Breaking the Middle-Income Barrier: Strategies for emerging economies

In a world where economic advancement defines global influence, over 100 countries, including economic powerhouses like China, India, Brazil and South Africa, are confronting significant obstacles in their quest to transition from middle-income to high-income status.

The challenge, often referred to as the “middle-income trap,” is a pivotal issue highlighted in the World Bank’s World Development Report 2024: The Middle Income Trap. This comprehensive study offers the first roadmap for developing countries to overcome this economic impasse, drawing on five decades of economic data and lessons.

The report reveals a stark reality: as nations progress, they often hit a growth ceiling when their GDP per capita reaches approximately 10 per cent of the US. GDP per capita — about $8,000 in today’s terms. Since 1990, only 34 economies have successfully transitioned from middle- to high-income status, with many of these transitions bolstered by external factors like European Union integration or newfound natural resources such as oil.

As of the end of 2023, 108 countries are classified as middle-income, home to six billion people — 75 per cent of the global population — and responsible for over 40 per cent of global GDP and more than 60 per cent of carbon emissions. Yet, these nations face unprecedented challenges, including ageing populations, rising protectionism, and the urgent need for energy transition.

“The battle for global economic prosperity will largely be won or lost in middle-income countries,” stated Indermit Gill, chief economist of the World Bank Group. He emphasises that many of these countries rely on outdated strategies, such as prolonged focus on investment without adequate shifts to innovation.

The report advocates a fresh, phased approach — termed the “3i strategy”—to guide countries through their developmental stages, ensuring they navigate the middle-income trap effectively.

The 3i Strategy: A phased approach to economic advancement

The World Bank’s 3i strategy provides a structured pathway for countries aspiring to achieve high-income status, tailored to different stages of development. The strategy is broken down into three phases:

Investment Phase (1i): For low-income countries, the focus should be on policies that boost both public and private investment. This foundational phase is critical for building infrastructure, attracting foreign capital, and setting the stage for economic growth.

Infusion Phase (2i): As countries enter the lower-middle-income bracket, they need to expand their focus to include the infusion of foreign technologies. This phase involves adopting and disseminating new technologies across various sectors, enabling economies to scale and diversify.

Innovation Phase (3i): Upon reaching upper-middle-income status, countries should evolve towards a strategy that balances investment, infusion, and innovation. In this phase, nations move from merely adopting existing technologies to pushing the boundaries of innovation, contributing to the global technology frontier.

The report highlights South Korea as a prime example of successfully navigating all three phases. In 1960, South Korea’s per capita income was a mere $1,200.

By the end of 2023, it had soared to $33,000. South Korea’s journey began with a strong emphasis on public and private investment, which evolved in the 1970s into an industrial policy that encouraged domestic firms to adopt foreign technology.

Companies like Samsung exemplified this shift, transitioning from a noodle maker to a global technology giant. The South Korean government played a crucial role by aligning educational policies with the needs of the industry and fostering the development of a highly skilled workforce.

Global lessons and the path forward for emerging economies

Other countries, such as Poland and Chile, have also demonstrated success by adopting similar strategies. Poland leveraged technology infusion from Western Europe to drive productivity, while Chile adapted Norwegian salmon farming techniques to become a global leader in salmon exports. These examples underscore the importance of tailoring strategies to local conditions while embracing global best practices.

However, the road ahead is fraught with challenges. Somik V Lall, Director of the 2024 World Development Report, cautions that success hinges on a delicate balance between innovation, preservation, and reform. Countries that resist necessary reforms or shy away from global integration may find themselves stagnating, missing out on the economic gains that come with sustained growth.

As the world grapples with demographic shifts, ecological concerns, and geopolitical tensions, the strategies outlined in the World Development Report 2024 offer a beacon of hope for middle-income countries striving to break through the economic barriers that have historically held them back.

The key to success lies in a disciplined, phased approach that evolves with the country’s economic landscape, ensuring that they not only escape the middle-income trap but also thrive in the global economy.

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