World Development Report 2024: The Middle-Income Trap

What indicates that a middle-income economy is advancing in its efforts to catch up with high-income economies?

The World Bank’s income classification aims to reflect a country’s level of development, drawing on Atlas gross national income (GNI) per capita as a broadly available indicator of economic capacity. GNI per capita is a useful indicator that is often closely correlated with other, nonmonetary measures of quality of life. However, it does not directly measure a country’s level of development or the welfare of its residents. Moreover, measures of income per capita can reflect high levels of investment and consumption expenditure by governments—as well as good fortune in the area of natural resources.

Because of these limitations, better indicators are needed to provide a clear picture of the underlying structure of an economy, much like an MRI provides three-dimensional images of the human body, going beyond the less-detailed view provided by an X-ray. To that end, the first step is to examine the dynamism of a country’s enterprises, its talent, and its changing carbon emissions profile. The second step is to examine specific factors that drive progress and identify those that hold it back.

Enterprise

Middle-income growth requires a shift from investment in physical capital to infusion of technology and innovation. At this stage, countries need to improve their capabilities to produce a range of sophisticated products. The Economic Complexity Index (ECI) provides a measure of a country’s productive capabilities based on the diversity and complexity of its export basket.

At this stage of growth, countries also need to improve the allocation of resources to their most productive firms. In fact, efficient allocation of the factors of production accounts for about 25 percent of productivity growth in developing countries. Efficiency in allocating resources boosts job and output growth as well as creates positive spillovers for other businesses along the value chain.

By reducing productivity-constraining distortions—defined as policy measures that curb the expansion and growth of productive firms—countries can encourage productive firms to infuse new technologies and grow. Finally, when countries focus on innovation, there is a rise in the number of their patents and the importance of these patents in the global production of knowledge.

Talent

Countries need a more skilled workforce as their production processes become more complex with infusion and innovation. Although low-skilled workers can fuel demand from firms at early stages, infusion and innovation require a shift toward workers with technical and professional skills.

Enrollment in formal schooling can signal a country’s commitment to education—even if it may not reflect the actual skills and -competencies being developed. The first step for countries, therefore, is to provide primary and secondary education to their youth.

The second step requires countries to improve social mobility—that is, to create better incentives for individuals to invest in their own skills development. With improved social mobility, they enjoy better opportunities to take advantage of their potential.

As countries improve their talent pools, innovation and infusion require countries to invest in their researchers, who contribute to the expansion of knowledge in various fields.

Energy

A reliable energy supply is vital for a country’s -economic prosperity and security. Unreliable supply disrupts production and creates additional pressures on firms to invest in alternate backup sources.

Further, growing energy use often exacerbates emissions. The ultimate impact of rising energy demand on carbon emissions will depend on the carbon intensity of production, reflecting both the energy mix and the energy intensity of production. Middle-income countries will need to enhance energy access and reliability while “decoupling” from their economic growth and carbon emissions.

The indicators suggested in table S.1 complement the use of GNI per capita to understand a country’s economic structure. The selected countries in table S.1 account for 62 percent of the global population and 72 percent of global GDP. The proposed indicators can help policy makers gain a clearer and more complete picture of their countries’ economic health. In the twenty-first century, business dynamism, the talent pool, and energy and carbon intensity are much more reliable indicators of the progress an economy is making toward reaching high-income status.