What stops middle income countries from becoming high-income economies? | Experts’ Opinions

By Catalina Russu

What stops middle income countries from becoming high-income economies? | Experts’ Opinions

Money makes money – which is why it is said that the first US$1 million is the hardest. The same might apply to countries as well, as only a few manage to shift from middle-income status to high-income status. A new World Bank study, “World Development Report 2024,” reveals that “as countries grow wealthier, they usually hit a ‘trap’ at about 10% of annual US$ GDP per person”, classifying them as middle-income economies. Since 1990, only 34 middle-income economies have managed to upgrade their status and more than a third of these were either the beneficiaries of integration into the European Union or of previously undiscovered oil. Why are most middle-income countries caught in this “trap” and how can they get out of it? We asked DevelopmentAid experts to discover more.

Key Takeaways:

  • In 2023, 108 countries were classified in the middle-income category, with a GDP per capita ranging from US$1,136 to US$13,845 annually. These countries are home to six billion people, representing 75% of the world’s population.
  • Corruption, income inequality, embezzlement, and subtle trade wars are among the factors that hinder development in many middle-income countries.
  • Global challenges, such as aging populations, rising protectionism, and energy transition further complicate the development of these countries.
  • According to experts, the shift from low-value-added industries to high-value sectors like technology and manufacturing is key for middle-income countries to break free from the income trap.

DevelopmentAid: What are the key factors contributing to the middle-income trap in developing countries, and how do they differ across regions?

Michael Ade, Senior Economist, trade and investment
Michael Ade, Senior Economist, trade and investment
  • Corruption, nepotism, embezzlement, profligacy and mismanagement by political elites are to the detriment of further development of their countries. These constraints differ across regions and tend to be rife and endemic in regions containing a cluster of developing countries like Africa, Latin America and in some Asian countries, also impacting negatively on national income.
  • Low national income. The national income of a country is important for better levels of human development and overall quality of life. Often middle-income countries in regions closer to rich states do benefit from developmental spill-over thereby easing their transition, first to upper middle-income and then to high-income levels. Unfortunately, this is not always the case where there is an agglomeration or cluster of low-income developing countries, with most consequently getting caught in the middle-income trap.
  • Income inequality. Empirical evidence in countries like Venezuela, Columbia, Indonesia and South Africa shows very high levels of income inequality, with wealth concentrated in the hands of a few. Consequently, large masses of the population with little economic power are left out from effectively contributing to economic development or improving their welfare. A recent study by the World Bank states that countries like Brazil, India, China and South Africa risk being stuck in the middle-income trap unless they adopt radical growth strategies for their economies. Additionally, there’s a need to conscientiously improve governance and implement inclusive growth policies, and effectively implement radical economic transformation to boost growth, create jobs, and reduce poverty levels and income inequality.
  • The adoption of beggar-thy-neighbor policies, subtle trade wars and inward looking policies or protectionism by neighborly countries tend to hinder rather than boost regional economic development. The post-COVID-19 period has seen the active adoption of imports substitution, industrialization, localisation and exports promotion, towards better economic growth and job creation. Some of these policies risk retaliation, thereby perpetuating the entrapment of countries in the middle-income grouping. “
Joseph Viruthiyel, M&E Specialist
Joseph Viruthiyel, M&E Specialist

“I will explain by showcasing India’s case. India aims to cross the middle-income gap by 2047, requiring informed policies and effective strategies. To achieve this, India needs to maintain a sustained growth rate of 7-10% for the next 20-30 years, reaching a high-income status with a per capita income of US$18,000 and a US$30 trillion economy by 2047. This necessitates a GDP growth of nine times today’s US$3.36 trillion and per capita income rising eight times from US$2,392. Consistent policy support and economic reforms are crucial. Despite GDP improvements, India faces growing inequality. The top 1% holds about 23% of the national income, while the top 10% controls 57%, and the bottom 50% holds only 13%. Addressing income inequality through inclusive growth policies, social welfare programs, and targeting the poor in social protection networks is necessary to cross the middle-income gap. Development must transcend mere economic growth.”

