ADB Economics Working Paper Series

Tracking the Middle-Income Trap: What is It, Who is in It, and Why? Part 1
Jesus Felipe No. 306 | March 2012

ADB Economics Working Paper Series No. 306

Tracking the Middle-Income Trap: What is It, Who is in It, and Why? Part 1

Jesus Felipe March 2012

Jesus Felipe is Advisor, Economics and Research Department, Asian Development Bank. The author is grateful to Douglas Brooks, Shigeko Hattori, Chris MacCormac, Macu Martinez, and Norio Usui for their very useful comments and suggestions. Arnelyn Abdon provided excellent research assistance. The author accepts responsibility for any errors in the paper.

Asian Development Bank 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines www.adb.org/economics ©2012 by Asian Development Bank March 2012 ISSN 1655-5252 Publication Stock No. WPS124670 The views expressed in this paper are those of the author(s) and do not QHFHVVDULO\ UHÀHFW WKH YLHZV RU SROLFLHV of the Asian Development Bank.

The ADB Economics Working Paper Series is a forum for stimulating discussion and eliciting feedback on ongoing and recently completed research and policy studies undertaken by the Asian Development Bank (ADB) staff, consultants, or resource persons. The series deals with key economic and development problems, particularly WKRVH IDFLQJ WKH $VLD DQG 3DFL¿F UHJLRQ DV ZHOO DV FRQFHSWXDO DQDO\WLFDO RU methodological issues relating to project/program economic analysis, and statistical data and measurement. The series aims to enhance the knowledge on Asia’s development DQG SROLF\ FKDOOHQJHV VWUHQJWKHQ DQDO\WLFDO ULJRU DQG TXDOLW\ RI $'%¶V FRXQWU\ SDUWQHUVKLS VWUDWHJLHV DQG LWV VXEUHJLRQDO DQG FRXQWU\ RSHUDWLRQV DQG LPSURYH WKH TXDOLW\ DQG availability of statistical data and development indicators for monitoring development effectiveness. 7KH $'% (FRQRPLFV :RUNLQJ 3DSHU 6HULHV LV D TXLFNGLVVHPLQDWLQJ LQIRUPDO SXEOLFDWLRQ ZKRVH WLWOHV FRXOG VXEVHTXHQWO\ EH UHYLVHG IRU SXEOLFDWLRQ DV DUWLFOHV LQ SURIHVVLRQDO journals or chapters in books. The series is maintained by the Economics and Research Department.

Contents
Abstract Executive Summary I. ,, III. Introduction 'H¿QLQJ ,QFRPH *URXSV What is the Middle-Income Trap? A. Determining the Threshold Number of Years to be in the Middle-income Trap v vii 1  14

15 21 24 26 

IV.

Who is in the Middle-income Trap Today? A. Who is not in the Middle-Income Trap Today?

V.

Conclusions

5HIHUHQFHV

Abstract
7KLV SDSHU SURYLGHV D ZRUNLQJ GH¿QLWLRQ RI ZKDW WKH PLGGOHLQFRPH WUDS LV ,W FODVVL¿HV  FRXQWULHV WKDW KDYH FRQVLVWHQW GDWD IRU ± )LUVW WKH SDSHU GH¿QHV IRXU LQFRPH JURXSV RI JURVV GRPHVWLF SURGXFW SHU FDSLWD LQ  SXUFKDVLQJ SRZHU SDULW\ GROODUV ORZLQFRPH EHORZ  ORZHU PLGGOHLQFRPH EHWZHHQ  DQG  XSSHU PLGGOHLQFRPH EHWZHHQ  DQG  and high-income above $11,750. In 2010, there were 40 low-income countries in WKH ZRUOG  ORZHU PLGGOHLQFRPH  XSSHU PLGGOHLQFRPH DQG  KLJKLQFRPH countries. Second, the paper calculates the threshold number of years for a country to be in the middle-income trap: a country that becomes lower middleincome (i.e., that reaches $2,000 per capita income) has to attain an average growth rate of per capita income of at least 4.7% per annum to avoid falling into the lower middle-income trap (i.e., to reach $7,250, the upper middle-income OHYHO WKUHVKROG  DQG D FRXQWU\ WKDW EHFRPHV XSSHU PLGGOHLQFRPH LH WKDW reaches $7,250 per capita income) has to attain an average growth rate of per FDSLWD LQFRPH RI DW OHDVW  SHU DQQXP WR DYRLG IDOOLQJ LQWR WKH XSSHU PLGGOH income trap (i.e., to reach $11,750, the high-income level threshold). Avoiding WKH PLGGOHLQFRPH WUDS LV WKHUHIRUH D TXHVWLRQ RI KRZ WR JURZ IDVW HQRXJK VR DV WR FURVV WKH ORZHU PLGGOHLQFRPH VHJPHQW LQ DW PRVW  \HDUV DQG WKH XSSHU middle-income segment in at most 14 years.

Executive Summary
7KHUH LV QR FOHDU DQG DFFHSWHG GH¿QLWLRQ RI ZKDW WKH ³PLGGOHLQFRPH WUDS´ LV despite the attention that the phenomenon is getting. This paper provides a ZRUNLQJ GH¿QLWLRQ RI WKH WHUP 7KH SDSHU ¿UVW GH¿QHV IRXU LQFRPH JURXSV RI JURVV GRPHVWLF SURGXFW *'3 SHU FDSLWD LQ  SXUFKDVLQJ SRZHU SDULW\ 333 GROODUV ORZ LQFRPH EHORZ  ORZHU PLGGOHLQFRPH EHWZHHQ  DQG  XSSHU PLGGOHLQFRPH EHWZHHQ  DQG  DQG KLJKLQFRPH DERYH  7KH SDSHU FODVVL¿HV  FRXQWULHV IRU ZKLFK WKHUH LV FRQVLVWHQW GDWD IRU ± ,Q  WKHUH ZHUH  ORZLQFRPH FRXQWULHV LQ WKH ZRUOG  RI WKHP KDYH EHHQ LQ WKLV JURXS IRU WKH ZKROH SHULRG   PLGGOHLQFRPH FRXQWULHV  ORZHU PLGGOHLQFRPH DQG  XSSHU PLGGOHLQFRPH  DQG  KLJK income countries. Second, by analyzing historical income transitions, the threshold number of years for a country to be in the middle-income trap is calculated. This cut-off is the median number of years that countries spent in the lower middle-income and in the upper middle-income groups, before graduating to the next income group (for WKH FRXQWULHV WKDW PDGH WKH MXPS WR WKH QH[W LQFRPH JURXS DIWHU   7KHVH WZR WKUHVKROGV DUH  DQG  \HDUV UHVSHFWLYHO\ 7KH\ LPSO\ WKDW D FRXQWU\ WKDW becomes lower middle-income (i.e., that reaches $2,000 per capita income) has to attain an average growth rate of per capita income of at least 4.7% per annum to avoid falling into the lower middle-income trap (i.e., to reach $7,250, the upper PLGGOHLQFRPH OHYHO WKUHVKROG  DQG WKDW D FRXQWU\ WKDW EHFRPHV XSSHU PLGGOH income (i.e., that reaches $7,250 per capita income) has to attain an average JURZWK UDWH RI SHU FDSLWD LQFRPH RI DW OHDVW  SHU DQQXP WR DYRLG IDOOLQJ into the upper middle-income trap (i.e., to reach $11,750, the high-income level threshold). 7KH DQDO\VLV LQGLFDWHV WKDW LQ   RXW RI WKH  PLGGOHLQFRPH FRXQWULHV ZHUH LQ WKH PLGGOHLQFRPH WUDS  LQ WKH ORZHU PLGGOHLQFRPH WUDS QLQH RI WKHP can potentially graduate soon), i.e., they have been in this income group over  \HDUV DQG ¿YH LQ WKH XSSHU PLGGOHLQFRPH WUDS WZR RI WKHP FDQ SRWHQWLDOO\ leave it soon), i.e., they have been in this income group over 14 years. Eight out of the remaining 17 middle-income countries (i.e., not in the trap in 2010) are at WKH ULVN RI IDOOLQJ LQWR WKH WUDS WKUHH LQWR WKH ORZHU PLGGOHLQFRPH DQG ¿YH LQWR the upper middle-income).

