The middle income trap is when countries that have achieved middle-income status often experience a growth slowdown and a stagnation in the growth of real per capita incomes

2. Linda Yueh on the
Middle Income Trap
• “After three decades of rapid growth,
China is now approaching the so-called
“middle-income country trap”: a dramatic
slowing of an economy after it has
reached upper middle income status,
which at present is around $14,000
(£9,000) per capita.”
• “History is littered with examples of
countries such as Argentina, where
growth slows so much that they never join
the ranks of the rich. The Organisation for
Economic Co-operation and Development
estimates that only a dozen or so
countries, such as Korea and states in
southern Europe including Spain and Italy,
have escaped this trap in the postwar
period.”
Source: www.theguardian.com/commentisfree/2015/aug/12/china-economic-slump-global-effects

3. Growth Slowdown in Asian Countries – China Following?
Source IMF Data

4. Key Causes of the Middle Income Trap
• The middle income trap is when countries that have achieved middle-income
status often experience a growth slowdown and a stagnation in the growth of real
per capita incomes: Some of the causes include:
• Rising wages / unit labour costs
• The surplus supply of labour dwindles, Lewis Turning Point reached
• Labour migration can run dry including rural-urban movement
• Erosion of comparative advantage from fast-growing, low cost labour supply
• Productivity growth slows down
• End of catch-up growth, transition from investment/export driven growth
• Possible failure to invest in human capital especially in tertiary education
• Slowdown in the rate of innovation by businesses
• Institutions may not support an adaptive and creative economy and society
• Financial systems may not be able to cope with rapid expansion of credit
• Maintaining macro-economic stability
• Many fast growing countries suffer from high relative inflation
• Credit bubbles can develop as speculative investments take hold

6. Strategies to help avoid the Middle Income Trap
Sufficiently large
middle class / rising
incomes
Foreign direct
investment inflows
in higher value
industries
Investment in
human capital to
lift labour
productivity
Improving working
conditions and
basic welfare safety
nets
Investment in
“hard” and “soft”
infrastructure
Opening up an
economy to
international
competition
Macro policies e.g.
to control inflation
and improve fiscal
stability
Regional Trade
Blocs to boost trade
& capital
investment
Research and
Development to
boost innovation
Diversification - a
broader base of
industries
Incentives to
stimulate new
private sector
businesses
Interventions to
tackle income and
wealth inequalities

8. More Notable Barriers to Growth & Development
Vulnerable
employment /
exploitation
Gender inequality and
other forms of
discrimination
Trade barriers e.g.
limited access to
developed markets
Landlocked countries High inflation for
some, deflation for
others
Income & wealth
inequality