We analyze the reasons for the middle-income trap in Latin America, where countries have been at the middle-income level for decades, and drawout lessons for Asia. The middle-income trap captures a situation where a middle-income country can no longer compete internationally in standardized, labor-intensive goods because wages are relatively too high, but it also cannot compete in higher value-added activities on a broad enough scale because productivity is relatively too low. The result is slow growth, stagnant or falling wages, and a growing informal economy.
Insufficient development of domestic innovation capabilities is at the heart of the middle-income trap. In Latin America, it is the result of a market-led strategy which generated dismal productivity growth, rapid de-industrialization, a decline in export sophistication in many countries, poor innovation performance, and underinvestment in the requisite social capabilities. Globalization provides a challenging context for middle-income countries to narrow the capabilities gap because they have less time to do so with more players competing in the innovation space and with technological innovation changing faster. A comprehensive innovation-focused strategy with strategic active policies is the only way to escape the middle-income trap. The nature of the production structure, already existing elements of an innovation ecosystem, and the possibilities for creating political coalitions in support of a systemic advancement of innovation capabilities are critical factors conditioning the escape from the middle-income trap.
WORKING PAPER NO: 685
FAQs
A comprehensive innovation-focused strategy with strategic active policies is the only way to escape the middle-income trap.
What was an alternative to the middle-income trap? ›
Instead of a middle-income trap what happened was a liberalization trap. Growth didn't happen because countries turned middle- income, but happened in a given period, around the 1980s, when these countries faced a serious foreign debt crisis and were constrained to open their economies.
How does a country escape the middle-income trap? ›
A fresh approach is needed: first focus on investment; then add an emphasis on infusion of new technologies from abroad; and, finally, adopt a three-pronged strategy that balances investment, infusion, and innovation.
How to get out of the middle class trap? ›
Escaping the middle-class trap is achievable with the right mindset and strategies. By enhancing your financial literacy, implementing smart budgeting practices, investing wisely, and exploring side hustles, you can pave the way for financial freedom.
How do you escape the money trap? ›
One way to escape the time for money trap is to apply a reverse methodology and do the opposite of what is expected. To gain more worth and wealth, one must learn to work half of the time, which requires determining how to work the most efficiently and effectively.
Can China avoid the middle-income trap? ›
It can either get caught in an “inequality trap,” leading to MIT, or it can reduce inequality and avoid MIT. Fortunately, China still has the eco- nomic and political levers it can use to avoid the inequality trap and MIT.
How did Japan escape the middle-income trap? ›
Starting from 1961, the Japanese government took a series of measures to increase people's income. In agriculture, the government raised the price of farm products and encouraged production efficiency. In industry, the government cut taxes and lowered interest rates to facilitate borrowing and reduce costs.
How did South Korea escape the middle-income trap? ›
The divergence thus suggests South Korea's effective and successful capability to overcome the structural weaknesses and deal with the hard and soft infrastructure issues. Therefore, this enabled South Korea's high-sustained growth rates, which in turn helped the country escape the middle-income trap.
What is the middle class money trap that keeps you from being rich? ›
The Lifestyle Mirage: Keeping Up with the “Joneses”
This pattern of consumption, known as keeping up with the “Joneses,” can lead to unnecessary debt and a cycle of overspending that pushes wealth accumulation further away. Key Insights: Be discerning of the potential financial return when investing in education.
Which countries are stuck in the middle-income trap? ›
Currently, there are 108 countries — including major economies like China, Brazil, Türkiye and India — stuck in the “middle-income trap”, according to the World Bank.
The catch-up effect is a theory that the per capita incomes of all economies will eventually converge. This theory is based on the observation that underdeveloped economies tend to grow more rapidly than wealthier economies. As a result, the less wealthy economies literally catch up to the more robust economies.
What countries are stuck in a poverty trap? ›
For example, Bangladesh, El Salvador, Mozambique and Nepal are stuck in a poverty trap, where their relative per capita income is constant at or below 5 percent of the U.S. level.
What is the reason for the middle-income trap? ›
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.
What is an example of a middle class trap? ›
“A common middle class money trap is spending all or more than your income without saving anything that will allow you to make investments that generate wealth, such as a home,” said John Bodrozic, co-founder of HomeZada.
What is the middle-income technology trap? ›
More specifically, while the strategic approaches and industrial policy instruments used by these countries are different, they focus on avoiding what we call here a middle-income technology trap, that is, a specific structural and institutional configuration of the economy that is not conducive to increasing domestic ...
What caused the middle-income trap? ›
7 By contrast, a middle-income trap typically occurs after a country has been growing rapidly for a sustained period of time and has improved substantially the standards of living of its population–so that the question is more about explaining a slowdown in growth, rather than why it is low in the first place–and for ...
What is stuck in the middle-income trap? ›
A middle-income trap describes countries that suffer from a sharp and sustained fall in economic growth after reaching 'middle-income level', preventing them from moving up the ladder to a higher income level (the seminal paper in this literature is Gill and Kharas 2007).
