What Is the Middle Income Trap,Why do Countries Fall into It,and How Can It Be Avoided?

Abstract

The risks of falling into the Middle Income Trap have increasingly become a focus of discussions on the long-term economic and social development prospects of developing countries. These risks, and how to minimize them, are being debated at the highest levels of policy making in some of the fastest growing emerging economies, even while these countries remain a source of envy to the rest of the world. The term Middle Income Trap is by now also being widely used in economic literature as well as business-oriented media. We draw satisfaction from the fact that some of our previous writings (Gill and Kharas, 2008; Kohli et al. 2009) (co-authored with other colleagues) seem to have helped popularize this term. At the same time, we realize that some have interpreted and used the term quite differently from what we had in mind when we first introduced the term Middle Income Trap in our writings and presentations. This article offers our perspective as to what the Middle Income Trap is, why so many countries fall into it, and the key challenges involved in avoiding the trap. With policy makers as its primary audience, the article is deliberately short in length and straightforward in language.