World Development Report 2024: The Middle-Income Trap

Key messages

• Today’s 108 middle-income countries represent about 40 percent of the global economy, are home to about 75 percent of the world’s population and more than 60 percent of the world’s poor, and contribute nearly two-thirds of global carbon dioxide emissions.

• Middle-income countries are prone to systematic growth slowdowns—a concept termed the “middle-income trap.” The median growth slowdown episode occurs when a country reaches about 11 percent of the gross domestic product per capita of the United States.

• Although income per capita is the metric most commonly used to measure the pace of economic development, measures of average income can differ greatly, depending on the measure.

• Countries with weaker institutions—and especially those with lower levels of economic and political freedom—are more susceptible to slowdowns at even lower levels of income.

Introduction

The problem of economic growth in middle-income economies has been a concern of development policy practitioners for at least five decades. In the first World Development Report, published in 1978, “middle-income” was an omnibus term applied to countries with diverse economic characteristics at various stages of development. Middle-income countries were defined as those with annual income per capita of over US$250. By that definition, 58 countries, home to about 900 million people, were designated middle-income. Despite the diversity, World Development Report 1978 identified two characteristics that distinguished middle-income from low-income countries:

• Their growth prospects were more sensitive to economic conditions in the industrialized (high-income) countries, particularly the environment for trade and commercial capital flows.

• They had more resources available to raise the living standards of the poor.

The 1978 Report emphasized the central role of cultivating engineering talent to design products that change continually and rapidly, alongside better organizing workshops and other production facilities so they are made efficiently.

Interest in the economic growth of middle-income countries rose over the last two decades, especially after a 2007 World Bank regional report on East Asia introduced the term “middle-income trap.” The term encapsulated the concern that middle-income countries are prone to systematic slowdowns in growth demonstrated, for example, by the economic stagnation in Latin America and the Middle East since the mid-1970s. This chapter assesses whether the experience of the developing world is consistent with this concern. It finds that the majority of growth slowdowns do take place in middle-income countries. The median growth slowdown episode occurs when a country reaches about 11 percent of the gross domestic product (GDP) per capita of the United States. This chapter also documents that countries with weaker institutions—and especially those with lower levels of economic and political freedom—are susceptible to slowdowns at even lower levels of income.

Chapter 2 explores a related but relatively qualitative question: Is economic growth during the middle-income stage systematically different from growth in low- and high-income countries? Chapter 3 examines the growing concern that rapidly changing economic conditions and policies in the advanced economies of the North Atlantic will make development in middle-income countries even more difficult.

Growth in middle-income countries

The share of middle-income countries in the global economy has increased rapidly since the 1990s, suggesting that it is easier to enter the middle-income stage than to exit it. According to the World Bank’s 2023 income classifications, the 108 current middle-income countries are split evenly between lower- and upper-middle-income countries. Representing about 40 percent of the global economy, middle-income countries are home to about 75 percent of the world’s population and more than 60 percent of the world’s poor. In other words, more than 400 million of the extreme poor globally live in middle-income countries, a statistic that should concern wealthier countries. They also contribute nearly two-thirds of global carbon dioxide (CO2) emissions (see table P1.1), a statistic that is of global concern.

Over the last three decades, the world’s two most populous countries, China and India, joined the club of middle-income countries, in 1997 and 2007, respectively. It is not surprising, then, that growth in middle-income countries will play a pivotal role in international development.

Since 1990, 34 middle-income economies have transitioned to high-income status (figure 1.1). Thirteen benefited from deep integration with the European Union (EU)—whose economic model features vigorous trade and capital flows, freer enterprise, free worker mobility, stronger institutions, and social inclusion—at a time of relatively rapid economic growth in Western Europe. They benefited greatly from institutional and regulatory reforms that enabled transitions to a market economy, incentivized emerging economies to attract foreign direct investment and infuse new technologies into their production structures while pushing advanced economies to innovate, and fostered an environment for developing a skilled workforce.

