Middle-income trap is a situation in which a middle-income country experiences systematic growth slowdowns as it is unable to take on the new economic structures needed to sustain high-income levels.

What is a middle-income country?

The World Bank presently classifies 108 countries as “middle-income”—that is, those with annual income per capita ranging from US$1,136 to US$13,845.1 

World Bank  Country calculations and selected global indicators 

The World Bank currently recognises: 

• 26 economies as  low-income (GNI per capita, US$1,135 or less )
• 54 as lower-middle-income (GNI per capita of between US$1,136 and US$4,465); 
• 54 as upper-middle-income (GNI per capita of between US$4,466 and US$13,845); and 
• 83 as high-income (GNI per capita of US$13,846 or more)

Developing economies change in structure as they increase in size. Economic expansion, on average, begins to decelerate and often reaches a plateau in income per capita growth, typically at about 11 per cent of US GDP per capita. Today, this figure would be about US$8,000, or around the level at which countries are firmly considered upper-middle-income. A systematic slowdown in growth then occurs. 

Since 2007, the World Bank has called this as the “middle-income trap”.

To achieve high-income status, a middle-income country needs to ramp up the sophistication of its economic structure. 

Economic complexity of a country’s export basket is a measure of sophistication. Economic complexity expresses the diversity and sophistication of the productive capabilities embedded in the exports of each country.

Middle-Income countries are critical to long-term global prosperity. They account for nearly 40 per cent of global economic activity, more than 60 per cent of people living in extreme poverty, and more than 60 per cent of global carbon dioxide (CO2 ) emissions. 

The current scenario of middle income countries 

The pace of progress in middle-income countries is slowing. Average annual income growth in these countries slipped by nearly one-third in the first two decades of this century—from 5 percent in the 2000s to 3.5 percent in the 2010s.

 A turnaround is not likely soon because middle-income countries are facing ever-stronger headwinds. They are contending with rising geopolitical tensions and protectionism that can slow the diffusion of knowledge to middle-income countries, difficulties in servicing debt obligations, and the additional economic and financial costs of climate change and climate action.

3i strategy 

World Development Report proposes a “3i strategy” for countries to reach high-income status. Depending on their stage of development, all countries need to adopt a sequenced and progressively more sophisticated mix of policies. 

The three drivers of economic growth (3i)—investment, infusion, and innovation. 

To achieve more sophisticated economies, middle-income countries need two successive transitions 

• In the first, investment is complemented with infusion, so that countries (primarily lower-middle-income countries) focus on imitating and diffusing modern technologies.  
• In the second, innovation is added to the investment and infusion mix, so that countries (primarily upper-middle-income countries) focus on building domestic capabilities to add value to global technologies, ultimately becoming innovators themselves.

Successful middle-income countries will have to engineer two successive transitions to develop such economic structures. 

Economic success in lower-income countries stems largely from accelerating investment. As these economies move to middle-income status, continued progress requires complementing a good investment climate with measures deliberately designed to bring new ideas from abroad and diffuse them across the economy—so-called infusion.

Once a country has succeeded in the first transition, the second transition consists of switching to a 3i strategy, which entails paying more attention to innovation.

Once a middle-income country has begun to exhaust the potential of infusion in the most promising parts of its economy—running out of technologies to learn and adopt—it should expand its efforts to become an innovation economy. 

Infusion is powered mainly by the technology transfers embodied inflows of physical and financial capital. Although innovation requires both of these flows, it also needs increasingly vigorous exchanges of human capital—often triggered by a re-engagement with the emigrant diaspora but also creating the conditions cherished by innovators, such as freer economies, human rights, and livable cities. Moreover, to enable firms to innovate, governments must have done a lot during the infusion phase to reform and strengthen institutions. Weak institutions are as debilitating as premature attempts to leapfrog from investment to innovation. 

South Korea is a standout example in all three phases of the 3i strategy, the report says. In 1960, its per capita income stood at just $1,200. By end of 2023, that number had climbed to $33,000. South Korea began with a simple policy mix to increase public investment and encourage private investment. That morphed in the 1970s to an industrial policy that encouraged domestic firms to adopt foreign technology and more sophisticated production methods. 

Korean companies responded. Samsung, once a noodle-maker, began manufacturing TV sets for domestic and regional markets. To do so, it licensed technologies from Japanese companies—Sanyo and NEC. Samsung’s success fueled demand for engineers, managers, and other skilled professionals. The South Korean government responded in turn. The Ministry of Education set targets—and increased budgets—for public universities to help develop the new skill sets demanded by domestic firms. Today, Samsung is a global innovator in its own right—one of the world’s two largest smartphone manufacturers.

Other countries followed similar paths—including Poland and Chile. Poland focused on raising productivity with technologies infused from Western Europe. Chile encouraged technology transfer from abroad—and used it to drive domestic innovation.  One of its biggest successes involved adapting Norwegian salmon farming technologies to local conditions, making Chile a top exporter of salmon.

In some cases, ignoring the imperative of infusion to quicken innovation can even worsen the investment climate, setting middle-income economies back years if not decades 

The 3i strategy: What countries should do at different stages of development?

LOW-INCOME COUNTRIES 1i: Investment

• Improve the investment climate to increase domestic and foreign investment
• Invest in human capital by broadening foundational skills and improving learning outcomes.
• Increase investment in expanding access and grid networks. 
• Reform regulatory frameworks to attract private investment and ensure fair competition

LOWER-MIDDLE-INCOME COUNTRIES 2i: Investment + Infusion 

• Discipline market leaders through integration into globally contestable markets. 
• Diffuse global technologies with fluid factors and product markets. 
•  Reward value-adding firms to stimulate business dynamism.
• Discipline elites by providing equal opportunities for women, minorities, and disadvantaged groups.
•  Improve allocation of talent to task. Develop links among local and globally leading universities. 
• Allow emigration of educated workers whose skills are not valued in domestic markets.
• Discipline SOEs by hardening budget constraints. 
• Use international coalitions to encourage advanced economies to ease protection of domestic incumbents. 
• Aid adoption of energy-efficient practices. 
•  Enhance economic efficiency by reflecting environmental costs in energy prices.

UPPER-MIDDLE-INCOME COUNTRIES 3i: Investment + Infusion + Innovation

• Deepen capital markets and expand equity financing. 
• Strengthen antitrust regulation and competition agencies. 
• Protect intellectual property rights.
• Strengthen industry academia links domestically. 
•  Expand programs to connect with diaspora in advanced economies. 
• Enhance economic and political freedoms. 
•  Lower the cost of capital for low-carbon energy by reducing risks involving technology, markets, and policy. 
• Increase multilateral finance for very long-term investment