World Development Report 2024: The Middle-Income Trap

Key messages

• Many middle-income countries have a shortage of talent, a key ingredient for bolstering the forces of creation. Yet the forces of preservation prevent talent from developing as well as waste the existing talent.

• Talent matters more in middle-income countries than in low-income countries because in middle-income countries skilled workers have become increasingly key to their economic, structural, and technological transformation.

• The opportunities for social mobility in middle-income countries are few due to three main forces of preservation: networks, neighborhoods, and norms.

• Networks, such as elite pacts, facilitate the formation of groups that can determine access to jobs, services, and policy making. As a result, they tend to keep in-groups in and out-groups out, devalue talent and merit, perpetuate inequities of opportunity, and depress expectations for upward mobility in middle-income countries.

• Neighborhoods shape the access of those who were born, grew up, and lived there to opportunities and aspirations. In many middle-income countries, neighborhoods keep people stuck in place, impede migration, hinder productive agglomeration, slow knowledge diffusion, and block the pathways to scale that efficient small enterprises need to become large productive and innovative firms.

• Norms—particularly patriarchal social norms—can hold back women and other marginalized communities from entering the labor force, as well as from benefiting from educational opportunities. In this way, norms prevent the development and growth of talent among half the population of middle-income countries.

Preservation is an antagonist of creation because it is also an antagonist of destruction

In 2005, the government of Indonesia attempted to implement reforms that would heighten students’ achievement in elementary and lower secondary schools. One such reform included a rigorous teacher certification requirement in exchange for doubling teachers’ salaries. Although the certification process was supposed to include high-quality external assessments of teachers’ subject knowledge and pedagogical practice, the issue became highly politicized. Consequently the intended competency tests were replaced with weak certification requirements, and the reform amounted to a 100 percent salary hike for all teachers. Despite its very high fiscal price tag, the reform yielded no improvement in student achievement, although such a systemic improvement of teacher requirement may take a longer time to have a systemwide impact on learning.

As enterprises in middle-income countries infuse global technologies, they will need technical workers and specialized professionals to adopt and use technology as well as managers to run modern firms. Middle-income countries have a shortage of such talent, which is a key ingredient of efforts to bolster the forces of creation (see chapter 4). Yet the forces of preservation keep talent from developing as well as waste the existing talent, therefore reducing the incentives for many individuals to invest in developing their human capital. In many middle-income countries, access to opportunities is not based on merit, resulting in high income inequality and few opportunities for social mobility, thereby perpetuating “social immobility.” The roots of social immobility can be traced to networks, neighborhoods, and norms:

• Networks keep in-groups in and out-groups out, devalue talent and merit, perpetuate inequities of opportunity, and depress expectations for upward mobility, all for the sake of preserving social elites—and, with them, inefficient incumbent firms.

• Neighborhoods keep people stuck in place, impeding migration, hindering productive agglomeration, slowing knowledge diffusion, and blocking the pathways to scale that efficient small enterprises need to become large productive firms—and to become the innovative incumbents of the future.

• Norms keep women and marginalized communities out of the labor force, out of education, out of skills, out of luck, and out of hope.

The first two forces of preservation emerge from elite pacts, keeping out-groups out. The third is a consequence of patriarchal social norms and a system of attitudes and beliefs. The result is that women have unequal access to resources and power, thereby holding back a large proportion of the population. To be sure, all three factors can be helpful in filling the gaps left by missing markets and missing services, but they also become sources of preservation when they restrict and ration access based on social status.

This chapter highlights how social immobility preserves the status quo, exacerbating the stunting and waste of talent in middle-income countries. Although the forces of preservation discussed here focus on talent for a growing middle-income economy, the principles broadly apply to enterprise and energy as well. For example, obstructions posed by incumbents, including state-owned enterprises, hobble the drive for a quick lower-carbon transition, mainly led by young firms in the private sector. Incumbents can cause significant delays by refusing network connection on shared assets (“deep connection”). Incumbents can also “curtail” the distribution of power generated by wind and solar energy—a persistent problem for renewable energy developers in several middle-income countries, despite a “must-run” assurance in regulations to deliver reliable energy supplies.

This chapter examines three questions:

• How harmful are the forces of preservation in middle-income countries? As countries transition from low-income to middle-income status, the demand for skilled workers such as technicians, professionals, and managers increases substantially. As income per capita increases, the share of workers employed in small firms declines, and the share of those employed in medium and large firms steadily increases. Countries with greater social mobility have more skills to draw on in the workforce. The forces of preservation, holding back social mobility, are much more harmful in middle-income countries than in low-income countries.

• How do the economic and social “elite” preserve the status quo? Although economic and social elites have the resources and the education to help accelerate growth through the infusion of global technologies, their dominance can also buy economic, social, and political power. By capturing political and social institutions, they have an outsize say in who studies where and what, who gets a sought-after job and what they are paid, and who gets to start a business. They also influence housing markets to determine who lives where and whether newcomers to a city or country are welcome. The status quo is preserved by keeping “others” out.

• How does gender inequality hold back the potential of women? In many middle-income countries, patriarchal gender norms hold back women from taking advantage of attractive opportunities in the labor market and for entrepreneurship. Discrimination, sexism, and misogyny occur in all walks of life, including the businesses women own, the jobs they get and the pay they receive; how much their families spend on educating them and for how long; and their ability to operate bank accounts. Unequal social norms and beliefs and the institutions that reinforce men’s status advantage and access to more resources and power hold back nearly half a country’s people, curtailing an economy’s growth. It is of particular concern in graying middle-income countries projected to face labor crunches.

