from other transitions in economic progress. First, we will discuss in more detail the definitional issues already alluded to in this introduction. Then we examine historical transition phases in the inter-country distribution of income as well as cross-country patterns of growth to get a better understanding of whether MIC performance is different from other income categories. Finally, we close with a general discussion of potential policy implications.

# **II. How Do We Define a Middle-Income Trap?**

A number of recent papers (Cai, 2012; Felipe et al, 2012; and Kharas and Kholi, 2011; Lin and Treichel, 2012; and Woo, 2009) as well as seminar presentations (for example, Woo, 2011) discuss the potential existence of a middle-income trap—particularly in the context of a specific country or region. Two definitional issues arise in this incipient literature: how one defines the thresholds for middle-income status; and secondly, how one defines a “trap.” In both cases, there are obvious parallels to the literature on poverty measurement. Poverty can be measured in absolute or relative terms—a fixed household income per capita threshold (in PPP dollars or national currency) is established for the former, while a fixed proportion of mean or median household income per capita is used for the latter. Secondly, there is an extensive literature on poverty “traps”, where a trap implies some form of self-reinforcing mechanism driven by market failures or lack of institutional development that inhibits progress towards either an absolute or relative threshold.

Whether one takes a relative or absolute approach to thresholds has very strong implications for descriptive statistics. For example, from a relative perspective, the Latin America and the Caribbean (LAC) region is often cited as the classic case of a MIC trap phenomenon: a review of either the regional aggregate or individual countries shows that income per capita relative to the United States did not progress during the 20<sup>th</sup> century. Figure 2(a) uses Maddison data to track the progress of the LAC aggregate’s ratio as well as Colombia – the latter simply as an example.

On the other hand, if one uses an absolute definition, then one might reach the conclusion that today’s high-income countries themselves were stuck in a “MIC trap” for much of the twentieth century. Figure 2(b) uses 2008 income per capita (in constant PPP adjusted dollars) for Colombia (still somewhat below the world average) and Poland (a recent “graduate” from MIC status, by World Bank standards) and compares the G7 economies to Colombia and Poland over the last century. One sees that it was only in the late 1950s that the G7 economies surpassed the recent income per capita of Colombia, and it was only in the 1970s that they all surpassed Poland.

This figure raises the question then: Were Colombia and most of Latin America stuck in a MIC “trap” for the entire twentieth century? Or was Europe stuck in a MIC “trap” for most of the twentieth century? Or are both statements relevant? Again, this reminds one of the literature on poverty measurement, where there is a clear welfare economics criterion for defining poverty based on an absolute threshold (Ravallion, 2008); however, there are other social cohesion views 4