2I WKH  FRXQWULHV LQ WKH PLGGOHLQFRPH WUDS LQ   DUH /DWLQ $PHULFDQ  in the lower middle-income trap and two in the upper middle-income trap), 11 are in the Middle East and North Africa (nine in the lower middle-income trap and two in the upper middle-income trap), six in Sub-Saharan Africa (all of them in the lower middle-income trap), three in Asia (two in the lower middle-income trap and one in the upper middle-income trap), and two in Europe (both in the lower PLGGOHLQFRPH WUDS  7KHUHIRUH WKLV SKHQRPHQRQ PRVWO\ DIIHFWV /DWLQ $PHULFD Middle East, and African countries. Asia is different from the other developing regions, for some economies (four SOXV -DSDQ DUH DOUHDG\ KLJKLQFRPH DQG ¿YH KDYH EHHQ ORZLQFRPH VLQFH  The study concludes that three Asian countries were in the middle-income trap LQ  6UL /DQND DQG 0DOD\VLD PD\ HVFDSH LW VRRQ  7KHUH DUH HLJKW $VLDQ middle-income countries not in the lower or upper middle-income trap (Indonesia and Pakistan are at risk of falling into the trap in the coming years). The People’s Republic of China has avoided the lower middle-income trap and in all likelihood will also avoid the upper middle-income trap. India became recently a lower middle-income country and will probably avoid the lower middle-income trap. $YRLGLQJ WKH PLGGOHLQFRPH WUDS LV D TXHVWLRQ RI KRZ WR JURZ IDVW HQRXJK VR DV WR FURVV WKH ORZHU PLGGOHLQFRPH VHJPHQW LQ DW PRVW  \HDUV ZKLFK UHTXLUHV D JURZWK UDWH RI DW OHDVW  SHU DQQXP  DQG WKH XSSHU PLGGOHLQFRPH VHJPHQW LQ DW PRVW  \HDUV ZKLFK UHTXLUHV D JURZWK UDWH RI DW OHDVW  SHU DQQXP 

I. Introduction
Historically, the economic development of countries has been a more or less a ORQJ VHTXHQFH IURP ORZ LQFRPH SRRU WR KLJK LQFRPH ULFK  ,Q WKH HDUO\ VWDJHV RI development, countries rely primarily on subsistence agriculture (with a few exceptions, such as Singapore or Hong Kong, China). This sector, relatively unproductive at this stage, takes the largest share in both output and employment. At some point, and as a result of the mechanization (capital accumulation) of agriculture and the transfer of labor WR LQGXVWU\ DQG VHUYLFHV RIWHQ ORFDWHG LQ WKH XUEDQ DUHDV ZKHUH ¿UPV QHHG ZRUNHUV IRU their new industries, more productive than agriculture), productivity starts increasing. As this process takes place, the structures of output and employment change. As a result, all sectors (including agriculture) can pay higher wages and the country’s income per capita increases. Economic development is a very complex process that involves: (i) the transfer of resources (labor and capital) from activities of low productivity (typically agriculture) LQWR DFWLYLWLHV RI KLJKHU SURGXFWLYLW\ LQGXVWU\ DQG VHUYLFHV  LL FDSLWDO DFFXPXODWLRQ (iii) industrialization and the manufacture of new products using new methods of SURGXFWLRQ LY XUEDQL]DWLRQ DQG Y FKDQJHV LQ VRFLDO LQVWLWXWLRQV DQG EHOLHIV .X]QHWV    8QGHUVWDQGLQJ KRZ FRXQWULHV JR WKURXJK WKH HFRQRPLF GHYHORSPHQW VHTXHQFH LV WKH XQHQGLQJ TXHVW RI GHYHORSPHQW HFRQRPLVWV 0RVW RIWHQ WKH VHTXHQFH LV IURP ORZ LQFRPH to middle income and, ideally, to high income. In some cases, however, countries get stuck in the low- or middle-income groups for a long period of time and do not move up. In some other cases, reversals happen. Indeed, countries that have made it to the middle income may slide back to the low-income group, perhaps due to a major shock, such as a war or a plunge in commodity prices, if the country is excessively dependent on a narrow set of commodities. The transition of an economy from low-income to middle-income status is a major leap toward attaining the coveted high-income status and eventually catch up with the richest (Spence 2011, chapter 16). During the last 2-1/2 decades, an important debate has arisen around the observation that some countries that managed to cross the middle-income bar some time ago, have not yet been able to make it into the high-income group. As D FRQVHTXHQFH VRPH DXWKRUV FODLP WKDW WKHVH FRXQWULHV DUH LQ D ³PLGGOHLQFRPH WUDS´ 1DWXUDOO\ WKLV LV D TXHVWLRQ RI FRQFHUQ IRU WKHVH FRXQWULHV¶ SROLF\ PDNHUV DV WKH\ REVHUYH that other countries do manage to cross the high-income bar.

2 | ADB Economics Working Paper Series No. 306

What will take these countries to escape this situation (and those not in it, to avoid it) DQG ¿QDOO\ DWWDLQ KLJKLQFRPH VWDWXV" 7KH SUREOHP LQ DQVZHULQJ WKLV TXHVWLRQ LV WKUHHIROG )LUVW WKHUH LV QR FOHDU DQG DFFHSWHG GH¿QLWLRQ RI ZKDW WKH ³PLGGOHLQFRPH WUDS´ LV despite the attention that the phenomenon is getting. Some studies describe possible FKDUDFWHULVWLFV RI FRXQWULHV WKDW DUH LQ WKH ³PLGGOHLQFRPH WUDS´ DQG SURYLGH SODXVLEOH explanations why these countries seem not to make it into the high income group (see, IRU H[DPSOH $'%  2KQR  *LOO DQG .KDUDV   0RUHRYHU FRXQWULHV WKDW DUH VDLG WR EH FDXJKW LQ WKH ³PLGGOHLQFRPH WUDS´ GLIIHU DFURVV VWXGLHV DQG UHIHUHQFHV WR WKH ³PLGGOHLQFRPH WUDS´ KDYH TXDOL¿HUV HJ ³VRFDOOHG PLGGOHLQFRPH WUDS´ :KHDWOH\   RU ³PLGGOHLQFRPH WUDS LI VXFK WUDSV H[LVW´ :RUOG %DQN   6SHQFH GRHV QRW XVH WKH WHUP ³WUDS´ EXW QRWHV WKDW WKH ³PLGGOHLQFRPH WUDQVLWLRQ >«@ WXUQV RXW WR EH YHU\ SUREOHPDWLF´ 6SHQFH    +H GH¿QHV WKH PLGGOHLQFRPH WUDQVLWLRQ DV ³WKDW SDUW RI the growth process that occurs when a country’s per capita income gets into the range of  WR ´ 6SHQFH    6HFRQG WKHUH KDV EHHQ VRPH P\VWL¿FDWLRQ RQ what this issue (i.e., the alleged trap) is about. After all, development is a continuum from low income (agrarian) to high income (industrial and service economy), not a dichotomy or even a process that takes place in discrete jumps. Therefore, it could be argued that not being stuck as a middle-income country is simply a problem of growth and, therefore, WKH IXQGDPHQWDO TXHVWLRQ UHPDLQV ZK\ GR VRPH FRXQWULHV JURZ IDVWHU WKDQ RWKHUV" RU as Eichengreen et al. (2011) analyze it: when do fast growing economies slow down?1 7KLUG WKH ZRUG ³WUDS´ LV WR VRPH H[WHQW PLVOHDGLQJ IRU LW LV UHPLQLVFHQW RI 1HOVRQ¶V  FRQFHSW RI ³ORZOHYHO HTXLOLEULXP WUDS´ RU RI 0\UGDO¶V  PRGHO RI ³FXPXODWLYH FDXVDWLRQ´2 These are models that explain features of the poor (low-income) countries UDWKHU WKDQ RI WKRVH WKDW KDYH DWWDLQHG PLGGOHLQFRPH VWDWXV ,W LV GLI¿FXOW WR DUJXH WKDW
1

In the simple neoclassical growth model, an economy that begins with a stock of capital per worker below its steady state value will experience growth in both its capital and output per worker along the transition path to the steady state. Over time, however, growth slows down as the economy approaches its steady state. Likewise, in the neoclassical growth model, an increase in the population growth rate leads to a decline in the growth rate of output (with respect to the old steady state growth rate) during the transition to the new (lower) steady state. This model can also incorporate easily the idea of a poverty trap by simply assuming a production function exhibits diminishing returns to capital at low levels of capital, increasing returns for a middle range of capital, and either constant or diminishing returns for high levels of capital. 2 Nelson’s (1956) low-level equilibrium trap is a model whose purpose is to demonstrate the difficulties that some poor countries may face in achieving a self-sustaining rise in living standards. The model contains three equations: (i) determination of net capital formation; (ii) population growth; (iii) income growth. The low-level equilibrium trap refers to a situation where per capita income is permanently depressed as a consequence of a fast population growth, faster than the growth in national income. In dynamic terms, as long as this happens, per capita income is forced down to the subsistence level. The model is rather pessimistic in the absence of a critical minimum effort. It is a conceptual framework and still may apply to some countries, although it may not wholly accord with the historical experience. In Western Europe, for example, it was not until population started to grow rapidly that per capita income started to rise, and population growth preceded income growth. This, however, is probably not the experience of many developing countries in present times, where birth rates are falling faster than death rates. Myrdal (1957) argued that economic and social forces produce tendencies toward disequilibrium, which tends to persist and even widen over time. Myrdal argued that: (i) following an exogenous shock that generates disequilibrium between two regions, a multiplier-accelerator mechanism produces increasing returns in the favored region such that the initial difference, instead of closing as a result of factor mobility, remains and even increases; and that (ii) through trade, the developing countries have been forced into the production of goods with inelastic demand with respect to both price and income.