Among the other newcomers to high-income status, resource-rich economies such as Chile and Saudi Arabia benefited when they timed policy reforms to coincide with high commodity prices. East Asian economies such as the Republic of Korea and Taiwan, China, stand out for following a path of high savings and investment, enlightened education policies, expansion of trade with export-oriented policies and technology adoption from more advanced economies, and a transition to local innovation well after closing the gaps with the global technology frontier.

For countries that are not fortunate enough to be in the European Union, are not endowed with abundant resources, or are not fiercely focused, progress through the middle-income stage has been slower. The average middle-income economy still has an income per capita less than one-tenth that of the United States (figure 1.2).

It is understandable why middle-income countries are not satisfied with the status quo and why most have plans for faster growth in living standards. China’s 14th Five-Year Plan outlines a vision of achieving the median GDP per capita of developed nations by 2035, with a large increase in the middle class. The vision document also highlights that China’s growth will be driven by major breakthroughs in key technologies, making it one of the most innovative nations in the world, buttressed by a modern economic system with digitalization, thriving cities, and modern agriculture. In India, the prime minister’s vision is to transform the nation into a developed economy by 2047—the hundredth year of independence. In Viet Nam, its Socio-Economic Development Strategy 2021–2030 outlines a plan to sustain GDP per capita growth of 7 percent through this decade, with a transition to high-income status by 2045. In South Africa, the 2030 National Development Plan has prioritized raising its income per capita from US$2,800 in 2010 to US$7,000 by 2030. Other middle-income countries have similar aspirations.

But the growth prospects of middle-income countries are not improving. Over the last decade, the global economy has gone from healthy to hobbling and from largely integrated to increasingly fragmented. Foreign trade and investment channels are also becoming more constricted—or at least encumbered—by geopolitical tensions. Meanwhile, the room for governments to act is shrinking due to rapidly changing demographic trends (more rapid than countries had planned for), multiple crises, and populist pressures. In many middle-income countries, government debt—which is more expensive for this income group than for any other—is at an all-time high. And the belated efforts of advanced economies’ central banks to normalize monetary policy and control inflation by raising interest rates has increased sovereign spreads (the difference between bond yields issued on international markets by the country in question versus those offered by governments with AAA ratings) and raised borrowing costs for emerging markets, in some cases to prohibitive levels. As a consequence, middle-income economies are being squeezed from several sides: tighter fiscal space reduces public investment and the cushion for structural reforms; higher public debt service crowds out private borrowing; and a higher risk of sovereign debt distress heightens policy uncertainty and dampens economic activity.

These difficulties are compounded by others. In some middle-income countries, fragility, conflict, and violence are hampering development. And in almost every country, climate change is putting pressure on the government to rethink its development strategy.

Given these headwinds, an economy at the middle-income stage will have to “make a miracle” to develop at the pace of the 34 economies that reached high-income status between 1990 and 2021. That would require having a business sector that facilitates a radical transformation of enterprises, having a government that assuages the growing expectations of an increasingly restless middle class, and having a country transition sooner to less emissions-intensive ways of producing and consuming than those engineered by the middle-income economies of the 1990s.

Even without these headwinds, today’s middle- income countries would still face long odds of achieving high-income status because of what the World Bank has called—since 2007—a “middle-income trap.” Although the term connotes inevitability, the original proposition was that getting mired in the middle stages of development is a possibility, not an inevitability. It would be inevitable only if countries did not adapt their policies and institutions to changing economic and structural needs. The three priorities for middle-income countries to evade the trap and maintain a growth momentum could be summarized as:

• Increasing the sophistication of processes and products through integration into world markets, generally accompanied by the growing specialization of production

• Keeping up with changing education system priorities to help workers acquire skills that enable them to adjust to new technologies and shape new products and processes

• Quickening the pace of innovation by both fostering entrepreneurial activity and keeping markets open to competition.

These tasks have proved to be surprisingly difficult, and they are likely to become even harder.