Chapter I: Introduction to the Middle-Income trap
Few concepts in development economics have garnered as much debate in recent years as the so-called middle-income trap. This term describes a situation in which a country’s economy grows fast enough to escape the ranks of low-income nations yet struggles to attain the more advanced status of high-income economies. In practice, it is marked by a slowdown in growth and particularly in productivity, leaving the country “stuck” in the middle-income range—sometimes for decades.
While this phenomenon is often discussed in purely economic terms, it has direct implications for human rights and broader development goals. A protracted slowdown can limit resources for social services, weaken opportunities for decent work, and exacerbate vulnerabilities in health, education, and other basic rights.
According to Agénor (2016), emerging economies have benefited from abundant, low-cost labor, attracting export-oriented manufacturing, as well as from technology imitation, where ideas developed abroad are replicated cheaply.
These factors fuel an initial strong growth, and workers often move from lower-yielding rural areas into higher-productivity sectors. Often in these scenarios developments come at a human cost. However, over time, costs rise and the scope of merely copying foreign innovations diminishes.
Economists studying the middle-income trap frequently point to productivity as a decisive factor in escaping it. In simpler terms, once the initial gains of cheap labor and imitation fade, the economy needs innovation and higher-value industries to keep growing quickly (Agénor, 2016). Take Taiwan and Shout Korea, for example: these two economies went from low-income countries to high income countries, famously with industries that pivoted in innovation, such as smartphones in South Korea (Samsung) and microchips in Taiwan (TMSC).
By contrast, strong emerging economies such as Brazil had failed to make this formula work diminishing their position in the global economy, often leaving the old BRICS trapped.
Nonetheless, when the innovation and productivity elements fail to materialize, or if the workforce lacks the sophisticated skills (higher education) to move the economy up the “value chain,” the result is slower growth, fewer new industries, and reliance on the same mature, lower-value products. This is exactly the scenario seen in parts of Latin America, the Middle East, North Africa, and even some Southeast Asian economies (Agénor, 2016).
This is of great importance as a developed economy gives often access to public health systems, social protection, and improvements in labor conditions. A protracted slowdown can stifle the revenues needed to strengthen education, housing, and healthcare—undermining basic rights and development goals (Agénor, 2016).
Chapter II: Critical factors influencing economic transition
Going beyond this initial analysis, Gill and Kharas (2015) highlighted further factors that affect middle-income economies. These additional considerations flesh out why some countries leap to high-income status while others risk stalling according to latest research.
A core insight is that demographic trends can either accelerate or undermine a country’s efforts to move up the income ladder. Younger societies like India often cite their large working-age population as a source of labor-market dynamism. If accompanied by policies that boost labor participation (especially for women) and skills training, the resulting productivity can fuel sustained growth.
In contrast, countries such as China face rapidly aging populations and rising dependency ratios, which can slow economic momentum. Increasing healthcare and pension obligations may tighten public budgets, making it harder to invest in advanced education or cutting-edge infrastructure.
Gill and Kharas (2015) also emphasize the importance of entrepreneurship—the process of turning ideas (innovation) into commercial, value-adding activities. Middle-income countries need not just more technology but also entrepreneurs who can deploy technology effectively to create new products, firms, and industries (productivity).
Zaman, R. (2023, January 1). Escaping Middle Income Trap–why and how? THE WAVES. https://www.the-waves.org/2022/12/16/escaping-middle-income-trap-why-and-how/
The state must enable a supportive environment including accessible venture capital, simpler procedures for business registration (and, crucially, exit), and a culture that does not stigmatize failure.
A balanced set of skills—management, finance, marketing, and technical know-how—helps entrepreneurs scale up. Overemphasizing science, technology, engineering, and math alone, for instance, may not yield the synergy needed to commercialize innovations (Gill & Kharas, 2015).
Another often-overlooked factor is how external institutions, and regional frameworks can lock in good policies and spur convergence with high-income economies. Take the case of the European Union: Gill and Kharas (2015) cite how many Eastern European countries “caught up” rapidly by adopting the EU’s deep regulatory commitments. These commitments covered competition policies, rule of law, and labor and environmental standards, forcing governments to modernize institutions and enhance investor confidence.