Tracking the Middle-Income Trap: What is It, Who is in It, and Why? | 3

countries that have attained middle-income status (especially those in the upper middleLQFRPH VHJPHQW DV GH¿QHG ODWHU DUH LQ ZKDW WKH OLWHUDWXUH UHIHUV WR DV D SRYHUW\ WUDS This does not mean that the notion of middle-income trap is entirely meaningless. After all, it is true that some countries that reached the middle income group some time ago have not crossed yet the high-income bar, while some others did it in fewer years. The TXHVWLRQ RI ZK\ VRPH FRXQWULHV PDNH WKLV WUDQVLWLRQ IDVWHU WKDQ RWKHUV LV DQ LQWHUHVWLQJ and potentially important, one.4 7KLV SDSHU DWWHPSWV WR ¿OO VRPH RI WKHVH JDSV E\ SURYLGLQJ D ZRUNLQJ GH¿QLWLRQ RI WKH middle-income trap. To do this, the paper employs a consistent data set for 124 countries IRU  6HFWLRQ  GH¿QHV WKH LQFRPH WKUHVKROGV XVLQJ JURVV GRPHVWLF SURGXFW *'3 SHU FDSLWD LQ  SXUFKDVLQJ SRZHU SDULW\ >333@ GROODUV HVWLPDWHV RI 0DGGLVRQ (2010), extended to 2010 using data from the International Monetary Fund. This allows FODVVL¿FDWLRQ RI HDFK RI WKH  FRXQWULHV LQWR ORZLQFRPH ORZHU PLGGOHLQFRPH XSSHU PLGGOHLQFRPH DQG KLJKLQFRPH 6HFWLRQ  DQDO\]HV KLVWRULFDO LQFRPH WUDQVLWLRQV DQG XVHV WKHP DV D JXLGH WR GH¿QH WKH middle-income trap as a state of being a middleincome country for over a certain number of years. In section 4, we identify the countries in the middle-income trap. The paper differentiates between those that are in the lower middle-income trap and those that are in the upper middle-income trap. A discussion of those countries that are not in either of these traps is likewise provided. Section 5 offers some conclusions.

II. Defining Income Groups
'H¿QLQJ WKH PLGGOHLQFRPH WUDS VWDUWV ZLWK D GH¿QLWLRQ ZKDW WKH PLGGOHLQFRPH LV )RU WKLV D FODVVL¿FDWLRQ RI FRXQWULHV WKDW LV UHOHYDQW LQ WKH FRQWH[W RI D VSHFL¿F SHULRG KDV to be provided. Indeed, if one takes today’s living standards (not only income but also poverty, mortality, schooling, etc.) as reference, all countries in the world were low-income LQ WKH V 7DEOH  VKRZV 0DGGLVRQ¶V  HVWLPDWHV RI LQFRPH SHU FDSLWD LQ  333 GROODUV EHWZHHQ  $' DQG  'XULQJ DOO WKLV SHULRG LQFRPHV YDULHG UHODWLYHO\ OLWWOH IURP D PLQLPXP RI  WR D PD[LPXP RI  LQ  $' DQG IURP DOVR ±  WR DERXW  LQ  ,Q VRPH FRXQWULHV LQ WKH WDEOH LQFOXGLQJ WKH 35& DQG ,QGLD LQFRPH SHU FDSLWD EDUHO\ FKDQJHG GXULQJ WKHVH DOPRVW  \HDUV 7KH ¿UVW FRXQWU\
3

Kremer (1993) or Snower (1996) can also be categorized as “poverty traps” models. Our assessment is that all these models refer to a stable steady state with low levels of per capita output and capital stock. Agents cannot break out of it because the economy has a tendency to return to the low-level steady state. Hence they find themselves in a vicious circle. 4 In recent work, Kharas (2010) argues that the factor underpinning the good performance that exhibited the developed countries for decades was the existence of a large middle class (itself an ambiguous social classification). He estimates that in 2009 there were 1.8 billion people in the global middle class, most of them in the developed world. Development, therefore, can be understood as a process of generating a large middle class that drives entrepreneurship and innovation. Achieving this requires growing incomes, that is, not getting trapped in the middle.

4 | ADB Economics Working Paper Series No. 306

in history to reach $2,000 per capita income was the Netherlands in 1700. Before this, incomes were extremely low and, as we shall see later, they are comparable to those of PDQ\ ORZLQFRPH FRXQWULHV WRGD\ 6RPH WDNHRII FDQ EH VHHQ WRZDUG WKH HQG RI WKH th FHQWXU\   ZKHQ VHYHUDO FRXQWULHV UHDFKHG DERXW  DQG DERYH DQG WKH 8QLWHG .LQJGRP DQG $XVWUDOLD UHDFKHG  VL[ WLPHV WKH SHU FDSLWD LQFRPH RI WKH 35& RU India). The Industrial Revolution had arrived. It is obvious that the pace of growth of LQFRPH SHU FDSLWD JURZWK GXULQJ WKHVH DOPRVW  \HDUV ZDV YHU\ VORZ ZKHQ FRPSDUHG with recent growth experiences. Table 1. GDP per capita (in 1990 PPP $) in years 1, 1000, 1500, 1600, 1700, 1820, and 1870 (all AD)
Economy Australia Austria Belgium Canada China, People's Rep. of Denmark Egypt Finland France Germany Greece India Italy Japan Mexico Morocco The Netherlands Norway Portugal Spain Sweden Switzerland Turkey United Kingdom United States 1 400 425 450 400 450 400 600 400 473 408 550 450 809 400 400 450 425 400 450 498 400 425 550 400 400 1000 400 425 425 400 466 400 500 400 425 410 400 450 450 425 400 430 425 400 425 450 400 410 600 400 400 1500 400 707 875 400 600 738 475 453 727 688 433 550 1,100 500 425 430 761 610 606 661 651 632 600 714 400 1600 400 837 976 400 600 875 475 538 841 791 483 550 1,100 520 454 430 1,381 665 740 853 700 750 600 974 400 1700 400 993 1,144 430 600 1,039 475 638 910 910 530 550 1,100 570 568 430 2,130 722 819 853 750 890 600 1,250 527 1820 518 1,218 1,319 904 600 1,274 475 781 1,135 1,077 641 533 1,117 669 759 430 1,838 801 923 1,008 819 1,090 643 1,706 1,257 1870 3,273 1,863 2,692 1,695 530 2,003 649 1,140 1,876 1,839 880 533 1,499 737 674 563 2,757 1,360 975 1,207 1,359 2,102 825 3,190 2,445

GDP = gross domestic product, PPP = purchasing power parity. Source: Maddison (2010).

7KH :RUOG %DQN¶V LQFRPH FODVVL¿FDWLRQ LV WKH PRVW ZLGHO\ XVHG WR GLYLGH FRXQWULHV LQWR LQFRPH JURXSV 7KH :RUOG %DQN FODVVL¿HV FRXQWULHV LQWR ORZLQFRPH ORZHU PLGGOH income, higher middle-income, and high-income, based on the countries’ gross national LQFRPH *1, SHU FDSLWD LQ FXUUHQW SULFHV 7KH :RUOG %DQN VHW WKH RULJLQDO SHU FDSLWD

