The Middle-Income Trap: Some Asian Experiences and Lessons

Abstract

What explains why only a handful of countries which have attained middle-income level have subsequently been successful in attaining income convergence with high-income countries, while most of their peers falter? The problem most face has been labelled as the Middle-Income Trap. How, precisely, does the trap impact once-promising economies, and can China, the world's second largest economy, escape the trap? Are there examples China can emulated? The following pages elucidate these issues. The “middle-income trap” is an economic twilight zone in which economies that have already moved out of poverty and low income by attaining middle-income status (per the World Bank designation, the ''middle income, refers to when a country achieves per capita gross national income of between US $1,000 and $12,000), cannot seem to jump to the next affluent “high-income” stage. An economy is deemed to be “trapped” when its growth momentum slows down and it becomes perpetually stuck in the middle-income range.1 The trap is triggered simultaneously from two sides. On one side, rising wages, together with weak or stagnant productivity, render the middleincome economy uncompetitive with low-income and low-wage economies, especially in low-skill and laborintensive assembly-based production. On the other side, the weak human capital base (at least compared to advanced economies) and limited productivity and innovation capability make them unable to compete with the advanced high-income and high-wage economies, especially in technology-intensive goods and services.