# 1 Introduction

Since the 1950s, rapid growth has allowed a significant number of countries to achieve middle-income status. However, very few have made the additional leap needed to become high-income economies. Rather, many have gotten stuck in what has been called a middle-income trap–or more appropriately perhaps, an imitation trap, as discussed later–characterized by a sharp deceleration in growth.<sup>1</sup> Most countries in Latin America and the Middle East for instance reached middle-income status during the 1960s and 1970s, and have remained there ever since. According to the World Bank (2012), of 101 middle-income economies in 1960, only 13 had become high income by 2008: Equatorial Guinea; Greece; Hong Kong; China; Ireland; Israel; Japan; Mauritius; Portugal; Puerto Rico; South Korea; Singapore; Spain; and Taiwan, China.<sup>2</sup> In Asia, Malaysia and Thailand provide good examples of the growth slowdown that characterizes a middle-income trap. Despite the financial crisis of 1997-98, they ended the century with productivity levels that stood significantly closer to those recorded in advanced countries. However, the pattern of labor-intensive production and exports in these countries has remained broadly unchanged for the past two decades. At the same time, they have faced growing competition from low-cost producers, first China and India, and more recently Vietnam and Cambodia. Growth has slowed significantly as a result. Moving up the value chain and resuming rapid growth by breaking into fast-growing markets for knowledge and innovation-based products and services has remained elusive–not only for Malaysia and Thailand but also for a number of other middle-income countries (UNIDO (2009)).

In a more formal analysis, Eichengreen et al. (2011) found that growth slowdowns typically occur at per capita incomes of about $16,700 in 2005 constant international prices.<sup>3</sup> At that point, the growth rate of GDP per capita slows from 5.6 to 2.1 percent, or by an average of 3.5 percentage points.<sup>4</sup> They also found, using regression and standard growth accounting techniques, that growth slowdowns are essentially productivity growth slowdowns–with a drop in TFP growth accounting for about

> 1The term “middle-income trap” was apparently first used by Gill, Kharas, et al. (2007); see also the Growth Report of the Commission on Growth and Development (2008). “Middle income economies” are defined in accordance with the World Bank’s classifications by income group, as given in http://data.worldbank.org/about/country-classifications.

2The ongoing crisis in many of these countries has of course brought into question the sustainability of these achievements.

> 3The authors define a growth slowdown based on three conditions: The first requires that prior to the slowdown the seven-year average growth rate is 3.5 percent per annum or greater. The second identifies a growth slowdown with a decline in the seven-year average growth rate by at least 2 percentage points. The third condition limits slowdowns to cases in which per capita GDP is greater than $10,000 in 2005 constant prices–thereby ruling out episodes related to countries that have not yet successfully developed. The authors also claim that weakening some of these conditions does not affect the results significantly.

> 4However, there is considerable dispersion in the income levels at which growth slowdowns occur: the standard deviation is $6,000. Although the mean per capita income is $16,700, the minimum is $10,000 and the maximum $40,000.

3