Tracking the Middle-Income Trap: What is It, Who is in It, and Why? | 5

income thresholds for the different income groups by looking at the relationship between PHDVXUHV RI ZHOOEHLQJ LQFOXGLQJ SRYHUW\ LQFLGHQFH DQG LQIDQW PRUWDOLW\ DQG *1, SHU capita.5 By taking into consideration nonincome aspects of welfare, each category of WKH :RUOG %DQN¶V LQFRPH FODVVL¿FDWLRQ UHÀHFWV D OHYHO RI ZHOOEHLQJ QRW MXVW LQFRPH characteristic of a set of countries when the original thresholds were established.6 The World Bank updates the original thresholds by adjusting them for international LQÀDWLRQ WKH DYHUDJH LQÀDWLRQ RI WKH (XUR =RQH -DSDQ WKH 8QLWHG .LQJGRP 8.  DQG WKH 8QLWHG 6WDWHV %\ DGMXVWLQJ IRU LQÀDWLRQ WKH WKUHVKROGV UHPDLQ FRQVWDQW LQ UHDO terms over time.7 Using thresholds that are constant over time implies that a country’s status is independent of the status of other countries. This means that there is no preset GLVWULEXWLRQ WKDW VSHFL¿HV WKH SURSRUWLRQ RI FRXQWULHV LQ HDFK FDWHJRU\²LH FRXQWULHV can all be high-income, middle-income, or low-income. For example, because the thresholds were set based on today’s well-being standards, most, if not all, countries in WKH WK FHQWXU\ ZHUH ³ORZLQFRPH´ %DVHG RQ 0DGGLVRQ¶V  HVWLPDWHV RI LQFRPH per capita and our income thresholds, which will be discussed below, only Australia, the 1HWKHUODQGV DQG WKH 8. ZHUH ORZHU PLGGOHLQFRPH FRXQWULHV GXULQJ WKH ¿UVW KDOI RI WKH WK FHQWXU\ 7KH UHVW ZHUH DOO ORZLQFRPH FRXQWULHV 7KH PRVW UHFHQW :RUOG %DQN FODVVL¿FDWLRQ ZLWK GDWD IRU  LV DV IROORZV D FRXQWU\ LV ORZ LQFRPH LI LWV JURVV QDWLRQDO LQFRPH *1, SHU FDSLWD LV  RU OHVV ORZHU PLGGOH LQFRPH LI LWV *1, SHU FDSLWD OLHV EHWZHHQ  DQG  XSSHU PLGGOHLQFRPH LI LWV *1, SHU FDSLWD OLHV EHWZHHQ  DQG  DQG KLJK LQFRPH RI LWV *1, SHU FDSLWD LV  RU DERYH 8QGHU WKLV FODVVL¿FDWLRQ  RXW RI WKH  FRXQWULHV LQ WKH VDPSOH ZHUH FRQVLGHUHG ORZLQFRPH LQ   ORZHU PLGGOHLQFRPH  XSSHU PLGGOH LQFRPH DQG  KLJKLQFRPH VHH $SSHQGL[ 7DEOH D DQG E  7KH :RUOG %DQN¶V LQFRPH FODVVL¿FDWLRQ VHULHV LV RQO\ DYDLODEOH KRZHYHU VLQFH  7R ORRN DW ³WUDSV D ORQJHU GDWD VHULHV LV QHHGHG 7R GR WKLV 0DGGLVRQ¶V  KLVWRULFDO *'3 SHU FDSLWD HVWLPDWHV are used. 0DGLVVRQ  SURYLGHV FRPSDUDEOH *'3 SHU FDSLWD GDWD IRU  FRXQWULHV +RZHYHU WKLV VWXG\ GLVFDUGV  RI WKHP L VHYHQ FRXQWULHV EHFDXVH RI SRSXODWLRQV EHORZ  PLOOLRQ LQ  LL  H[6RYLHW 5HSXEOLFV <XJRVODYLD DQG &]HFKRVORYDNLD DQG LLL VL[ FRXQWULHV ZKRVH *'3 SHU FDSLWD LV QRW UHSRUWHG LQ WKH ,0) GDWDEDVH This means WKDW ZH KDYH D FRPSOHWH GDWD VHW IRU  FRXQWULHV IURP  WR  :H H[WHQGHG WKH
5 6 7

World Bank (data.worldbank.org/about/country-classifications/a-short-history). The year the original threshold was established is not explicitly identified in the World Bank website. World Bank (data.worldbank.org/about/country-classifications/a-short-history). 8 The World Bank income thresholds was extended back to 1962 using GNI per capita data from the World Development Indicators. Income per capita thresholds in 2000 were adjusted using weighted inflation (by GDP) of Japan, the UK, and the US. However, there are data gaps for several countries during 1962–2009. 9 These countries are: (i) those that had populations below 1 million people in 2009. These are Bahrain, Comoros, Cape Verde, Djibouti, Equatorial Guinea, Sao Tome and Principe, and Seychelles. The Pacific Islands are also excluded. All these islands, except Papua New Guinea, also have very small populations; (ii) the successor republics of the Russian Federation (15), Yugoslavia (5), and Czechoslovakia (2) for which data is not complete for 1950–2008. We also exclude former Yugoslavia and Czechoslovakia (2); and (iii) Cuba, Democratic Republic of Korea, Puerto Rico, Somalia, West Bank and Gaza, and Trinidad and Tobago, whose GDP per capita estimates are not reported in the IMF database.

6 | ADB Economics Working Paper Series No. 306

VHULHV XS WR  XVLQJ JURZWK UDWHV RI *'3 SHU FDSLWD LQ ORFDO FXUUHQF\ PHDVXUHG LQ constant prices from the IMF World Economic Outlook database.10 7KH :RUOG %DQN¶V WKUHVKROGV PHDVXUHG LQ FXUUHQW *1, SHU FDSLWD FDQQRW EH DSSOLHG GLUHFWO\ WR 0DGGLVRQ¶V GDWD DV WKH ODWWHU XVHV *'3 SHU FDSLWD PHDVXUHG LQ FRQVWDQW  333 GROODUV 7KHUHIRUH ZH QHHG VRPH DGMXVWPHQWV WR FDOFXODWH RXU RZQ LQFRPH WKUHVKROGV 7KLV PHDQV ORRNLQJ IRU WKUHVKROGV LQ  333 GROODUV WKDW ZLOO JLYH XV DQ LQFRPH FODVVL¿FDWLRQ WKDW PDWFKHV DV PXFK DV SRVVLEOH WKDW RI WKH :RUOG %DQN WKDW LV LI FRXQWULHV $ % & DQG ' DUH FODVVL¿HG DV KLJK LQFRPH DFFRUGLQJ WR WKH :RUOG %DQN FODVVL¿FDWLRQ ZH ZRXOG OLNH PRVW LI QRW DOO RI WKHP WR EH DOVR KLJK LQFRPH LQ RXU FODVVL¿FDWLRQ XVLQJ  333 GROODU YDOXHV %\ GRLQJ WKLV ZH PDLQWDLQ WKH XQGHUO\LQJ information (both income and nonincome measures of well-being) that is encapsulated in each of the income categories. One issue that arises is that of potential inconsistencies. It LV SRVVLEOH WKDW D FRXQWU\ FODVVL¿HG DV ORZHU PLGGOHLQFRPH DFFRUGLQJ WR WKH :RUOG %DQN FODVVL¿FDWLRQ PD\ KDYH D ORZHU *'3 SHU FDSLWD LQ 0DGGLVRQ¶V GDWD VHW WKDQ D FRXQWU\ FODVVL¿HG DV ORZ LQFRPH DOVR E\ WKH :RUOG %DQN FODVVL¿FDWLRQ )LUVW GH¿QH VHWV RI *'3 SHU FDSLWD LQ  333 WKUHVKROGV (DFK VHW i is composed of three thresholds t0,i , t1,i , and t2,i , where t0,i<t1,i<t2,i . t0 is the threshold that separates ORZ IURP ORZHU PLGGOHLQFRPH W1 is the threshold that separates lower middle-income IURP XSSHU PLGGOHLQFRPH DQG W2 is the threshold that separates upper middle-income from high-income. Each set of thresholds i is a combination of t0 from $1,500 to $4,750, t1 IURP  WR  DQG W2 IURP  WR  DW  LQWHUYDOV11 This gives a total of 14 (intervals of $250 from $1,500 to $4,750) × 16 (intervals of $250 from $5,000 WR  î  LQWHUYDOV RI  IURP  WR   VHWV RI WKUHVKROGV For example, set 1 is (t0,1  W1,1  DQG W2,1   VHW  LV W0,2   DQG t1,2  DQG W2,2   DQG VHW  LV W  W t    6HFRQG XVLQJ *'3 SHU FDSLWD  333 IRU HDFK VHW i, categorize a country as low LQFRPH LI LWV *'3 SHU FDSLWD LQ  333 LQ D SDUWLFXODU \HDU LV OHVV WKDQ W0, i  ORZHU PLGGOH LQFRPH LI LWV *'3 SHU FDSLWD LV DW OHDVW W0, i , but less than t1, i  XSSHU PLGGOH LQFRPH LI LWV *'3 SHU FDSLWD LV DW OHDVW W1, i , but less than t2, i  DQG KLJKLQFRPH LI LWV *'3 SHU FDSLWD LV ODUJHU WKDQ RU HTXDO WR W2,i. For each year, code low-income countries DV  ORZHU PLGGOHLQFRPH FRXQWULHV DV  XSSHU PLGGOHLQFRPH FRXQWULHV DV  DQG KLJK LQFRPH FRXQWULHV DV 

10

April 2011 edition. Available at www.imf.org/external/pubs/ft/weo/2011/01/weodata/index.aspx (accessed 25 June 2011). 11 The range of t , t , and t , was decided based on the distribution of GDP per capita when the World Bank’s 1990 0 1 2 income classification was applied to Maddison’s data for 1990. Specifically, the mean plus one standard deviation (rounded off ) of GDP per capita for each income group is used as bounds. The mean plus one standard deviation for the low, lower middle-income, upper middle-income, and high-income are $1,542, $5,011, $9,104, and $19,642, respectively. The upper bounds of each group are $250 below the lower bound of the next threshold.