Escaping the middle-income trap is fundamentally about improving productivity through innovation while ensuring that gains in income translate into social well-being. Although the trap is sometimes couched in purely economic terms, research increasingly shows it shapes, and is shaped by, human rights outcomes—from job security and gender equality to social protection and access to essential services.
However, it is important to note that there are a few borderline cases such as Argentina, as the country developed into a high-income economy but moved back to the middle-income category in 2015 and 2016, before returning to the high-income level in 2017. Nevertheless, it was once again downgraded to middle-income status in 2019.
Spruk, R. (2019). The rise and fall of Argentina. Latin American Economic Review, 28(1). https://doi.org/10.1186/s40503-019-0076-2
Chapter III: From policy to practice
One framework that encompasses in a detailed manner how countries progress from low- or middle-income status toward more advanced ranks is the so-called “3I” approach, encompassing Investment, Infusion, and Innovation by the World Bank (2024). Although these stages often overlap, understanding each provides insight into both the early drivers of economic growth and the methods by which growth can be deepened and sustained over time. In essence, the 3I framework highlights how nations initially power economic expansion through capital accumulation, then accelerate their trajectory by absorbing world-class technologies, and finally develop the capacity for self-sustained, indigenous innovation.
During this investment phase, large sums are dedicated to infrastructure—roads, ports, power grids—and to strengthening basic education and healthcare. These outlays improve conditions for production and reduce transaction costs, allowing industries to thrive, often in labor-intensive sectors such as textiles, basic manufacturing, or resource extraction. Because wages tend to be low, this arrangement can spark substantial growth spurts and employment gains. However, overreliance on pure capital accumulation eventually hits diminishing returns. Once the initial infrastructure is in place, additional projects have smaller productivity impacts, and low-cost labor alone is not enough to maintain global competitiveness (World Bank, 2024).
Infusion becomes necessary once a country moves decisively into middle-income territory. At this stage, local firms and policymakers focus on importing and adapting cutting-edge technology from more advanced economies. Rather than reinventing processes from scratch, they borrow recognized best practices, either through foreign direct investment, licensing deals, or partnerships with multinational corporations. In parallel, governments and educational institutions intensify vocational training and technical education, thereby ensuring the workforce can effectively operate sophisticated machinery or deliver advanced services. Eventually, the gains from adapting foreign technology, and economies at this level must seek new ways to compete—particularly if they face pressure from low-wage competitors and high-tech producers alike (World Bank, 2024).
Innovation marks the last point at which a country graduates from adopting external know-how to generate its own breakthroughs. This involves nurturing research and development ecosystems, encouraging venture capital to support high-risk startups, and cultivating a talent pipeline in science and engineering that can pioneer next-generation products. Instead of solely relying on international technology, homegrown innovators can differentiate their offerings and continually renew the economy’s technological edge. Countries like South Korea and Taiwan illustrate how, after mastering imitation and adaptation, they devoted substantial resources to R&D, higher education, and industrial research consortia, eventually producing smartphones, semiconductors, and other high-value goods that stand shoulder to shoulder with global leaders (World Bank, 2024).
World Bank. (2024). World Development Report 2024: The Middle-Income Trap. In Washington, DC: World Bank eBooks. https://doi.org/10.1596/978-1-4648-2078-6
The government’s role simultaneously might improve roads (investment), set up technology parks where local firms collaborate with foreign partners (infusion), and foster digital entrepreneurship with public R&D grants (innovation). However, it is important to note that ramping up investment without following through on knowledge acquisition leads to middle-income stagnation, as does importing high-tech without cultivating a skilled workforce. Only by pushing through all three pillars, sometimes in an iterative cycle, can economies truly escape the trap of middle-income status (World Bank, 2024).
We must note that often, those economies that have tried to develop might have stagnated, therefore creative destruction is often mentioned, regarded by economists as a vital mechanism for propelling societies beyond the middle-income stage. Coined by Joseph Schumpeter (Creative Destruction – Econlib, 2023), the term captures a dual phenomenon. On one side, there is creation—the emergence of innovative firms, technologies, and production processes that drive economies forward. On the other side, there is destruction—the inevitable replacement or phasing out of outdated industries, inefficient companies, or obsolete practices. This cycle ensures that economic systems are constantly refreshed, adapting to new market realities and responding to shifts in consumer demand and technological progress. By fostering this perpetual renewal, middle-income countries can transcend the stagnation that arises when initial gains from cheap labor and commodity-based exports run their course.