Talent drives economic progress, but social immobility holds back the development of talent

Fostering talent is a priority for middle-income countries

As economies grow, their production processes become more complex; they rely on a growing division of labor, and the need for new talents emerges. Agrarian societies need few skills, whereas high-income countries need many more for their high-end, sophisticated services. The share of skilled workers among the workforce is very low in low-income countries, but it increases steadily as countries move from lower-middle-income to upper-middle-income to high-income status (see chapter 2, figure 2.3). Pakistan would need to double its share of skilled workers to reach the level of Chile, and China would also need to increase its share substantially. In general, as middle-income countries grow—particularly as they approach high-income status and must innovate rather than simply adopt technologies—they require increasingly sophisticated talent. Such transformations in the economy make the development and efficient allocation of talent particularly important for middle-income countries and place social mobility and equitable access to opportunities at the forefront of policies to promote growth and social welfare.

Skilled workers are key to economic, structural, and technological transformation

Firms grow as skilled workers, such as managers and professionals, become more abundant. In lower-income countries with gross domestic product (GDP) per capita under US$3,000, most workers are unskilled and employed in small firms with fewer than 10 employees (figure 5.1). As GDP per capita increases, the share of workers employed in small firms declines, and the share of those employed in medium and large firms increases steadily. As economies transition to higher-income status, the demand for skilled workers such as technicians, professionals, and managers increases substantially. In turn, more educated managers are more likely to adopt technology for general and sector-specific business functions, thereby raising not only the productivity of their firm but also contributing to creation and economic progress for the economy as a whole (box 5.1).

Improving social mobility is a priority for middle-income countries

How do societies select who has access to education, employment, and finance? What prevents talent from being nurtured? A better-educated and wealthier parent has a greater capacity to finance investments and make better investment decisions, has better connections for job searches and placements, and can serve as a role model in terms of education and professional work. In a self-reinforcing cycle, greater investments—and better investment choices—yield increasing benefits to parental background: that is, they create increasing returns. In particular, greater investments by parents in early childhood increase the returns on later investments. This approach can lead to higher inequality and the development of a “human capital elite,” where there is considerable mobility within a class boundary but not across classes. A striking example is the intergenerational persistence among political elites (where the social and economic status of family members between generations stays the same). In many low-income and middle-income countries, the descendants of political elites also tend to be involved in and consolidate power and resources through politics.

Countries characterized by higher income inequality are often those in which a significant portion of economic advantage is transmitted from parents to their children. The association between income inequality and intergenerational immobility—often referred to as the “Great Gatsby Curve”—is positive as more unequal countries are more socially immobile (figure 5.2). This association is much stronger for middle-income countries than for high-income countries.

At one end of the income equality scale is Finland, where schooling is largely free at all levels and is of very high quality by international standards. There, 80 percent of children attain a level of social mobility that is not dependent on their parents’ social status. By contrast, in middle-income countries on average, intergenerational persistence is much higher (40 percent). Specifically, the share of individuals whose social and economic status is the same as that of the previous generation is more than twice as large as in Finland. Closing even a fraction of this gap means a great boost to acquisition and allocation of talent and to growth.

Box 5.1 Firms with better-educated managers adopt more technology

If technology is available, why don’t more firms adopt it? Data from the World Bank’s Firm-level Adoption of Technology (FAT) survey of 12,000 firms in 11 developing countries reveal that the average firm has adopted an intermediate level of technology, scoring 2.4 on the technology adoption index out of a possible 5.a The education level of managers is an important factor in the adoption of technology because better-educated managers are more likely to adopt technology (figure B5.1.1). A manager’s education is particularly important to the adoption of advanced technologies such as enterprise resource planning for business administration, software-based statistical control or automated systems for quality control, and robots or additive manufacturing for advanced manufacturing.

The process may also work two ways: firms that adopt more technology hire more educated managers. But a considerable share of firms (more than 30 percent in Georgia, Ghana, India, Kenya, and Senegal) view the lack of capabilities—including managers’ and workers’ skills—as an important barrier to technology adoption, suggesting that having better-educated managers may be a prerequisite for greater technology adoption.

a. The World Bank–administered FAT survey provides firm-level data on the adoption of more than 300 technologies across approximately 50 business functions. These include general business functions that are common to all firms and sectors, such as business administration, operations planning, sales, and quality control. They also include sector-specific business functions that vary across sectors. For food processing, for example, functions include input testing; mixing, blending, and cooking; antibacterial procedures; packaging; and storage. For further information, see Cirera, Comin, and Cruz (2022).

Social mobility is key to enabling growth, particularly more equitable and inclusive growth. Countries with greater social mobility have more skilled workforces. Data reveal that if two countries have the same income per capita but one has more social mobility than the other from one generation to the next (intergenerational mobility), the country with greater intergenerational mobility has a higher share of skilled workers. This positive association between the share of skilled workers and social mobility arises because a country with higher mobility is able not only to produce more talent but also to generate more skilled jobs. More advanced economies are also better able to ensure that more individuals, regardless of their parents’ circumstances, have better opportunities to become skilled workers. And social mobility matters much more in middle-income countries than in low-income countries simply because the former need more skilled workers to invest, infuse, innovate, and grow (figure 5.3).