Escaping the Middle-Income Trap

This paper provides a working definition and framework for analysis of the Middle-Income Trap (MIT). Middle-income countries can be trapped between, and unable to compete with low-wage economies that dominate in mature industries and highly-skilled advanced economies that dominate in industries undergoing rapid technological change. A country is considered to be trapped if it remains in the lower or upper middle-income category longer than the average transition period of previously successful graduates. On average, countries managed to leave the lower middle-income category in 24 years and the upper middle-income category in 14 years. This means that countries have to grow with at least 4.7% to avoid the lower middle-income trap, and with at least 3% to avoid the upper middle-income trap. The second part of this study considers the importance of inclusiveness for a country's ability to escape the MIT. Inclusiveness is a concept used to denote to what extent the population shares in opportunities to contribute to economic development. Four indicator groups serve as proxies for inclusiveness: (1) (female) educational attainment; (2) life expectancy; (3) economic inclusiveness; and (4) political freedoms and civil liberties. The importance of inclusiveness is tested by comparing countries on three dichotomies: (1) Countries that have escaped the lower or upper MIT versus those that are (expected to be) or have been trapped; (2) Countries that have transitioned to a higher income category versus those that have not; and (3) Countries with strong growth versus those with slow growth. This study finds that countries that managed to escape the middle-income trap, managed to graduate to a higher income category or experience strong growth show considerable higher levels of inclusiveness.