Dharmagoddess. (2013, July 6). Creative Destruction: A different twist on Schumpeter’s theory. Dharma Goddess: The Journey to Me. https://dharmagoddess.wordpress.com/2013/06/25/creative-destruction-a-different-twist-on-schumpeters-theory/
However, creative destruction does not unfold automatically. In many middle-income countries, powerful incumbent interests often act as a barrier to the disruption and renewal process. These incumbents may include monopolistic conglomerates, large state-owned enterprises, or politically connected firms that wield significant economic and social clout (World Bank, 2024). Their influence can manifest through preferential regulatory treatment, lucrative subsidies, or protective policies that limit competition from smaller startups or foreign investors. As a result, the possibility of genuine innovation is stifled, because new players struggle to access financing, compete in domestic markets, or secure the political support needed to grow. When old methods and obsolete technologies remain entrenched, economic resources—including capital, skilled labor, and infrastructure—are locked into low-productivity uses, and the country finds itself gradually losing its competitive edge.
Nonetheless, shuttering unviable industries implies job losses, potential bankruptcies, and distress in local communities that once depended on these now-outmoded sectors. Hence, policy makers face the dual challenge of promoting innovation-driven competition while ensuring a humane safety net.
In guiding the process of creative destruction toward positive outcomes, several core measures are essential, including labor reskilling and redeployment, robust social protections, community transition plans, and an unwavering commitment to human rights and equity. These strategies help manage the inevitable disruptions associated with economic renewal while ensuring that individuals and communities remain supported throughout the transition (World Bank, 2024).
Countries that have successfully progressed from middle- to high-income status—notably South Korea and Singapore—demonstrate how creative destruction can be seamlessly integrated into broader development agendas. Through continuous upgrades to domestic industries, concerted investments in advanced skills, and an embrace of innovative ideas, these nations sustained growth well beyond the initial advantages driven by labor and capital.
Escaping the middle-income trap is not merely an economic goal, but a vital step toward securing widespread prosperity, safeguarding human rights, and fostering social resilience. As demonstrated by nations that have successfully transitioned to high-income status, balanced policies that embrace innovation while protecting vulnerable communities can unlock a cycle of perpetual renewal. By integrating measures such as the World Bank’s “3I” framework, fostering creative destruction in a managed and inclusive manner, and investing in both hard and soft infrastructure, countries can chart a sustainable path forward.
While the journey is demanding, the rewards—greater economic diversification, a dynamic entrepreneurial climate, and stronger social protections—stand within reach. By remaining resilient in nurturing institutions, encouraging entrepreneurship, and prioritizing equity, emerging economies can transform the middle-income trap into a steppingstone toward development and shared prosperity.
Resources:
Agénor, P. (2016). CAUGHT IN THE MIDDLE? THE ECONOMICS OF MIDDLE‐INCOME TRAPS. Journal of Economic Surveys, 31(3), 771–791. https://doi.org/10.1111/joes.12175
Creative Destruction – Econlib. (2023, May 12). Econlib. https://www.econlib.org/library/Enc/CreativeDestruction.html
Dharmagoddess. (2013, July 6). Creative Destruction: A different twist on Schumpeter’s theory. Dharma Goddess: The Journey to Me. https://dharmagoddess.wordpress.com/2013/06/25/creative-destruction-a-different-twist-on-schumpeters-theory/
Gill, I. S., & Kharas, H. (2015). The Middle-Income trap turns ten. In World Bank policy research working paper. https://doi.org/10.1596/1813-9450-7403
Spruk, R. (2019). The rise and fall of Argentina. Latin American Economic Review, 28(1). https://doi.org/10.1186/s40503-019-0076-2
World Bank. (2024). World Development Report 2024: The Middle-Income Trap. In Washington, DC: World Bank eBooks. https://doi.org/10.1596/978-1-4648-2078-6
Zaman, R. (2023, January 1). Escaping Middle Income Trap–why and how? THE WAVES. https://www.the-waves.org/2022/12/16/escaping-middle-income-trap-why-and-how/
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