Tracking the Middle-Income Trap: What is It, Who is in It, and Why? | 7

7KLUG FDOFXODWH WKH SDLUZLVH FRUUHODWLRQV RI HDFK RI WKH UHVXOWLQJ  FODVVL¿FDWLRQV ZLWK WKH :RUOG %DQN¶V²DOVR FRGHG DV RUGLQDO YDOXHV  ORZLQFRPH   ORZHU PLGGOH LQFRPH   XSSHU PLGGOHLQFRPH DQG  KLJKLQFRPH  7KH SRO\FKRULF FRUUHODWLRQ LV XVHG This is the maximum likelihood estimate of the correlation between the unobservable continuous and normally distributed variables underlying the ordinal categories (Olsson  .ROHQLNRY DQG $QJHOHV  12 $OO GDWD IURP  WR  ZHUH SRROHG DQG XVHG in the calculation of the correlations. 7KH VHW RI WKUHVKROGV WKDW \LHOGHG WKH KLJKHVW FRUUHODWLRQ  LV W0  W1  and t2  7KXV WKH LQFRPH FODVVL¿FDWLRQ LV GH¿QHG DV IROORZV D FRXQWU\ LV ORZLQFRPH LI LWV *'3 SHU FDSLWD LQ  333 GROODUV LV OHVV WKDQ  ORZHU PLGGOH LQFRPH LI LWV *'3 SHU FDSLWD LV DW OHDVW  EXW OHVV WKDQ  XSSHU PLGGOHLQFRPH LI LWV *'3 SHU FDSLWD LV DW OHDVW  EXW OHVV WKDQ  DQG KLJK LQFRPH LI LWV *'3 per capita is $11,750 or higher. These thresholds are constant over time.14 Appendix 7DEOHV D DQG E SURYLGH WKH FODVVL¿FDWLRQ IRU  Using these thresholds, the distribution of the 124 countries by income class over time LV VKRZQ LQ )LJXUH  ,Q   FRXQWULHV  RI WKH WRWDO ZHUH FODVVL¿HG DV ORZ LQFRPH  FRXQWULHV  ZHUH ORZHU PLGGOHLQFRPH VL[ FRXQWULHV  ZHUH XSSHU PLGGOHLQFRPH DQG RQO\ WKUHH FRXQWULHV².XZDLW 4DWDU DQG 8QLWHG $UDE (PLUDWHV² had income per capita above the high-income threshold. Maddison’s (2010) per capita LQFRPH HVWLPDWHV IRU WKHVH FRXQWULHV LQ  LQ  333V ZHUH   DQG  UHVSHFWLYHO\ 7KH 86 UHDFKHG WKH KLJKLQFRPH WKUHVKROG LQ  EXW LWV LQFRPH SHU FDSLWD VOLSSHG WR XSSHU PLGGOHLQFRPH DIWHU WKH ZDU LQ  DQG LW UHJDLQHG KLJK LQFRPH VWDWXV RQO\ LQ  7RJHWKHU ZLWK WKH 86 WKH RWKHU ¿YH XSSHU PLGGOHLQFRPH FRXQWULHV LQ  ZHUH $XVWUDOLD &DQDGD 1HZ =HDODQG 6ZLW]HUODQG DQG 9HQH]XHOD

12

The polychoric correlation provides a measure of the degree of agreement between two raters (in this case the World Bank’s and the present study’s) on a continuous variable (income) that has been transformed into ordered levels (several income levels), under the assumption of a continuous underlying joint distribution. The Spearman’s rank correlation, which also measures the association between ordinal variables, implicitly assumes discrete underlying joint distribution (Ekstrom 2010). In this study, the use of the polychoric correlation is more appropriate since the unobserved variable underlying the ordinal values is the level of well-being, e.g., income level, poverty, etc. 13 For example, Angola was classified as lower middle-income and Egypt as low-income in 1990 under the World Bank classification. The GDP per capita of Angola in the same year, according to Maddison’s estimates in 1990 PPP $, was $868, and that of Egypt was $2,523. This makes Angola a low-income country and Egypt a lower middleincome country in 1990 based on the thresholds defined in this paper. 14 The use of these constant thresholds is, in principle, equivalent to what the World Bank does. As discussed above, the World Bank’s thresholds are inflation-adjusted and, therefore, remain constant in real terms.

8 | ADB Economics Working Paper Series No. 306

Figure 1: Distribution by Income Class
124 High Income 100 Number of Countries Upper Middle-Income

75

Lower Middle-Income

50 Low Income

25

0 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Source: Authors’ calculations.

Figure 1 indicates that the number of countries in the low-income group has decreased RYHU WLPH IURP  LQ  WR  LQ 15 %\ GHFDGH WKH V ZLWQHVVHG WKH ODUJHVW GHFOLQH LQ WKH QXPEHU RI ORZLQFRPH FRXQWULHV ZKHQ  PDGH LW LQWR WKH ORZHU PLGGOH LQFRPH JURXS 7KLV ZDV IROORZHG E\ DQRWKHU  FRXQWULHV GXULQJ WKH V DQG  PRUH FRXQWULHV GXULQJ WKH V %HWZHHQ  DQG WKH HDUO\ V KRZHYHU YHU\ IHZ ORZ LQFRPH FRXQWULHV GLG JUDGXDWH 7KH QXPEHU RI ORZLQFRPH FRXQWULHV ZDV VWLOO   RI WKH WRWDO LQ  DOPRVW WKH VDPH DV LQ   FRXQWULHV RU  RI WKH WRWDO  7KLV gradually fell after 2001 when eight countries (Cambodia, Republic of Congo, Honduras, ,QGLD 0R]DPELTXH 0\DQPDU 3DNLVWDQ DQG 9LHW 1DP DWWDLQHG ORZHU PLGGOHLQFRPH VWDWXV ,Q WRWDO  RXW RI WKH  ORZLQFRPH FRXQWULHV LQ  KDG HVFDSHG IURP WKH ORZ income category by 2010. By region, 14 out of the 42 countries were in Asia (both East DQG 6RXWK $VLD   LQ /DWLQ $PHULFD QLQH LQ WKH 0LGGOH (DVW DQG 1RUWK $IULFD ¿YH LQ Europe, and four in Sub-Saharan Africa. There were also three countries that moved out RI ORZ LQFRPH VRPHWLPH GXULQJ ± EXW IHOO EDFN LQWR WKLV FDWHJRU\ DQG LQ  WKH\ ZHUH ORZ LQFRPH DJDLQ 7KHVH DUH WKH &RWH G¶,YRLUH ,UDT DQG 1LFDUDJXD 7KHUH DUH  FRXQWULHV WKDW KDYH EHHQ ORZLQFRPH VLQFH   RI WKHP LQ 6XE 6DKDUDQ $IULFD ¿YH LQ $VLD DQG RQH LQ WKH &DULEEHDQ 7KHVH DUH VKRZQ LQ 7DEOH  7KH 2010 income per capita of most of these countries is comparable (or even lower) to that RI :HVWHUQ (XURSH DQG RWKHU FRXQWULHV IRU ZKLFK GDWD LV DYDLODEOH LQ WKH th century or earlier (see Table 1). The Democratic Republic of Congo, for example, had an income per FDSLWD RI  LQ  ZHOO EHORZ WKH FRXQWULHV LQ 7DEOH  LQ  $'
15

Note that many of these “countries” were in fact colonies during the 1950s and 1960s.

Tracking the Middle-Income Trap: What is It, Who is in It, and Why? | 9

Table 2: Countries that have Always been in the Low-Income Group during 1950–2010
Asia Afghanistan ($1068) Bangladesh ($1250) Lao PDR ($1864) Mongolia ($1015) Nepal ($1219) Caribbean Haiti ($664) Sub-Saharan Africa Angola ($1658) Benin ($1387) Burkina Faso ($1110) Burundi ($495) Cameroon ($1208) Sub-Saharan Africa Central African Rep. ($530) Chad ($708) Congo, Dem. Rep. ($259) Eritrea ($866) Gambia ($1099) Ghana ($1736) Guinea ($607) Guinea Bissau ($629) Kenya ($1115) Lesotho ($1987) Liberia ($806) Madagascar ($654) Malawi ($807) Sub-Saharan Africa Mali ($1185) Mauritania ($1281) Niger ($516) Nigeria ($1674) Rwanda ($1085) Senegal ($1479) Sierra Leone ($707) Sudan ($1612) Tanzania ($813) Togo ($615) Uganda ($1059) Zambia ($921) Zimbabwe ($900)

Note: 2010 gross domestic product per capita (1990 purchasing power parity $) in parenthesis. Sources: Author's calculations, World Economic Outlook (IMF 2011); Maddison (2010).

