Middle Income Trap

Gaps in the trap: Neglected politics in middle-income trap analysis

Development Matters New social contract , ,

By Richard F. Doner, Professor Emeritus, Department of Political Science, Emory University1

Scholars, advisors and policymakers alike have paid extensive attention to the middle-income trap. Despite some differences in definition, most agree that the “trap” refers to various conditions that have discouraged many middle-income countries from ascending to high-income status. Cross-national economic convergence has been nowhere near what was expected given middle-income countries’ access to advanced technologies and market opportunities.

Explanations for the trap vary but typically include some combination of low productivity, inconsistent macroeconomic policies, weak institutional frameworks, policies ill-adapted to promoting technology absorption, and weak human resource development. As a recent post by Alonso and Ocampo argues, these writings have been valuable in focusing attention on the challenges of a particular stage of development. Nevertheless, gaps, we might even call them blind spots, persist in analysis of the middle-income trap.   

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Middle-income countries should not be rushed to graduate

Development Matters Development in Transition, New social contract , , ,

By Otaviano Canuto, Senior Fellow at the Policy Centre for the New South, Non-Resident Senior Fellow at Brookings Institution, and Former Vice President at the World Bank; Matheus Cavallari, Senior Advisor and Tiago Ribeiro dos Santos, Advisor at the Board of Executive Directors of the World Bank Group. Opinions here are their own. The authors wrote chapter 12 of the recent book: Alonso, J.A. & Ocampo, J.A. (eds.), Trapped in the Middle? Developmental Challenges for Middle-Income Countries, Oxford University Press, 2020

Salvador, Bahia, Brazil

Many donor countries seem eager to see middle-income countries (MICs) “master out” and graduate to a non-client status in multilateral development institutions before fully achieving their development potential. We argue that such institutions can still significantly contribute to the sustainable development of MICs, while also seizing many benefits from this relationship (Middle income countries and multilateral development banks: traps on the way to graduation).  

Multilateral development banks operate in two main ways: regular lending and concessional finance. Regular lending uses interest rates close to market levels and relies on multilateral development banks’ wealth of knowledge to create attractive projects for MICs. Concessional finance on the other hand, is attractive for low-income countries, not only because of the banks’ knowledge, but also because it is much more financially favourable, offering low interest rates or grants.

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Growth and labour markets in middle-income countries

Development Matters Building resilience , ,

By Rolph van der Hoeven1 International Institute of Social Studies at Erasmus University, The Hague & Member of the Committee for Development Policy of the United Nations

“You can check out any time you like but you can never leave… “

It is almost as if the lyrics of the world’s best rated song ‘Hotel California’ were written for the large category of middle-income countries (MICs) as since the classification was introduced in 1992 only four2 MICs outside Eastern and Western Europe (The Republic of Korea, Chile, Uruguay, and Argentina) have so far managed to ‘graduate’ to the high-income category. Are all other countries unable ‘to leave’?

To look into this, it is worth recalling that the middle-income country group is a vast one and spans countries with considerable differences in per capita income, growth rates and labour market experiences. MICs are therefore often subdivided into Lower and Higher Middle-Income country categories. To see how dynamics play out, it is therefore as important to look how countries develop within the large MIC grouping, as it is to look at the differences between those MICs that have graduated to the high-income category and those that have not.

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Is there an institutional trap in middle-income countries?

Development Matters New social contract , ,

By José Antonio Alonso, professor of Applied Economics at the Complutense University of Madrid. He is co-editor of the recent book: Trapped in the Middle? Developmental Challenges for Middle-Income Countries, Oxford University Press, 2020

It is assumed that, as countries progress, they require better institutions to manage the societal issues that emerge with more extensive and sophisticated markets and respond to the needs of a more demanding society. In other words, the development process requires a path of institutional change. However, economic and institutional processes do not necessarily evolve at the same pace, as institutions are subject to greater inertia. As a consequence, inertial institutions can fall behind social demands, or else changes in institutions may not be properly rooted in social behaviour.

These issues are particularly relevant to middle-income countries which tend to experience episodes of intense economic growth that put their institutional frameworks under pressure. Transforming expansive episodes into sustained economic convergence with high-income countries requires a continuous and successful process of institutional improvement. However, these two processes are difficult to synchronise.

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