Ben Akure, Programme Coordinator

“The first comprehensive road map to enable development countries escape the MIDDLE-INCOME TRAP (MIT) is the new SAP designed to address a new development problem the hobbling and fragmented nature of the global economy (world Bank 2024) due to multiple barriers to technological innovation by upper Middle-Income Countries (MICs) such as China, India, Brazil, and South Africa, members of the BRICS group of South-South Cooperation. Its real purpose is to upgrade the WCM, the old SAPs, to ensure that the BRICS countries are unable to create a viable alternative to the WCM solutions. It will focus on influencing the development paths chosen so that they align with the Free-Market Capitalism Development Paths (FMCDP), the WCM-development path. It is essentially a knowledge trap, just as SAPs where knowledge traps inform of a misleading, poor MNC knowledge driven policy trap to promote interests of free market capitalist economies and to erode the progress made by social democratic market economies of northern Europe and globalize an enabling environment (market and policy based) for Northern MNCs interests (Macarov 2003, Madley 2003, Banugire 2017). The world Bank has identified six (6) structural factors (1) geo -political tensions, (2) multiple economic and non-economic crises, (3) rising government debt (4) high borrowing costs (5) climate change damages (6) Social and political violence that kill or make lives precarious. It recommends transformation of enterprises, pro middle class policy reforms, transition to renewable energy sources and less emissions-intensive other energy sources. It will set its knowledge-cum -policy trap in form of structural adjustments for both the MICs and LICs. Therefore, the alternative adjustments strategy by the BRICS countries as group and the south – south cooperation policies including North – South Cooperation or partnerships must offer a more progressive package. The new “Creative Destruction Model” (CDM) as a policy trap must be counter balanced with a social solidarity economy model (SSEM) for building progressive markets and socially accountable Public Sector Management (PSM) within frameworks of Global Partnerships for Sustainable development.”

DevelopmentAid: How can countries that are currently classified as middle-income overcome the barriers to reaching high-income status?

Michael Ade, Senior Economist, trade and investment
Michael Ade, Senior Economist, trade and investment
  • “Due to the mimicking behavior and inhibiting trade practices, countries find it hard to make the transition from low value-added industries, mostly characterized by primary and extractive industries like agriculture and mining, to high value-added secondary industries consisting of smart manufacturing, ICT, health and other investment attractive industries. Countries need to develop specific policies targeting these industries.
  • Durable peace and a firm commitment to regional economic stabilization are prerequisites for economic growth and economic diversification. These will help to bridge the income inequality gap, and triple the per capita income of the economically disadvantaged, thereby enabling them to join the group of high-income countries.
  • More private sector-led initiatives will be helpful given the wide-scale corruption and indifference in the government sectors. A strategy that is predicated on private sector export-led initiatives, labor-intensive or complementary investments to the tools of the fourth industrial revolution (including AI and robotics), and regional cooperation could boost exports of traditional goods and products.
  • Dispelling the myth of the natural resources curse – this refers to a paradoxical situation in which a country stagnates or regresses in terms of economic growth and development, despite being endowed or replete with natural resources. In most cases, this often occurs after the discovery of important natural resources. Ironically, resource-rich African countries tend to cluster around the upper lower-income to the middle-income levels, with few benefitting from the discovery of resources. Encouragingly, comparator countries can draw suitable lessons from developmental states like Rwanda and Mauritius which, with comparatively limited natural resources, have done very well with the diligent implementation of policies towards the achievement of developmental goals. Generally, the discovery of natural resources in regions across the world may act as an impetus towards faster economic growth, as countries take advantage of bullish commodity and metal prices.”
Joseph Viruthiyel, M&E Specialist
Joseph Viruthiyel, M&E Specialist

