# **I. Introduction**

In recent years, the term middle income or “MIC” trap has entered common parlance in the development policy community – particularly, in East Asia where concerns about slower growth following the 1997 regional financial crisis prompted concerns of a protracted period of subpar performance. The term itself often has not been precisely defined in the incipient literature. In some cases, the phenomenon is described in terms of relative “catch-up” with the United States or some other rich country reference (Woo, 2011; Lin and Rosenblatt, 2012). In others, it is based on stagnation or painfully slow growth in absolute income levels. For example, Felipe et al (2012) establish a definition based on the number of years a country takes to move from one income category to another, based on absolute thresholds for low, lower middle, upper middle and high income countries.

The concept of a low-equilibrium growth “trap” has been explored in theory and empirically, but with a focus on low-income country “poverty traps” (Azariadis and Drazen, 1990; Azariadis and Stachurski, 2005; Kraay and Raddatz, 2007). A variety of models have been developed that focus on aid volatility (Agenor and Aizenman, 2010), natural resource exploitation (Antoci et al, 2011), or institutions (Capra et al, 2009; Gradstein, 2008). Recently, Agenor and Canuto (2012) developed a model with a knowledge externality in the “design” sector that produces multiple equilibria, including the possibility of a low productivity growth MIC trap.

In terms of development strategy or the microeconomic determinants of growth, a number of authors have focused on the peculiar position of MICs within the global supply chains. The basic idea is that incomes (and wages) in MICs have increased enough to require graduation from low-skilled labor intensive activities, but MICs have not yet developed national innovation systems -- or perhaps not even accumulated enough physical and human capital – to compete with high-income countries in more sophisticated products (Gill and Kharas, 2007; Jankowska et al, 2012; Yusuf and Nabeshima, 2009; and Woo, 2009). This line of inquiry leads directly to policy discussions of what needs to be done (Kharas and Kohli, 2011; Shijin et al, 2012; Xiaohe, 2012; Flaeen et al, 2013) to transition successfully from middle income status to high income status. Aiyar et al (2013) define the middle income trap as a special case of growth slowdowns and explore some of the determinants behind these slowdowns.

What characterizes a middle income country (MIC)? Quite literally, MICs are defined as the middle of the distribution of countries ranked by per capita income. One could also imagine using some other metric, or metrics, of economic development to define the “middle class.” Scanning a variety of dimensions, a “typical” MIC would have income per capita of about $4,000, an adult literacy rate of about 70 to 93 percent, infant mortality of about 19 to 50 per 1,000 live births, and life expectancy is around 65-72 years.<sup>2</sup> In terms of economic structure, the typical MIC possesses a wide variety of productive sectors–ranging from still large primary sectors to industries that may be highly developed—or even at the technological frontier globally. A typical MIC still has substantial shares of its population toiling at relatively low

> 2 These data are from World Development Indicators (WDI).  Median income per capita (“Atlas” measure of market exchange rates) was approximately $4,300 in 2010, as reported in the WDI.

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