Growth in Middle-Income Countries
The Middle-Income Trap
Middle-income countries—home today to 6 billion people—are in a race against time. Many have set ambitious deadlines for themselves: reach high-income status within the next two or three decades. That will not be easy. Since the 1990s, only 34 middle-income economies have succeeded in that feat. The rest—108 at the end of 2023—have been stuck in “the middle-income trap”. Since 1970, the median income per capita of middle-income countries has never risen above 10 percent of the US level.
Climbing to high-income status in today’s environment will be harder still—because of high debt and aging populations in developing countries and growing protectionism in advanced economies. World Development Report 2024: The Middle-Income Trap outlines how all developing economies can avoid the middle-income trap.
Depending on their stage of development, countries need to adopt a sequenced and progressively more sophisticated mix of policies, shifting from a 1i (investment) approach to a 2i (investment + infusion) to a 3i (investment + infusion + innovation) approach. Moreover, the handful of countries that have made speedy transitions from middle- to high-income status have done so by disciplining vested interests, building their talent pool, and modernizing policies and institutions. Today’s middle-income countries can do the same.
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Key Policy Messages
This section summarizes the high-level policy messages from The Middle-Income Trap. Click on each card to read more.
Low-income countries can focus solely on policies designed to increase investment—the 1i approach.
Low-income countries can focus solely on policies designed to increase investment—the 1i approach.
Countries growing out of low-income status into middle-income status tend to have a 1i strategy for accelerating investment. They should:
- Improve the investment climate to increase domestic and foreign investment.
- Invest in human capital by broadening foundational skills and improving learning outcomes.
- Increase investment in expanding access and grid networks.
- Reform regulatory frameworks to attract private investment and ensure fair competition.
Lower-middle-income countries must expand the policy mix to a 2i approach—investment + infusion.
Lower-middle-income countries must expand the policy mix to a 2i approach—investment + infusion.
Lower-middle income countries should:
- Discipline market leaders through integration into globally contestable markets; diffuse global technologies; and reward value-adding firms.
- Discipline elites by providing equal opportunities for women and disadvantaged groups; allocate talent to task; develop links within academia; and allow emigration of educated workers whose skills are not valued in domestic markets.
- Discipline SOEs by hardening budget constraints; advocate for advanced economies to ease protection of domestic incumbents; boost energy efficiency; and reflect environmental costs in energy prices.
Upper-middle-income countries need to shift gears yet again, to a 3i strategy: investment + infusion + innovation.
Upper-middle-income countries need to shift gears yet again, to a 3i strategy: investment + infusion + innovation.
Upper-middle-income countries should:
- Deepen capital markets and expand equity financing; strengthen antitrust regulation and competition agencies; and protect intellectual property rights.
- Strengthen industry-academia links domestically; expand programs to connect with diaspora in advanced economies; and enhance economic and political freedoms.
- Lower the cost of capital for low-carbon energy by reducing risks involving technology, markets, and policy; and increase multilateral finance for very long-term investments.
Countries that have made speedy transitions from middle- to high-income status have disciplined domestic vested interests.
Countries that have made speedy transitions from middle- to high-income status have disciplined domestic vested interests.
Powerful incumbents—large corporations, state-owned enterprises, and powerful citizens—can add immense value, but they can just as easily reduce it. Governments must devise mechanisms to discipline incumbents through competition regimes that encourage new entrants without either coddling small- and medium-size enterprises or vilifying big corporations.
Countries should reward merit to build their talent pool.
Countries should reward merit to build their talent pool.
Middle-income countries have smaller reservoirs of skilled talent than advanced economies and are also less efficient at utilizing them. So they will have to become better at accumulating and allocating talent.
Countries should capitalize on crises as opportunities to modernize policies and institutions.
Countries should capitalize on crises as opportunities to modernize policies and institutions.
Cheap, reliable energy has long been a cornerstone of rapid economic development. But prospering while keeping the planet livable will now require paying greater attention to energy efficiency and emissions intensity. Climate change and other exigencies can provide opportunities to forge the consensus needed for tough policy reforms.
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Policy Research Working Papers
Domestic Laws and Protectionism in Government Procurement
This paper examines how procurement rules affect international trade, leveraging a novel dataset that characterizes national laws across 141 countries. Text analysis of national laws on government procurement identifies prevalent protectionist measures such as preferential treatment for domestic bidders and mandatory domestic sourcing. A descriptive analysis reveals that 124 countries incorporate preferential treatment provisions, highlighting the widespread nature of protectionism. The prevalence of procurement policies characterized as protectionist negatively correlates with trade openness across countries, in both public and private markets. This protectionist effect is confirmed in gravity regressions. Countries with more protectionist procurement laws are found to trade more domestically than from abroad in procurement markets. Industry-level estimates suggest that these effects are stronger for goods than for services.
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Policy Research Working Papers
Taxing for Growth : Revisiting the 15 Percent Threshold
Tax revenue collection is essential to the state’s ability to address market failures, provide goods and services such as health and education, invest in infrastructure, stabilize the economy in response to shocks, and maintain sustainable debt dynamics. Using a regression discontinuity design, this paper demonstrates that there is a tax threshold around 15 percent of gross domestic product where future inclusive growth improves significantly. This may be due to increased productive spending, more progressive taxes, and lower output volatility. The paper also shows that low-income countries graduate to middle-income status around the same threshold.
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Policy Research Working Papers
Export-Led Industrial Policy for Developing Countries : Is There a Way to Pick Winners?
Industrial policy prioritizes growth in specific sectors. Yet there is little agreement about how to target sectors in practice, and many argue that governments cannot pick winners. This essay observes that governments can and do identify tradable sectors where public inputs accelerate growth and generate economic benefits. These strategic sectors are: (i) those that are relatively more productive, and (ii) those that are relatively less productive but require technology like the country’s existing technology and have rapidly growing markets and limited international competition. Since developing countries are productive in fewer sectors and have less technology, targeting can be more valuable for them.
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Policy Research Working Papers
The Financial Premium and Real Cost of Bureaucrats in Businesses
This paper characterizes finance allocation distortions in capital markets across state-owned and private-owned enterprises. The analysis finds that firms with public authorities as direct shareholders (state-owned enterprises) have subsidized access to debt and equity, compared to their private counterparts. The paper then quantifies the macroeconomic effects of removing state-owned firms and reallocating their financial resources toward the private sector.
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Policy Research Working Papers
Jobless Development
Analyses of GDP per capita differences across countries focus almost exclusively on differences in productivity. This paper shows that there are also large differences in medium-run dynamics in the employment-to-population ratio. The paper finds a general tendency for productivity growth to be negatively correlated with changes in the employment to population ratio for a large sample of EMDEs—a phenomenon described using the term jobless development in this paper.
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