“Enhancing the manufacturing sector and improving logistics by investing in infrastructure, reducing regulatory bottlenecks, and promoting ease of doing business are essential. Additionally, improving education and vocational training to equip the workforce with modern economy skills is vital. Technological advances, including leveraging technology, encouraging R&D, and fostering the start-up ecosystem, can boost productivity and innovation. Building robust institutions that support good governance, transparency, and accountability is essential for sustainable development. India and the world face severe climate change challenges, leading to natural disasters. Urban pollution contributes to climate change. Multilateralism is crucial for tackling environmental pollution and climate change, and global governance must address strife and war. Redirecting war funds to combat poverty and climate change is imperative. Middle-income countries cannot bridge the income gap amid war and military-industrial dominance.”

Ben Akure, Programme Coordinator

“Solutions by upper MICs. If there is a Techno-Economic Trap (TET) driven by factors identified by the World Bank and collaborating international NGOs, it can be and should be addressed by the World Bank for the concerned upper MIC. However, in our view the main trap facing the upper MICs including the BRICS group is the knowledge and policy trap set for the MICs through the World Bank’s comprehensive road map for growth. The developing countries must continue to search for an alternative Structural Adjustment Framework (ASAF) rising inequalities and climate change damages, through appropriate social solidarity mechanisms for building social solidarity economies towards the status of People Centered Economies (PCEs) as recommended by the South Commission and strongly supported by the international team of peer reviewers of its Report (The south Centre, 1993).

Solutions by lower MICs. The lower the stage of development, the greater the need to adopt a social solidarity approach based on the principles of self-reliance for sustainable development, articulated and implemented at regional, national and local levels to avoid the traps of economic dependency and monopoly power driven governance traps.”

DevelopmentAid: How do global trends such as aging populations, rising protectionism, and the energy transition complicate the efforts of middle-income countries to achieve high-income status?

Michael Ade, Senior Economist, trade and investment
Michael Ade, Senior Economist, trade and investment
  • An aging population tends to constrict a country’s labor force, also inhibiting the use of its vibrant youthful workers. It also reduces domestic consumption and tanks domestic demand, with negative ripple effects on gross domestic product and gross national income, ultimately complicating efforts in transitioning to a high-income status.
  • Protectionism (especially against imports) is generally bad for global trade as it is inward-looking and may lead to retaliatory measures and a trade war. This is to the detriment of middle-income countries that really need key raw materials and inputs to rejig local industrialisation processes and boost economic development. Furthermore, countries should pursue export promotion of locally manufactured products to boost domestic capacity utilization. Export promotion policies represent a major element of developed countries’ strategies to foster trade, penetrate markets abroad and grow. Countries such as Japan, the US and the EU have introduced multiple promotion programs based on direct and indirect subsidization, and export incentives.
  • While energy transition including the adoption of green, renewable or clean energy is good in order to maintain a lower global carbon footprint, the challenge faced by middle-income countries is how to manage budgets and allocate funding to effectively deal with existing trade-offs between remedying the urgent current socio-economic challenges of poverty, unemployment and inequality and embracing future needs such as energy transitioning. Ironically, in most middle-income countries the current dependence on fossil-based systems of energy production and consumption (including coal, oil and natural gas), helps in creating sustainable jobs and employment opportunities in the upstream, midstream and downstream value chains.”
Ben Akure, Programme Coordinator

“Ageing population in emerging industrial economies such as China tends to reduce availability of labor, but is not a serious handicap for growth.Protectionism by More Developed Countries (MDCs) is a serious market constraint in medium and high technology products. This can be addressed by North-South Cooperation agreements for both tariff and non-tariff barriers. However, MNCs monopoly power over policies of High-Income Countries (HICs) tends to raise Non-Tariff Barriers (NTBs) against MICs through SAPs including against access to innovations through strong intellectual rights (Stiglitz 2010). For Energy transition, the MIC can compete successfully with MDCs and with one another. This offers opportunity for growth.”

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