Navigating the Road to Riches

WASHINGTON, D.C. – A switchover of global growth engines is taking place. Developing economies as a whole are now the source of more than half of global GDP growth. As a result, concern has naturally shifted to a new question: Are there risks that some or many of these developing countries could fall prey to the “middle-income trap”?

The “middle-income trap” has captured many developing countries: they succeeded in evolving from low per capita income levels, but then appeared to stall, losing momentum along the route toward the higher income levels of advanced economies. Such a trap may well characterize the experience of most of Latin America since the 1980’s, and in recent years, middle-income countries elsewhere have expressed fears that they could follow a similar path. Does moving up the income ladder get harder the higher one climbs?

In most cases of successful evolution from low- to middle-income status, the underlying development process is broadly similar. Typically, there is a large pool of unskilled labor that is transferred from subsistence-level occupations to more modern manufacturing or service activities that do not require much upgrading of these workers’ skills, but nonetheless employ higher levels of capital and embedded technology.