Economic development theorists and practitioners are increasingly using the term “middle-income trap” to describe the situation where developing economies’ convergence to the development frontier comes to a halt once their income per capita reaches a middle-income level. The term is ambiguous: is it a halt in convergence or slowdown in growth, and what exactly is the definition of middle-income? Nevertheless, the concept has been successfully used to create a scare that developing countries are more likely to run out of breath or even give up the race in the middle of the track than to continue catching up with the leading economies. Eichengreen et al. and several IMF economists are among those who provide empirical evidence that the “middle-income trap” is real and that developing countries do get stuck at some low-level equilibrium.
The finger has been repeatedly pointed at China and year after year the question is raised as to when China’s growth is going to slow. Examining the validity of the “middle-income trap” does not require sophisticated analysis. The trap implies that countries at the middle rungs of the development ladder will grow slower than the U.S. economy - the benchmark for the development frontier. Looking at average GDP per capita growth for 155 economies during the last half-century, convergence has been taking place in 3 out of 5 decades. It is only during the 80s and 90s that convergence slowed: U.S. average GDP per capita growth in the 80s (2.4%) and the 90s (2.2%) was higher than in 102 and 93 other economies, respectively, including most middle-income countries. Interestingly, even though the term was coined in 2007 by two World Bank economists, since the turn of the century, more developing countries than ever have been converging, i.e. they have been growing faster than the U.S. economy (see chart). Only 33 countries had lower GDP per capita growth during 2001-13 than the U.S., and only a handful of these were middle-income countries.
Recent history makes the “middle-income trap” even less of a scare. In the last two decades, 19 countries with a combined population of 330 million (in 1991) became high-income countries according to the World Bank’s income classification. Six of them, all from Eastern Europe except Chile, went from being lower-middle to upper-middle to high income within this period. Interestingly, GDP growth in all but Chile accelerated during their upper-middle income status, compared to when they were lower-middle income countries. And in Chile, as in more than a third of the newly listed high-income countries, growth was higher after reaching high income than before. There is also empirical counter evidence to the middle-income trap from two other World Bank economists: Im and Rosenblatt find little support for the idea in the data. More importantly, a dozen countries are close to reaching the high income threshold (Gross National Income per capita of $12,746 in 2014) within a decade or less. This group, with a combined population today of half a billion, includes Brazil, Turkey, and Mexico.
The proponents of the “middle income trap” often mention how Latin America and the Middle East have been unable to escape the middle-income trap for decades. It seems, however, that the fault is not in the fact that they are middle-income economies but elsewhere; that the two largest Latin economies are about to leave the middle income ranks confirm this. And even if annual growth slows in China to 6-7 percent, more than 1.3 billion people will join the high-income ranks before 2030.