These countries will not be discussed in detail, since this is not the purpose of this paper. We will mention only that these countries belong to Collier’s (2007) bottom billion, WKDW WKH\ KDYH YHU\ SURQRXQFHG GXDOLVWLF VWUXFWXUHV DQG WKDW WKH\ DUH LQ D ³ORZOHYHO HTXLOLEULXP WUDS´ 7KH DYHUDJH VKDUH RI DJULFXOWXUH LQ WRWDO RXWSXW LQ WKHVH FRXQWULHV LV   ZKHUHDV WKH ZRUOG DYHUDJH LV   DOVR WKH VKDUH RI DJULFXOWXUDO HPSOR\PHQW LQ WRWDO HPSOR\PHQW LV   VLJQL¿FDQWO\ KLJKHU WKDQ WKH ZRUOG DYHUDJH   7KHVH FRXQWULHV¶ SUREOHP LV VLJQL¿FDQWO\ GLIIHUHQW IURP WKDW RI WKH FRXQWULHV WKDW KDYH UHDFKHG PLGGOH LQFRPH 7KH VROXWLRQ LV D ³ELJ SXVK´ LQ WHUPV RI LQYHVWPHQW RU ³FULWLFDO PLQLPXP HIIRUW´ WR UDLVH SHU FDSLWD LQFRPH WR WKDW OHYHO EH\RQG ZKLFK DQ\ IXUWKHU JURZWK RI SHU capita income is not associated with income-depressing forces (e.g., population growth) that exceed income-generating forces (e.g., capital formation). ,Q  WKHUH ZHUH  FRXQWULHV FODVVL¿HG DV PLGGOHLQFRPH  ORZHU PLGGOHLQFRPH and six upper middle-income). This number increased to 56 (46 lower middle-income DQG  XSSHU PLGGOHLQFRPH LQ 16 But the number of middle-income countries KDV UHPDLQHG DW DERXW  EHWZHHQ WKH PLGV DQG  DV YHU\ IHZ ORZLQFRPH countries reached the lower middle- income threshold, and also very few countries jumped from lower middle-income into upper middle-income. Colombia, Namibia, Peru, DQG 6RXWK $IULFD IRU H[DPSOH KDYH EHHQ ORZHU PLGGOHLQFRPH FRXQWULHV VLQFH  ,Q   FRXQWULHV ZHUH FODVVL¿HG DV PLGGOHLQFRPH  ORZHU PLGGOHLQFRPH DQG  upper middle-income). By population, this is the largest income group, as countries like the PRC, India, and Indonesia are in it.
16

Some countries transitioned from low-income to middle-income during 1980–2000, and others transitioned from middle-income to high-income, over the same period. The net increase in the number of countries in the middleincome group is 17 (i.e., 56–39).

10 | ADB Economics Working Paper Series No. 306

Figure 1 also shows the sharp increase in the number of high-income countries between WKH ODWH V DQG  DQG EHWZHHQ WKH ODWH V DQG  7KH IRUPHU SHULRG RYHUODSV ZLWK ZKDW 0DGGLVRQ  UHIHUUHG WR DV WKH ³*ROGHQ $JH´ ±  ZKHQ productivity accelerated considerably. The latter period corresponds to the entry of a number of non-European countries into the high income status, particularly East Asian HJ WKH 5HSXEOLF RI .RUHD 6LQJDSRUH DQG 7DLSHL&KLQD DQG /DWLQ $PHULFDQ HJ Argentina and Chile) economies. The number of countries that reached the high-income WKUHVKROG LQFUHDVHG IURP IRXU  RI WKH WRWDO LQ  .XZDLW 4DWDU 6ZLW]HUODQG DQG 8QLWHG $UDE (PLUDWHV WR   LQ  DQG IURP   LQ  WR   LQ 2010.17 To summarize, our thresholds distribute the 124 countries in 2010 as follows: 40 countries ZHUH FODVVL¿HG DV ORZ LQFRPH  DV ORZHU PLGGOHLQFRPH  DV XSSHU PLGGOHLQFRPH DQG  DV KLJKLQFRPH FRXQWULHV $SSHQGL[ 7DEOH $ VKRZV WKH OLVW RI WKH  FRXQWULHV Appendix Table 1B shows the 22 countries of Czechoslovakia, the Russian Federation, and Yugoslavia. In the next sections, we identify which countries, among those in the lower middle-income and upper middle-income groups, are caught in the middle-income trap, those that are approaching it, and those that are likely to avoid it. :H FORVH WKLV VHFWLRQ ZLWK D EULHI UHIHUHQFH WR WZR UHODWHG TXHVWLRQV WKDW )LJXUH  WULJJHUV 7KH ¿UVW RQH LV ZKHWKHU WKH GLVSHUVLRQ RI LQFRPH SHU FDSLWD DFURVV WKH ZRUOG is decreasing. The second one is whether developing countries are catching up with the leader. Figure 2 shows the standard deviation of the 124 countries’ income per capita for ± 7KH ¿JXUH VKRZV WKDW ZRUOG LQFRPH SHU FDSLWD KDV EHFRPH PRUH PXFK PRUH XQHTXDO WKDQ LW ZDV  \HDUV DJR 7KLV LV D E\SURGXFW RI WKH IDFW WKDW GHYHORSPHQW GRHV QRW RFFXU HTXDOO\ LQ DOO FRXQWULHV VRPH PRYH XS IDVW ZKLOH RWKHUV UHPDLQ SRRU 7KLV LV obvious in the case of Asia. The standard deviation of income per capita increased very IDVW WKURXJKRXW WKH V V DQG V DQG RQO\ WDSHUHG RII DURXQG  7KLV was due to the fast development of a group of countries in East Asia. The dispersion of income among the other groups is much smaller.

17

Only the United Arab Emirates has remained high income during 1950–2010 (Kuwait fell to the upper middleincome category in 1981 and regained high-income status in 1993; Qatar fell to upper middle-income in 1985 and regained high-income status in 2005). 18 Our 2010 classification and that of the World Bank differ in 44 countries (see Appendix Tables 1a and 1b). 19 Note that although income dispersion within Europe, Latin America, and Sub-Saharan Africa is similar, income levels across these three groups are very different, which is reflected in the overall (world) standard deviation.

Tracking the Middle-Income Trap: What is It, Who is in It, and Why? | 11

Figure 2: Standard Deviation of (the log of) Income per Capita
1.2 Standard Deviation of log Gross Domestic Product per Capita

1.0

0.8

0.6

0.4 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Overall Latin America Sub-Saharan Africa
Sources:

Asia Middle East and North Africa Europe

Author's calculations, World Economic Outlook (IMF 2011); Maddison (2010).

7KH RWKHU TXHVWLRQ LV ZKHWKHU FRXQWULHV DUH FDWFKLQJ XS WKDW LV ZKHWKHU WKH DEVROXWH income gap between a country’s income per capita and that of the economic leader is declining. In other words: given that the number of low-income countries has halved VLQFH  FDQ LW EH LQIHUUHG IURP )LJXUH  WKDW WKH ZRUOG LV FDWFKLQJ XS WR WKH OHDGHU" Both Hong Kong, China and Singapore already surpassed the US income per capita in  DQG  UHVSHFWLYHO\ DQG 1RUZD\¶V LQFRPH SHU FDSLWD ZDV DERXW  WKDW RI the US in 2010. Is this a generalized phenomenon? Due to technology diffusion from the leading economy to the followers and other mechanisms, the catch up hypothesis SUHGLFWV WKDW HYHQWXDOO\ *'3 SHU FDSLWD RI PRVW FRXQWULHV ZLOO DSSUR[LPDWH WKDW RI WKH OHDGHU *HUVFKHQNURQ  DUJXHG WKDW GHYHORSPHQW UHTXLUHG FHUWDLQ SUHUHTXLVLWHV on top of government policies, but that there were forces which, in the absence of VXFK SUHUHTXLVLWHV FRXOG RSHUDWH DV VXEVWLWXWHV ,Q SDUWLFXODU KH K\SRWKHVL]HG WKDW the more backward a country, the more rapid will be its industrialization. He called this WKH ³DGYDQWDJH RI HFRQRPLF EDFNZDUGQHVV´ /LNHZLVH LQ WKH QHRFODVVLFDO IUDPHZRUN low-capital countries should catch up to the level of the developed countries because: L KLJKHU LQWHUHVW UDWHV VKRXOG LQGXFH KLJKHU GRPHVWLF VDYLQJV LL KLJKHU JURZWK UDWHV VKRXOG DWWUDFW IRUHLJQ LQYHVWPHQW DQG LLL WKH PDUJLQDO SURGXFWLYLW\ RI D XQLW RI LQYHVWHG capital is higher. Evidence shows that these mechanisms operated in the post-WWI period, and that they permitted Europe and Japan to catch up to the US level. The idea is best explained in the following terms:

