World Development Report 2024: The Middle-Income Trap

Key messages

• Middle-income countries can allocate talent and human capital more efficiently by opening up education, employment, and business opportunities to all who have talent and display acquired ability. Economic development policies should not target an ideal income distribution but pay attention to enhancing mobility.

• Middle-income countries should avoid solely targeting firms for support by size. Instead, they could also assess the value that firms add to the economy through jobs, exports, technology infusion, and innovation. Countries’ policies should target support to those firms that display the most potential for growth, while letting go of unproductive firms, modernizing organizational models to manage firms, and connecting entrepreneurs with money (financing opportunities), mentors, and markets.

• Middle-income countries will need to adopt policies that support the diffusion of lower-carbon energy technologies, incentivize the efficient use of energy, and consider the social and ecological costs of greenhouse gas emissions. They should consider all options for decoupling their growing economies from the growth of these emissions.

Moving forward by promoting merit activities

To strengthen the forces of creation, middle-income countries will need to shift their policies and institutions toward promoting merit activities—that is, those with positive effects on general well-being and that aid in the efficient use of talent, capital, and energy.

Specifically, middle-income countries should put three considerations at the center of economic policy making: the economic and social mobility of people; the value added by firms; and the greenhouse gases (GHGs) emitted by the economy.

• The economic and social mobility of people. Governments should adopt policies that will enable an economy to allocate talent and human capital more efficiently—in particular, by opening up education, employment, and business opportunities to all those who have talent and display acquired ability. Because advancing the sophistication of an economy can increase income inequality, economic development policies should not target an ideal income distribution. Instead, by rewarding talent and effort, policies can generate both higher social and economic mobility, which leads to faster growth. However, perceptions of mobility matter. When perceptions of the opportunities for future mobility are high, social tolerance of inequality is also high, and vice versa.

• The value added by firms. A similar principle applies to firms. Dynamic, productive young firms should be able to expand, and less productive firms should be able to contract and exit, thereby enhancing value added across the economy through efficient resource utilization. Policies should not target firms for support by size, but instead should assess the value that firms add to the economy through jobs, exports, technology infusion, and innovation.

• The GHG emissions of an economy. A similar principle also applies to energy. Government policies should aid in the diffusion of lower-carbon energy technologies, encourage the efficient use of energy, and consider the social and ecological costs of GHG emissions. Because today’s middle-income countries account for two-thirds of global GHG emissions and all new emissions growth, they will need to consider all options to decouple their growing economies from higher GHG emissions.

The economic and social mobility of people

The introduction of global technologies must go hand in hand with a search for the technical workers and specialized professionals needed for firms to adopt technologies, along with competent managers to run firms. Meanwhile, more engineers are needed to build and maintain infrastructure, teachers to educate students, doctors to treat patients, and highly qualified men and women to run governments. Chapter 5 highlighted that middle-income countries face two related challenges. First, talent is scarce in those countries because they do not accumulate human capital. Second, middle-income countries are not as effective as high-income countries in allocating talent to tasks. Middle-income countries must then focus on improving social mobility—going beyond narrowly focusing on inequality. In doing so, these countries will need to revise how they reward talent by upgrading their talent pool, selecting efficient learners, expanding occupation choices and rewards, and nurturing scientific inquiry and enhancing research capabilities, and installing a socially responsible safety net to protect those who may lose their livelihoods in the creative destruction process.

Upgrading the talent pool

Support high-quality secondary and higher education

Countries that transitioned from middle- to high-income status in recent decades sought to accumulate human capital, which begins with developing foundational skills. As a result, their upper-secondary enrollment and graduation rates, as well as their tertiary education enrollment rates, steadily increased (figure 8.1). Countries that did not transition to high-income status have attained levels of tertiary education that are close to the levels achieved by countries at the time of their transition, but enrollment in and completion of upper-secondary education have lagged for a wider swath of the population. For significant shares of the population in countries that have not transitioned to high-income status, education stops in the early teen years, or earlier, especially for girls and members of minorities. Unless these countries secure foundational skills, their talent pipeline will remain weak.

