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.
Download Report Overview
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.
Multimedia
Policy Research Working Papers
The World Bank’s New Inequality Indicator: The Number of Countries with High Inequality
The World Bank recently introduced a new key indicator to guide its work: the number of countries with high inequality, defined as a Gini index above 40. The new indicator was introduced as part of the new World Bank vision of ending poverty on a livable planet. This paper reviews why reducing inequality matters for ending poverty on a livable planet, summarizes the advantages and disadvantages of using the Gini index to track inequality, outlines challenges in measuring inequality, and discusses what a Gini threshold of 40 implies. Using the most recent data for every country, 52 countries of a total of 169 countries are classified as high inequality countries, which represents a decline from 77 countries at the beginning of the millennium.
Read more
Policy Research Working Papers
Leveraging Growth Regressions for Country Analysis
This paper shows how growth regressions can be useful for analyzing a country’s growth performance. Growth regressions describe changes in key macroeconomic variables that countries typically experience during their growth process. Such partial correlations facilitate comparative analysis, can usually be linked to policies, and can hence be informative from a policy perspective. Against this background, the paper introduces a new data set of growth correlates spanning more than 150 countries from 1970 to 2019. Additionally, it presents several econometric reference models and details their application for country-level growth analysis. Two distinct metrics highlight infrastructure and human capital as exhibiting the strongest correlations with growth.
Read more
Policy Research Working Papers
Energy Price Shocks and Current Account Balances: Evidence from Emerging Market and Developing Economies
This paper investigates the effects of real energy price shocks on the current account balances of 45 emerging market and developing economies using country-specific structural vector autoregression models.
Read more
Policy Research Working Papers
What Explains Global Inflation
This paper examines the drivers of fluctuations in global inflation, defined as a common factor across monthly headline consumer price index (CPI) inflation in G7 countries, over the past half-century.
Read more
Policy Research Working Papers
Is There Still A Role for Direct Government Support to Firms in Developing Countries?
Should governments in developing countries directly support firms with policies such as grants, subsidized loans, and training and consulting programs, or should they instead just aim to enact sensible regulatory and macroeconomic policies and not attempt to engage in industrial policy? While industrial policy has gained renewed attention in developed economies, it faces considerable skepticism in developing countries scarred by previous experiences and facing limited fiscal space. This paper discusses the rationale for government involvement, and then lessons from a recent research agenda in development economics on how to target these programs, on whether they induce firms to undertake additional activities, on avoiding political capture, and on how these interact with competition.
Read more
Other Links