12 | ADB Economics Working Paper Series No. 306

When a leader discards old stock and replaces it, the accompanying productivity increase is governed and limited by the advance of knowledge between the time when the old capital was installed and the time it is replaced. Those who are behind, however, have the potential to make a larger leap. New capital can embody the frontier of knowledge, but the capital it replaces was technologically superannuated. So, the larger the technological and, therefore, the productivity gap between leader, DQG IROORZHU WKH VWURQJHU WKH IROORZHU¶V SRWHQWLDO IRU JURZWK LQ SURGXFWLYLW\ DQG RWKHU WKLQJV EHLQJ HTXDO WKH IDVWHU RQH H[SHFWV WKH IROORZHU¶V JURZWK UDWH WR EH )ROORZHUV tend to catch up faster if they are initially more backward. $EUDPRYLW]  ± Some people think, however, that spillovers take place automatically and that the living standards of the poor countries are catching up to those of the rich countries, as the former speedily adopt the technologies, know how, and policies that made the rich FRXQWLHV ULFK ,Q SUDFWLFH WKLV VHHPV WR EH LQFRUUHFW +REGD\  )UHHPDQ DQG 6RHWH   7R DGGUHVV WKH TXHVWLRQ RI ZKHWKHU WKH ZRUOG LV FDWFKLQJ XS WR WKH OHDGHU ZH FRPSXWH D measure of income gap as GAP = 1 − (Yi / YUS ) , where Yi denotes the income per capita of country i, and YUS denotes the income per capita of the world’s leader (the US in   7KHUHIRUH  ” GAP ”  )LJXUH  VKRZV WKH UDWH DW ZKLFK *$3 FKDQJHG GXULQJ WKH SHULRG ± DJDLQVW WKH *$3 LQ 20 A negative rate (i.e., below the zero line) PHDQV WKDW WKH FRXQWU\ KDV UHGXFHG LWV *$3 ZLWK WKH 86 DQG D SRVLWLYH UDWH LPSOLHV WKDW WKH FRXQWU\¶V *$3 ZLWK WKH 86 ZLGHQHG GXULQJ ± ,V WKH DEVROXWH LQFRPH *$3 GLPLQLVKLQJ" 7KH HYLGHQFH WKDW *$3 KDV GHFOLQHG DQG WKDW FRXQWULHV DUH FDWFKLQJ WR WKH 86 LQFRPH OHYHO LV QRW FRQFOXVLYH :H ¿QG QHJDWLYH *$3 UDWHV IRU  FRXQWULHV  ORZLQFRPH  ORZHU PLGGOHLQFRPH VHYHQ XSSHU PLGGOHLQFRPH DQG  KLJKLQFRPH DQG SRVLWLYH UDWHV IRU   ORZLQFRPH  ORZHU PLGGOHLQFRPH VHYHQ XSSHU PLGGOHLQFRPH DQG  KLJKLQFRPH  )LJXUH $ VKRZV WKDW ,UHODQG ,5/  7DLSHL&KLQD 73(  DQG WKH 5HSXEOLF RI .RUHD .25 FORVHG WKH *$3 WKH IDVWHVW ZKLOH WKH *$3 EHWZHHQ WKH 86 DQG WKH 8QLWHG $UDE (PLUDWHV $5( DQG 6ZLW]HUODQG 6:, ZLGHQHG ,W LV LPSRUWDQW WR QRWH WKDW LQ   FRXQWULHV RXW RI WKH  KDG LQFRPHV EHORZ  WKDW RI WKH 86 $PRQJ QRQKLJK LQFRPH FRXQWULHV )LJXUH %  3HRSOH
V 5HSXEOLF RI &KLQD 35&  0DOD\VLD 0$/  DQG 7KDLODQG 7+$ FORVHG WKH *$3 WKH IDVWHVW $SSHQGL[ 7DEOH  SURYLGHV WKH OLVW RI FRXQWULHV WKH *$3 ZLWK WKH 86 LQ  DQG WKHLU *$3 JURZWK UDWHV IRU ± 7KH 7DEOH VKRZV WKDW *$3 GXULQJ ± LQFUHDVHG IRU DERXW KDOI RI WKH FRXQWULHV DQG WKDW LQ  *$3 ZDV  RU KLJKHU LH LQFRPH SHU FDSLWD ZDV DW PRVW  WKDW RI WKH 86 LQ D VLJQL¿FDQW QXPEHU RI countries. This result casts some doubt on the idea that the world at large is catching up to the leader.
20

Panel A contains 121 countries: 124 countries minus the US and minus Singapore and Hong Kong, China whose GDP per capita were higher than that of the US in 2010. Panel B contains 92 non-high-income countries.

Tracking the Middle-Income Trap: What is It, Who is in It, and Why? | 13

Figure 3: Initial GAP with the US (1985) and Its Growth Rate (1985–2010)
A. All economies ARE 6 SWI
Annual Growth Rate of GAP, 1985–2010 (percent)

4 2 0 –2 –4 0 0.2 0.4

DNK CAN

SAU DEU GAB IRQ ITA NZL FRA VEN LBY ECU OMN ROU MEX COG DZA JPN JOR ZAF CIV PRY NIC CMR JAM ZWE HUN BGR PAN MNG HTI SYR SLE BRA YEM LBR TGO GTM HND GNB MDG ZAR SWZ BEN BDI CAF SEN KEN RWA KWT NAM SLV NER ZMB BOL AFG GIN MRT BFA GMB MWI TZA TCD ERI NPL PHL UGA MLI NGA MAR COL LBN EGY PAK GHA PER BGD SDN IRN LAO LSO AGO ALB MOZ KHM SWE BWA DOM ISR TUR VNM IND MMR TUN IDN CRI LKA GRC ARG POL PRT BEL URY FIN NLD GBR THA MAL AUT PRC QAT CHL ESP MUS NOR AUS KOR TPE IRL 0.6 0.8 1.0

Gap in 1985 B. Non-high-income economies in 2010 1.0 SAU GAB Annual Growth Rate of GAP, 1985–2010 (percent) VEN LBY ECU OMN MEX COG CIV JOR ROU ZAF DZA PRY NIC CMR JAM ZWE HUN BGR PAN HTI SLE SYR BRA YEM TGO LBR GNB GTM SWZ ZAR HNDMNG MDG BDI BEN CAF RWA SEN KEN NER NAM SLV ZMB BOL GIN AFG MRT MWI BFA GMB TCD TZA ERI NPL PHL MLI NGA MAR UGA COL PAK EGY GHA LBN BGD SDN AGO IRN PER LAO LSO ALB MOZ KHM BWA DOM TUR VNM MMR TUN IDN IND CRI LKA POL URY MAL –1.0 0.6 0.7 0.8 Gap in 1985
Source: Author’s calculations.

IRQ

0.5

0

–0.5

THA PRC 0.9 1.0

14 | ADB Economics Working Paper Series No. 306

III. What is the Middle-Income Trap?
$V QRWHG LQ 6HFWLRQ  WKHUH LV QR SUHFLVH GH¿QLWLRQ RI ZKDW WKH PLGGOHLQFRPH WUDS 0,7 LV DQG ZLWKRXW RQH LW LV YHU\ GLI¿FXOW WR XQGHUWDNH SROLF\ GLVFXVVLRQV DERXW KRZ WR DYRLG it. Most references to the MIT do it in terms of the possible characteristics of the countries WKDW DUH SUHVXPDEO\ LQ LW )RU H[DPSOH $'%   UHIHUV WR FRXQWULHV ³XQDEOH to compete with low-income, low-wage economies in manufactured exports and with DGYDQFHG HFRQRPLHV LQ KLJKVNLOO LQQRYDWLRQV « VXFK FRXQWULHV FDQQRW PDNH D WLPHO\ transition from resource-driven growth, with low cost labor and capital, to productivityGULYHQ JURZWK´ 6SHQFH  UHIHUV WR WKH PLGGOHLQFRPH WUDQVLWLRQ DV FRXQWULHV LQ WKH ±  SHU FDSLWD LQFRPH UDQJH +H DUJXHV ³DW WKLV SRLQW WKH LQGXVWULHV WKDW GURYH WKH JURZWK in the early period start to become globally uncompetitive due to rising wages. These labor-intensive sectors move to lower-wage countries and are replaced by a new set of industries that are more capital-, human capital-, and knowledge-intensive in the way they FUHDWH YDOXH´ 6SHQFH    *LOO DQG .KDUDV   QRWH WKDW ³7KH LGHD WKDW PLGGOHLQFRPH FRXQWULHV KDYH WR GR VRPHWKLQJ GLIIHUHQW LI WKH\ DUH WR SURVSHU LV FRQVLVWHQW ZLWK WKH ¿QGLQJ WKDW PLGGOHLQFRPH countries have grown less rapidly than either rich or poor countries, and this accounts for the lack of economic convergence in the twentieth century world. Middle-income FRXQWULHV LW LV DUJXHG DUH VTXHH]HG EHWZHHQ WKH ORZZDJH SRRUFRXQWU\ FRPSHWLWRUV WKDW dominate in mature industries and the rich-country innovators that dominate in industries XQGHUJRLQJ UDSLG WHFKQRORJLFDO FKDQJH´ 2KQR   LQGLFDWHV WKDW ³$ ODUJH QXPEHU RI FRXQWULHV WKDW UHFHLYH WRR OLWWOH PDQXIDFWXULQJ )', VWD\ DW VWDJH ]HUR (YHQ DIWHU UHDFKLQJ WKH ¿UVW VWDJH FOLPELQJ XS WKH ODGGHUV EHFRPHV LQFUHDVLQJO\ GLI¿FXOW $QRWKHU JURXS RI FRXQWULHV DUH VWXFN LQ WKH second stage because they fail to upgrade human capital. It is noteworthy that none of the ASEAN countries, including Thailand and Malaysia, has succeeded in breaking through the invisible ‘glass ceiling’ in manufacturing between the second and the third VWDJH $ PDMRULW\ RI /DWLQ $PHULFDQ FRXQWULHV UHPDLQ PLGGOHLQFRPH HYHQ WKRXJK WKH\ KDG achieved relatively high income as early as in the nineteenth century. This phenomenon can be collectively called the middle-income trap´ $OVR DV QRWHG LQ WKH ,QWURGXFWLRQ (LFKHQJUHHQ HW DO  VWXGLHG WKH TXHVWLRQ RI when do fast growing economies slow down? They studied middle-income countries (with earnings per person of at least $10,000 in 2005 constant international prices), which LQ WKH SDVW KDOI FHQWXU\ KDG HQMR\HG DYHUDJH *'3 JURZWK RI DW OHDVW  IRU VHYHUDO \HDUV DQG GH¿QH D VORZGRZQ DV D GHFOLQH LQ WKH \HDU DYHUDJH JURZWK UDWH E\ DW OHDVW 2 percentage points. Eichengreen et al. conclude that countries undergo a reduction in WKH JURZWK UDWH RI *'3 E\ DW OHDVW  SHUFHQWDJH SRLQWV LH VORZ GRZQ ZKHQ SHU FDSLWD