How should countries allocate education spending between foundational and advanced skills? In setting priorities, countries may want to consider the principle of progressive universalism, which advocates investing progressively in higher education as quality for all is reached at lower educational levels. The “universal” component advocates high-quality education for all. The “progressive” component recognizes that efforts and resources are limited and prioritizes the early years of a child’s life, as well as outreach to disadvantaged students who face the greatest learning hurdles. The Republic of Korea adopted this approach. In the 1950s, it enforced compulsory education and devoted nearly 80 percent of its education budget to primary education, thereby increasing enrollment rates from about 40 percent to 90 percent in 10 years. Korea then shifted its efforts and spending to secondary education and attained equally rapid success. Only later did it invest substantially in tertiary education. Throughout this period, Korea focused not only on enrollment but also on learning—for all. Because its efforts to improve foundational skills were focused and deliberate, Korea was able to pivot to advanced skills in a relatively short period of time. An emphasis on foundational skills for all was key to the success of school reforms in other countries as well (box 8.1).

Strengthening foundational skills does not always require more money, but it does require efficient spending. In fact, countries that spend more do not necessarily have better learning outcomes. A comparison across 46 countries of 150 interventions in early childhood and primary and secondary education reveals that some of the most cost-effective programs deliver the equivalent of three additional years of high-quality schooling (comparable with that of the highest-performing education systems) for just US$100 per child. The three most cost-effective interventions are targeted information campaigns about the benefits, costs, and quality of schooling; interventions to target teaching instruction by learning level rather than grade; and improved pedagogy through structured lesson plans providing student materials, teacher professional development, and monitoring. Other policies—such as early childhood development and merit-based scholarships—are costlier and yet are still highly effective.

Box 8.1 Developing foundational skills: Learning from Finland and Chile

The successful reforms implemented by countries that graduated from middle- to high-income status have shared three elements.a First, they broadened access to foundational skills to create a large, deep talent pool of high school graduates. Second, they relied on student assessments to collect information on learning and evaluate progress toward achieving policy goals. Third, education reforms were part of a deliberate long-term growth strategy.

Finland. In the early 1970s, Finland replaced its two-track school system (students were divided into two tracks, general secondary and vocational, after the first four years of education) with a nine-year comprehensive school system (all students followed the same national curriculum until age 16 and then chose a track). In addition, teacher training became more selective and rigorous. Finally, curricula setting went from highly centralized to more decentralized.b These reforms broadened the talent pool, which may have helped weaken the relationship between parental income and, for example, the likelihood of becoming an inventor.cReforms also targeted higher education, making access more equitable and holding institutions accountable for their contributions to the economy.

Chile. Since the 1980s, students in Chile have had access to universal vouchers to attend private schools. In 2008, a reform was enacted to raise the voucher amount for disadvantaged students, provide additional funding to schools with large shares of such students, and create an accountability system for schools receiving vouchers. Critically, a test-based assessment system was created in the 1980s and is still being used to gauge results. The opening of private universities was encouraged, new sources of student funding became available through scholarships and loans, and the supply of short-cycle higher education programs grew rapidly.d Against the backdrop of these reforms, the share of high school students scoring above minimum proficiency levels in the worldwide assessment, the Programme for International Student Assessment (PISA), rose from 53 percent to 68 percent between 2000 and 2018, and net enrollment rates in higher education have grown from less than 5 percent to about 45 percent since 1970. Furthermore, college access has become more equitable for men and women and for students from different socioeconomic backgrounds.e However, the share of disadvantaged students among top performers in the high school math exit exam has barely changed over the past five decades, suggesting that, although many disadvantaged students have gained access to college, their elementary and high schools are not yet preparing them for admission to Chile’s top universities.

a. See, for example, Aghion et al. (2023) and Pekkarinen, Uusitalo, and Pekkala Kerr (2009) for Finland; World Bank (2021) for Ireland; Lee, Jeong, and Hong (2014) for the Republic of Korea; Guyon, Maurin, and McNally (2012) for Northern Ireland; and Jakubowski et al. (2016) for Poland.

b. Pekkarinen, Uusitalo, and Pekkala Kerr (2009); Saavedra-Chanduví, Alasuutari, and Gutiérrez Bernal (2018).

d. Aguirre (2021); Fontaine and Urzúa (2018); Murnane et al. (2017); Solis (2017); Vegas (2018).