
According to Asian Development Bank, avoiding the middle-income trap requires identifying strategies to introduce new processes and find new markets to maintain export growth. It is also essential to increase domestic demand because an expanding middle class can use its increasing purchasing power to buy high-quality, innovative products and help drive growth. The biggest challenge is moving from resource-driven growth based on cheap labor and cheap capital to high productivity and innovation, which requires investments in infrastructure and education—building a high-quality education system that encourages creativity and supports breakthroughs in science and technology that can be applied back into the economy.
From 1960 to 2010, only 15 out of 101 middle-income economies escaped the middle income trap, including Japan and the Four Asian Tigers: Hong Kong, Singapore, South Korea and Taiwan. Diversifying exports is also considered important to escape the middle income trap.
Criticism
Significant debates exist regarding the empirical validity of the “middle-income trap.”
Other economists either find that there is no middle income trap or claim that
debates about a “middle-income trap” appear anachronistic: middle-income countries have exhibited higher growth rates than all others since the
mid-1980s.
See also
Crony capitalism
Dual-sector model
Human capital
Human Development Index
Resource curse
World-systems theory
References
Further reading
Russians are stuck in 'Middle Income Trap'
International finance
Development economics
2006 introductions