The Economist on The Middle Income Trap

But first things first: what is a middle income trap?

Here’s my assistant’s answer:

The middle-income trap is a concept that describes a situation where a country’s economy gets stuck in a middle-income range, and it struggles to advance to higher levels of development.
To understand this, we need to first know about development economics and growth theory. Development economics is the study of how countries become richer and more developed over time. Growth theory is a part of development economics that studies how economies grow and what factors help or hinder growth.
Now, let’s go back to the middle-income trap. When a country starts to develop, it usually grows quickly and becomes a middle-income country. However, some countries find it hard to keep growing and end up getting stuck in this middle-income range.
The problem is that these countries face new challenges when they reach this stage. For example, they may have to compete with cheaper goods from other countries, or they may need more advanced technology to keep growing. These challenges can be difficult to overcome, and the country’s growth slows down or even stops.
This can be a problem because being stuck in the middle-income trap can mean that a country’s people do not get richer over time, and the country may not be able to provide the same opportunities as wealthier countries.
To avoid the middle-income trap, countries need to keep innovating and adapting to new challenges. This can involve investing in education and training, creating new technologies, and finding new ways to do things. By doing this, a country can keep growing and move towards becoming a high-income country.

So which countries find themselves in the middle income trap? The Economist has a lovely chart within an article that helps us find out the answer to this question

As a country, you want to be in the top row, since that implies you are doing well today. You do not want to be in the bottom row, since that implies that you are not doing well today. Things get interesting in the row in the middle.

The first column (read left to right) in the middle row is a great story. You were “low” in 1960, and are “middle” today, so you’ve covered impressive ground, and are hopefully on your way up from here on in. The third column (read left to right) in the middle row, is a problematic story (to put it mildly). You were “high” in 1960, but have reached “middle” today.

The square bang in the middle? That’s the middle income trap.

These are countries that were doing relatively well back then, in 1960, and are doing relatively well today – but in the sense that there hasn’t been a relative improvement, they find themselves in a middle income trap.

What does “relatively well” mean, and what does “relative improvement” mean? Take China as an example – China was a middle income country in 1960 (it falls in the middle, read left to right), and it is a middle income country today (it falls in the middle, read bottom to top). That’s not to say that there has been no improvement for the Chinese since 1960, of course! There has been remarkable improvement.

But relative to the USA, China was in the middle of the pack in 1960, and finds itself to be middle of the pack in 2022. Therefore the middle income trap.

Even within that square itself, by the way, there are stories to be discovered. If you are in the right top of that square (Mexico, for example), you were on the verge of becoming a high-income nation in 1960, and you are on the verge of becoming a high income nation today, but you haven’t actually achieved that status as of yet.

If you are in the top left of that square in the middle, you were barely better than low income in 1960, and are about to break through the metaphorical ceiling today (China, for example). India hasn’t moved much within that middle square, and that is therefore a frustrating story for us in India.

Homework: how would you describe Nicaragua’s position in this graph? Is it better off or worse off over these past sixty years or so?

Finally, you might also want to think about whether the middle income trap is such a bad thing in the first place!

Poland and Malaysia may now be running into this [he’s referring to the middle income trap here – Ashish] problem. McKinsey cites Poland’s need to develop or acquire strong brands in order to catch up with West Europe. The failure of Malaysia’s attempt to build domestic champions is worrying.
And yet I see two responses to this. The first is: Do we really care? Poland and Malaysia may not be as rich as Germany or Korea, but they’ve definitely escaped poverty. Countries like Bangladesh or Vietnam or Ghana or even Mexico would kill to have a per capita GDP of $30,000. That’s about the GDP of the U.S. in the early 1980s. Is it really fair to call that level of development a “middle income trap”? If you’re a poor country, and you have a reliable, dependable way of getting as rich as the U.S. was in the early 1980s, dammit, you take it. You don’t worry about whether that strategy will eventually make it harder to get as rich as the U.S. of 2023.

Let me be clear – I am not saying (and I don’t think Noah is either) that more growth is a bad thing. But a targeting of rapid growth at all costs, and above all else, isn’t necessarily a great idea.

Why not? Because opportunity costs matter! At what costs (to the climate, to the distribution of income, to the development of social capital, to give you just three examples) do we achieve this growth? Remember, the answer to the third question depends on how you define the word “better”.

I’ve said it before, and I’ll say it again: macro is hard.

5 thoughts on “The Economist on The Middle Income Trap

    • Hello sir,
      I like how you’re increasingly using chatgpt to simplify/ cut short the process of explaining complex economics concepts.
      Big fan of your teaching and your blog!

      • Thank you! Especially re: the feedback about using ChatGPT – I hope to write a longer post about this soon, so this feedback really helps

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