World Development Report 2024: The Middle-Income Trap

In brief

Middle-income countries are in a race against time. Since the 1990s, many of them have done well enough to escape low-income levels and eradicate extreme poverty, leading to the general perception that the last three decades have been great for development. But this is because of abysmally low expectations—remnants from a period when more than two-thirds of the world lived on less than a dollar a day. The ambition of the 108 middle-income countries with incomes per capita of between US$1,136 and US$13,845 is to reach high-income status within the next two or three decades. When assessed against this goal, the record is dismal: the total population of the 34 middle-income economies that transitioned to high-income status since 1990 is less than 250 million, the population of Pakistan.

During the last decade their prospects have worsened. With rising debt and aging populations at home, growing protectionism in advanced economies, and escalating pressures to speed up the energy transition, today’s middle-income economies are growing into ever-tighter spaces. The odds that the 6 billion people in today’s middle-income countries will see their countries grow to high-income status within a generation or two were never that good. Now they are decidedly daunting.

Drawing upon the development experience since the 1950s and advances in economic analysis by Schumpeterian economists, World Development Report 2024 (WDR 2024) identifies pathways for emerging market economies to avoid what has become known and feared as the “middle-income trap.” The Report points to the need for not one but two transitions during middle-income. The first is to transition from a 1i strategy for accelerating investment to a 2i strategy that emphasizes both investment and infusion in which a country brings technologies from abroad and diffuses them domestically. Governments in lower-middle-income countries must add to investment-driven strategies measures to infuse modern technologies and successful business processes from around the world into their national economies. This requires reshaping large swaths of domestic industry as global suppliers of goods and services.

Once a country has succeeded in doing this, it can switch to a 3i strategy where it increases attention to innovation. Upper-middle-income countries that have mastered infusion can complement investment and infusion with innovation—beginning not just to borrow ideas from the global frontiers of technology but also to push the frontiers outward. This requires restructuring enterprise, work, and energy use once again, with an even greater emphasis on economic freedom, social mobility, and political contestability.

Transitions across growth strategies are not automatic. Success depends on how well societies juggle the forces of creation, preservation, and destruction. They can do this by disciplining incumbency, rewarding merit, and capitalizing on crises. Incumbents—large corporations, state-owned enterprises, and powerful citizens—can add immense value, but they can just as easily reduce it. Governments must devise mechanisms to discipline incumbents through competition regimes that encourage new entrants without either coddling small and medium-size enterprises or vilifying big corporations. Middle-income countries have smaller reservoirs of skilled talent than advanced economies and are less efficient in utilizing them, so they will have to become better at both accumulating and allocating talent. Cheap and reliable energy has been a cornerstone of rapid economic development, but prospering while keeping the planet livable will now require much more attention to energy efficiency and emissions intensity. Exigencies such as the rise of populism and climate change provide opportunities to dismantle outdated arrangements and make room for new ones; crises are painful, but in democracies they can help forge the consensus needed for tough policy reforms.

The handful of economies that have made speedy transitions from middle- to high-income have encouraged enterprise by disciplining powerful incumbents, developed talent by rewarding merit, and capitalized on crises to alter policies and institutions that no longer suit the purposes they were designed to serve. Today’s middle-income countries will have to do the same. The question is how. Given the complex problems they will have to deal with to prosper, the imperative for today’s middle-income economies is surprisingly simple: they will have to become efficient—in the use of capital, labor, and energy. This is easier said than done, but advances in economic analysis during the last three decades provide useful pointers.

Readers might immediately recognize the problem with equating a country’s development with its income per capita. In fact, development practitioners have been using a raft of similarly superficial indicators to assess the structural strength of an economy and its disaggregates such as industry, society, and ecology. We have become accustomed to using the size distribution of firms in an industry to measure its productive efficiency, household income distributions to assess social durability, and the distribution of energy sources to approximate ecological sustainability. But as economic structures become more complex, these measures have become increasingly inaccurate and progressively poorer guides for making policy.

WDR 2024 is premised on the conjecture that, relative to the complexity of their economic structures, middle-income countries have more serious information deficits than either low-income countries or advanced economies. As a result, they suffer more than the others the consequences of policies predicated on superficial measures of economic efficiency, making them especially prone to premature slowdowns in development. This pathology was nicknamed the “middle-income trap” by World Bank economists, and strategies to avoid it are the subject of this Report.

In implementing these strategies, the Report recommends against using relatively superficial measures like firm size, income inequality, and energy sources to make policy, relying instead on unconditionally reliable measures such as value added, socioeconomic mobility, and emissions intensity. The latter are more realistic metrics for policy making, but they are also more demanding. Policy makers will have to be more willing to make public sensitive data, to openly debate policy, and take any opportunity to destroy outdated arrangements. This requires information that is harder to get, but it is essential. Without it, middle-income countries will be sailing blind into ever-stormier seas.

Since the 1970s, income per capita in the median middle-income country has stayed below a tenth of the US level. Growing geopolitical, demographic, and environmental complications will make economic growth harder in the years ahead. To become advanced economies despite these headwinds, middle-income countries will have to make miracles.

‘To get rich is glorious’

You are a policy maker in one of the world’s 108 middle-income countries. You have learned the importance of creating a credible, solid macroeconomic foundation for private investment, domestic and foreign, supported by strong institutions and clean governance. And, like Deng Xiaoping nearly 50 years ago, quoted here, you have big plans.

If your country is China, your 14th Five-Year Plan envisions reaching the median gross domestic product (GDP) per capita of developed nations by 2035, thereby greatly expanding your middle class. If it is India, your prime minister’s vision is to turn the nation into a developed economy by 2047, the centennial of independence. If it is Viet Nam, your Socio-Economic Development Strategy 2021–2030 outlines a strategy for sustained GDP per capita growth of 7 percent through this decade, with a transition to high-income status by 2045. And if it is South Africa, your 2030 National Development Plan sets a goal of raising the income per capita from US$2,800 in 2010 to US$7,000 by 2030. Other middle-income countries have similar aspirations.

If these plans succeed, your country will reach high-income status in less than one generation, or in one or two. Your firms will be earning like never before. Your people will be consuming like never before. Far fewer people will be poor, with none desperately poor. In the halls of government, these plans generate tremendous optimism.

But there is a problem.

According to widely used measures such as the World Bank’s World Development Indicators, you see that economic growth in middle-income countries—including your own—is not accelerating. If anything, it is slowing down as incomes increase—and even more so every decade.

Moreover, your country is not catching up with the income levels in advanced economies. Among those economies, the United States is still considered the world’s economic leader; people living in countries with incomes higher than those of Americans add up to fewer than 25 million. Since 1970 the mean income per capita of middle-income countries has never risen above one-tenth that of the United States (figure O.1).

Compared with the United States, middle-income countries seem trapped at modest income levels.

The observed rates of economic growth in middle-income countries do not exceed those in high-income countries by the margins needed to catch up in one generation—or even two or three. Estimates using the World Bank’s Long Term Growth Model, which is based on the celebrated Solow-Swan growth model, suggest that if the drivers of economic growth—investments in human capital, total factor productivity, labor force participation, and the shares of economic output devoted to public and private investment—follow recent and historic trends, most middle-income countries are likely to experience significant slowdowns between 2024 and 2100. Countries such as Brazil and Mexico are likely to be even further behind the United States in 2100 than they are today.