Middle income trap

The middle income trap is a theorized economic development situation, where a country which attains a certain income (due to given advantages) will get stuck at that level.

A country in the middle income trap will have lost their competitive edge in the exportation of manufactured goods because their wages are on a rising trend. However, they are unable to keep up with economically more developed economies in the high-value-added market. As a result, newly industrialised economies such as South Africa and Brazil have not, for decades, left what the World Bank defines as the 'middle-income range' since their per capita gross national product has remained between $1,000 to $12,000 at constant (2011) prices. They suffer from low investment, slow growth in the secondary industry, limited industrial diversification and poor labor market conditions.

Avoiding the middle income trap entails identifying strategies to introduce new processes and find new markets to maintain export growth. Ramping up domestic demand is also important—an expanding middle class can use its increasing purchasing power to buy high-quality, innovative products and help drive growth.

The biggest challenge is moving from resource-driven growth that is dependent on cheap labor and capital to growth based on high productivity and innovation. This requires investments in infrastructure and education—building a high-quality education system which encourages creativity and supports breakthroughs in science and technology.

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