Middle Income Trap – All the Things You Need to Know
What is middle-income trap?
The middle income trap (MIT) can be defined as countries that have quickly reached the middle-income status but after that, they cannot overcome that income range up to the developed status.
In other words, the middle-income trap exists in some countries that could significantly reduce extreme poverty by experiencing structural changes in their economies. But after achieving middle-income status, it is difficult for them to climb from middle-income status to high-income status.
Middle income countries
By size, population, and economic level, Middle Income Countries (MICs) around the world are a distinct category. Lower middle-income economies are those with a GNI per capita between $1,036 and $4,045, whereas higher middle-income economies are those with a GNI per capita between $4,046 and $12,535 are considered to be these countries (2021). 75% of the world’s population and 62% of its poor live in middle-income countries.
According to research done by the world bank, in the year 1960, 101 countries has been deemed as middle-income countries. Among them, only 13 countries have reached the high-income status, in other words, have been developed in the year 2011. The majority of countries’ purchasing power has ranged from $8,500 to $18,500 according to the 2010 prices.
Among these countries, some countries are not in the middle-income trap. As examples for the upper-middle-income countries, we can say China, Poland, Turkey, Mexico, and so on. As examples of the lower-middle-income countries, we can say India, Pakistan, Viet Nam, Indonesia, and so on.
Countries in middle-income trap
Felipe 2012, has conducted research to find the countries that are in the middle-income trap and he has found 35 countries.
Countries in lower middle-income trap
- Philippines
- Sri Lanka
- Romania
- Albania
- Bolivia
- Brazil
- Colombia
- Dominican Republic
- Ecuador
- El Salvador
- Guatemala
- Jamaica
- Panama
- Paraguay
- Peru
- Algeria
- Egypt
- Iran
- Jordan
- Lebanon
- Libya
- Morocco
- Tunisia
- Yemen, Rep. of
- Botswana
- Congo, Rep. of
- Gabon
- Namibia
- South Africa
- Swaziland
Countries in upper middle-income trap
- Saudi Arabia
- Venezuela
- Malaysia
- Uruguay
- Syria
Among them, Saudi Arabia was an upper-middle-income country for 32 years and it will take another 35 years to reach higher-income status.
What is an example of middle-income trap countries?
Malaysia is a county that suffer from the middle income trap.
Malaysia has remained a lower middle income for 27 years. After that, it has become an upper-middle-income country and in the year 2010, it passed 15 years as an upper-middle-income country.
For the period 1991 – to 2000, there was a rapid economic growth in Malaysia approximately 7 percent of the GDP growth. But it has been reduced by approximately 5 percent GDP growth rate within the period of 2001 – 2007. So, Malaysia is in the upper-middle-income trap now.
Malaysia was using the New Economic Policy (NEP) as an economic growth strategy in the year 2009. This strategy was formulated in 1970. But the structure of the Malaysian economy and international economic conditions were very different in 2009 when compared to 1970. So as a result of the inconsistency with knowledge-led growth, the NEP has decreased investment in the private sector from 32.7 percent of GDP in 1995 to 9.3 percent in 2007. NEP of Malaysia rejects meritocracy and institutionalizes racism. So, it has prevented the full mobilization of the labor force. But these factors are very important for a knowledge-based society
Which countries have escaped middle-income trap?
Only 15 of 101 middle-income economies managed to avoid falling into the middle-income trap between 1960 and 2010, including the Hong Kong, Japan, Singapore, South Korea, Israel and Taiwan.
Why do countries fall into the middle-income trap?
1. Many nations have effectively transitioned to middle-income status by utilizing more traditional industrial policy tools, such as subsidies; but, they do not put enough effort into developing policies that support knowledge and innovation.
2. There may be problems in the development industries including manufacturing. Powerful interest groups (ex: labor unions) in the development industries can block the transformation processes of business and policy reforms. So, there may be higher wage cost in the labour intensive industries
3. Economic transformation is also expensive to maintain. In LICs, newly developing manufacturing industries frequently begin as net consumers of imported intermediate goods. Economic transformation becomes very expensive overall if these industries don’t immediately increase their export competitiveness or if the nation doesn’t establish domestic sources of intermediary goods.
4. The problems with corruption and inadequate accountability brought on by bureaucratic inefficiencies are common in many middle-income countries.
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How to overcome the middle-income trap
Construction of infrastructure: The infrastructure must also be sufficient and of high quality. With limited resources, the state or the state budget cannot fund the development of this infrastructure alone; the private sector will also be involved.
Convenient bureaucracy: The efficient operation of a nation’s economic operations will be aided by an easy, efficient, flexible, and straightforward bureaucracy. In industrialized or high-income countries, this is visible.
High-quality education: For graduates to have the skills that businesses demand, the secondary and higher education systems must expand quickly. High-value, innovative services, and manufacturing require highly skilled personnel as a necessary component.
The digital economy: A change from the traditional economic sector to that focused on high technology. For instance, economic activities rely on technology.
