By Andrei Skvarsky.
The World Bank has proposed a formula for avoiding a “middle-income trap”, an economic growth slowdown that, according to a common but disputed theory, typically hits a country after it has achieved a middle-income level and bars it from moving on to high-income status.
Use of a two-component remedy – investment plus technological modernisation – sums up the formula, which is part of a “3i” strategy for progressing from low-income to high-income status proposed by the World Bank in a document entitled “World Development Report 2024: The Middle Income Trap”.
A country normally falls into a middle-income trap, the international organisation argues, when it has achieved the equivalent of about 10 per cent of annual U.S. gross domestic product per capita or $8,000 today.
At the end of 2023, the World Bank put 108 countries, including China, India, Brazil and South Africa, in the middle-income category.
These countries are home to six billion people – 75 per cent of the global population – with two thirds of that number living in extreme poverty, generate more than 40 per cent of global GDP and produce more than 60 per cent of carbon emissions, the Washington-based institution said.
They face “even stiffer challenges than those seen in the past: rapidly aging populations and burgeoning debt, fierce geopolitical and trade frictions, and the growing difficulty of speeding up economic progress without fouling the environment”, the World Bank said in “World Development Report 2024”.
Since 1990, only 34 middle-income economies have managed to shift to high-income status, and more than a third of them owed this either to joining the European Union or to previously undiscovered oil, the organisation said.
The 3i strategy is a three-phase plan (“investment”, “infusion” and “innovation”).
Investment should practically be the sole concern of a country in trying to get through the 1i phase – transition from low-income to middle-income status, but cannot alone enable a country to achieve high-income status – it would need to be supplemented with technological modernisation.
The latter should be a two-stage process.
The lower middle-income stage, 2i, should involve “infusion” of technology – importing technologies from abroad and spreading them across the economy.
The upper middle-income stage, 3i, would be a period of “innovation” with the economy being put on the basis of both imported and domestically developed technologies.
Various economists have criticised the middle-income trap theory, which was first used in a World Bank study in 2007.
It has been argued that a slowdown may have various causes, that growth determinants in low-income economies may differ from those in high-income economies and that a consequent revision by a country of its economic strategy may cause stagnation at some middle-income level but that this does not imply hitting a middle-income trap.
Doubts have been expressed that middle-income traps exist as a phenomenon.
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