World Development Report 2024

THE MIDDLE-INCOME TRAP

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Drawing on the development experience and advances in economic analysis since the 1950s, World Development Report 2024 identifies what developing economies can do to avoid the “middle-income trap.” Lower-middle-income countries must go beyond investment-driven strategies—they must also adopt modern technologies and successful business practices from abroad and infuse them across their economies. Upper-middle-income countries need to accelerate the shift to innovation, by pushing the global frontiers of technology. This requires reconfiguring economic structures governing enterprises, labor, and energy use—in ways that enable greater economic freedom, social mobility, and political contestability.

Main Messages

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 outlines how all developing economies can avoid the middle-income trap.

The “3i strategy”

Depending on their stage of development, countries need to adopt a sequenced and progressively more sophisticated mix of policies:

  • Low-income countries can focus solely on policies designed to increase investment—the 1i approach.
  • Lower-middle-income countries must shift gears and expand the policy mix to 2i, investment + infusion.
  • Upper-middle-income countries need to shift gears yet again—to 3i: investment + infusion + innovation.

Merit must be rewarded—and vested interests must be disciplined.

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:

  • Discipline 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.
  • Reward merit. 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.
  • Capitalize on crises. 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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Chapter Summaries

  • Overview

    What is the middle-income trap?

    • Since the 1970s, income per capita in the median middle-income country has stayed below one-tenth of the US level.
    • Rising geopolitical, demographic, and environmental challenges will make it harder to achieve faster economic growth in the years ahead.
    • To become advanced economies amid these headwinds, middle- income countries will have to make miracles.
  • Chapter 1. Slowing Growth

    Is growth in middle-income countries slower than that in countries at other income levels?

    • Yes. Growth slowdowns occur more frequently in middle-income countries than in low- or high-income countries. 
    • Development strategies that served countries well in their low-income phase—capital investment, in particular— yield diminishing returns.
    • Countries with weaker institutions— and especially those with lower levels of economic and political freedom—are susceptible to slowdowns at even longer levels of income.
  • Chapter 2. Structural Stasis

    Is growth in middle-income countries different from that in countries at other income levels?

    • Yes. Successful middle-income countries will have to engineer two successive transitions to develop economic structures that can eventually sustain high-income levels. 
    • The first transition is from a 1i strategy for accelerating investment to a 2strategy focusing on both investment and infusion in which a country brings technologies from abroad and diffuses them domestically—a process broadly applicable to lower-middle-income countries.
    • The second transition is to switch to a 3i strategy, which entails paying more attention to innovation—a process more applicable to upper-middle-income countries. 
  • Chapter 3. Shrinking Spaces

    Is growth in middle-income countries now harder to achieve?

    • Yes. Foreign trade and investment are in danger of becoming constricted by geopolitical tensions, and populism is shrinking the room for governments to act. 
    • Rising debt and adverse demographics are crowding out private investors and  reducing public investment.
    • Accelerating climate action will require large investments in infrastructure and regulatory reforms that may stall productivity 
  • Chapter 4. Creation

    Who creates value? 

    • Both incumbents and entrants can create value. Incumbents bring scale. They can compete with entrants in the market to jointly expand a country’s technological capabilities, thereby moving the country closer to the global frontier. Entrants bring change—enterprises with new products or production processes, workers with new skills and ideas, or energy sources such as renewables that embody new technologies. By doing so, they expand a country’s technology frontier.

     

    What is the implication of having both incumbents and entrants as value creators? 

    • Policy makers will have to stop relying on superficial measures of structural efficiency such as firm size, income inequality, and energy sources. The imperative for today’s middle-income economies is “efficiency”—in the use of capital, labor, and energy. Policy makers will need to heed the value added of firms, socioeconomic mobility, and carbon emissions. They are more reliable and more realistic metrics for policy making, but they also require collecting more information. 
  • Chapter 5. Preservation

    How do incumbents preserve the status quo?

    • Incumbents’ dominance can buy economic, social, and political power. By capturing political and social institutions, incumbents have an outsize say in who learns where and what, who gets a sought-after job and what they are paid, and who gets to start a business. 


    How do discrimination and patriarchal gender norms hold back the potential of women? 

    • Patriarchal norms and systems of belief that give men greater status and authority and define strict gender roles and responsibilities hold back women from benefiting from attractive educational and job opportunities.

      Discrimination can be pervasive, affecting the businesses women own, the jobs they get, the pay they receive, what their families spend on educating them, and their ability to manage financial accounts. 
  • Chapter 6. Destruction

    Why is destruction important for structural change?

    • The destruction of outdated arrangements—enterprises, jobs, technologies, private contracts, policies, and public institutions—is essential to creating value through infusion and innovation. 

    Who are the antagonists blocking creative destruction in response to today’s energy crisis? 

    • Incumbents, usually state-owned enterprises, have the strongest incentive to maintain the status quo and limit competition from low-carbon energy providers.
    • Many G20 economies are introducing incentives for producing and deploying low-carbon technologies. Some measures may unintentionally preserve enterprises in advanced economies and destroy them in middle-income countries 
  • Chapter 7. Disciplining Incumbents

    How can middle-income countries weaken the forces of preservation that protect incumbents from healthy competition?

    • By promoting contestable markets, middle-income countries can strike a balance between supporting incumbents and ensuring that they do not abuse their market power. 
    • Institutional arrangements that promote contestability include retracting protection of incumbents such as market leaders and state-owned enterprises and norms that work against women. 
    • Openness to foreign trade, investment, and talent helps with technological upgrading. 
    • Interventions that target errant incumbents to destroy harmful arrangements include adopting competition laws and ensuring the effectiveness of competition authorities, as well as using fiscal policy to make elites contestable. 
  • Chapter 8. Rewarding Merit

    How can middle-income countries strengthen the forces of creation by rewarding merit—that is, those forces that aid in the efficient use of talent, capital, and energy?

    • To reward merit, middle-income countries can upgrade their talent pools, select efficient learners, and tap the productive power of women. 
    • To efficiently use capital, middle-income countries can move away from coddling small firms or vilifying large firms, let go of unproductive firms, modernize the management of firms, and connect entrepreneurs with mentors and markets. 
    • To decouple carbon emissions from a growing economy, middle-income countries can effectively price carbon emissions and scale up deployment of low-carbon energy by respecting the merit order—the sequence followed by grid operators selling power to the market. 
  • Chapter 9. Capitalizing on Crises

    How can middle-income countries Capitalize on crises to destroy outdated arrangements and make way for creation? 

    • Because middle-income countries need to recalibrate their mix of investment, infusion, and innovation, crises can become a necessary evil because they provide the momentum to weaken the status quo. 
    • To capitalize on today’s climate and energy crises, middle-income countries can support global decarbonization by infusing global technologies domestically to join low-carbon value chains for global markets. They can also invest in deploying low-carbon energy if it reaps economic returns. 
    • Middle-income countries face critical needs: growth, decarbonization, and energy security. Solutions will require decoupling emissions from a growing economy while extending affordable, secure energy to all firms and families.