Tracking the Middle-Income Trap: What is It, Who is in It, and Why? | 15

LQFRPHV UHDFK DERXW  7KH\ DOVR ¿QG WKDW KLJK JURZWK VORZV GRZQ ZKHQ WKH VKDUH RI HPSOR\PHQW LQ PDQXIDFWXULQJ LV   DQG ZKHQ SHU FDSLWD LQFRPH RI WKH ODWH developing country reaches 57% that of the technological frontier. The PRC’s income per FDSLWD LQ  ZDV DERXW  %UD]LO¶V  DQG ,QGLD¶V DERXW  7KH DXWKRUV conclude that these countries’ growth rates will unavoidably have to decline as per capita income reaches the estimated threshold. Hence, the possibility of ending up stuck in the middle-income trap. $OO WKHVH VWDWHPHQWV DUH QRW VWULFWO\ VSHDNLQJ GH¿QLWLRQV RI WKH PLGGOHLQFRPH WUDS Rather, they are summaries of the plausible reasons why at some point some countries seem not to make it into the high-income group. In this section, we provide a working GH¿QLWLRQ RI WKH 0,7 ,W LV EDVHG RQ WKH LQFRPH WKUHVKROGV LGHQWL¿HG LQ WKH SUHYLRXV section and on an analysis of historical income transitions. *LYHQ WKH ODFN RI GH¿QLWLRQ DQG WKHRUHWLFDO EDFNJURXQG RI ZKDW WKH PLGGOHLQFRPH WUDS is, this paper adopts a simple procedure: determine the minimum number of years that a country has to be in the middle-income group so that, beyond this threshold, one can argue that it is the middle-income trap. In this paper, this number of years is determined by examining the historical experience of the countries that graduated from lower to upper middle-income, and from there to high income: how many years were they in the two middle-income groups? A country is in the lower/upper middle-income trap today if it has been in lower/upper middle-income group longer than the historical experience. This method entails an unavoidable element of subjectivity, and therefore one has to be careful in taking the threshold number of years literally. It is only a guide. Since the challenge of graduating to the high-income group is more relevant for the upper middle-income countries, this paper will look at both lower middle-income and upper middle-income separately.

A. Determining the Threshold Number of Years to be in the Middleincome Trap
7KH ¿UVW VWHS LV WR GHWHUPLQH WKH QXPEHU RI \HDUV WKDW FRXQWULHV UHPDLQHG LQ WKH ORZHU middle-income group before they graduated to upper middle-income. From the list of 124 countries, 44 have graduated from lower middle-income to upper middle-income since 21 We divide them into two groups: (i) the nine countries that became lower middleLQFRPH DIWHU  DQG WKH JUDGXDWHG 7DEOH   DQG LL WKH  FRXQWULHV WKDW EHFDPH ORZHU PLGGOHLQFRPH EHIRUH  DQG WKHQ JUDGXDWHG $SSHQGL[ 7DEOH   7KLV DOORZV XV to compare recent transitions with those that took place earlier. The tables give the year WKHVH FRXQWULHV DWWDLQHG ORZHU PLGGOHLQFRPH VWDWXV WKH \HDU WKH\ DWWDLQHG XSSHU PLGGOH
21

A few more countries may have gone through the same phase during this time period but they are not considered because of missing data. For example, the US was lower middle-income between 1870 and 1940, but data is sparse prior to 1870. Thus, we do not know the exact year it became lower middle-income. Other examples are Hong Kong, China and Singapore, which were lower middle-income in 1950 but there is no data prior to 1950.

16 | ADB Economics Working Paper Series No. 306

LQFRPH LQFRPH VWDWXV WKH QXPEHU RI \HDUV WKH\ ZHUH ORZHU PLGGOHLQFRPH DQG WKHLU average income per capita growth rates during their transition from lower middle-income to upper middle-income. Table 3: Economies that became Lower Middle-Income after 1950 and Graduated to Upper Middle-Income
Economy Region Year Economy Turned LM (YLM) 1992 1969 1969 1967 1976 1953 1955* 1952* 1968 Year Economy Turned UM (YUM) 2009 1996 1988 1986 2004 2006 2005 2006 2001** Years as LM Average GDP per Capita Growth Rate (%) (YLM to YUM) 7.5 5.1 7.2 7.0 4.7 2.5 2.6 2.4 2.7

China, People's Rep. of Malaysia Korea, Rep. of Taipei,China Thailand Bulgaria Turkey Costa Rica Oman

Asia Asia Asia Asia Asia Europe Europe Latin America Middle East

17 27 19 19 28 53 50 54 33

*This refers to the second time Turkey and Costa Rica attained lower middle-income status. Turkey became lower middle-income in 1953 but slipped back to low income in 1954; Costa Rica became lower middle-income in 1947 but slipped back to lowincome in 1950. **This refers to the second time Oman attained upper middle-income status. It became upper middle-income in 1997 but fell back to lower middle-income in 1998. Source: Author’s estimates.

7KH WLPH VSHQW DV ORZHU PLGGOHLQFRPH IRU WKH QLQH FRXQWULHV LQ 7DEOH  UDQJHV IURP  years for the PRC to over 50 years for Bulgaria, Costa Rica, and Turkey. This is lower than the time spent as lower middle-income by the countries that had crossed the lower PLGGOHLQFRPH WKUHVKROG EHIRUH  VHH $SSHQGL[ 7DEOH   7KH WLPH VSHQW DV ORZHU PLGGOHLQFRPH IRU FRXQWULHV LQ $SSHQGL[ 7DEOH  UDQJHV IURP  \HDUV IRU 9HQH]XHOD WR  IRU WKH 1HWKHUODQGV FRPSDUHG WR  \HDUV IRU WKH 35&  7KH 1HWKHUODQGV ZDV WKH ¿UVW FRXQWU\ WR EHFRPH ORZHU PLGGOHLQFRPH LQ  RYHU  \HDUV HDUOLHU WKDQ -DSDQ EXW VSHQW  \HDUV XQWLO  LQ WKLV FDWHJRU\ 0DGGLVRQ  SRLQWHG RXW WKDW WKH DFFHOHUDWLRQ RI SURGXFWLYLW\ JURZWK KDSSHQHG GXULQJ ZKDW KH UHIHUUHG WR DV WKH ³&DSLWDOLVW HUD´ WKDW EHJDQ LQ  7KH 1HWKHUODQGV EHLQJ WKH HFRQRPLF OHDGHU GXULQJ WKH V was the richest country during that time until the United Kingdom overtook it in the late th century. Also Japan (a latecomer with respect to other advanced countries), the FRXQWU\ WKDW OHG WKH $VLDQ 0LUDFOH VSHQW  \HDUV DV D ORZHU PLGGOHLQFRPH FRXQWU\ 7KLV LV DERXW WZLFH DV ORQJ WKH WLPH WKH 35& WKH 5HSXEOLF RI .RUHD RU 7DLSHL&KLQD VSHQW LQ this income group.22

22

Schuman (2009) provides a fascinating account of how East Asian countries became rich during the second half of the 20th century. Rapid growth and export orientation were the top priorities of policy makers.

Tracking the Middle-Income Trap: What is It, Who is in It, and Why? | 17

The threshold that determines whether a country is in the lower middle-income trap is VHW DV WKH PHGLDQ QXPEHU RI \HDUV WKDW WKH FRXQWULHV LQ 7DEOH  VSHQW LQ WKLV JURXS 7KLV LV  \HDUV 7KXV D FRXQWU\ LV LQ WKH ORZHU PLGGOHLQFRPH WUDS LI LW KDV EHHQ LQ WKDW JURXS IRU  \HDUV RU PRUH 7KHUH DUH WZR LPSRUWDQW FDYHDWV ZLWK WKLV QXPEHU )LUVW certainly there is some element of arbitrariness behind this criterion and admittedly, that FRXOG EH D GLIIHUHQW QXPEHU RI \HDUV HJ WKH DYHUDJH LV  \HDUV  +RZHYHU LW VHHPV reasonable, if the notion of trap makes any sense. Indeed, the idea of a middle-income trap was conceived relatively recently by analyzing recent development experiences, not WKRVH RI WKH th century, or earlier. The number of years that the countries in Appendix 7DEOH  VSHQW DV ORZHU PLGGOHLQFRPH LV YHU\ KLJK $QG LI ZH JR EDFN LQ WLPH VHH 7DEOH 1), the threshold would be a very high number of years. The median number of years as ORZHU PLGGOHLQFRPH RI WKH FRXQWULHV LQ $SSHQGL[ 7DEOH  LV  \HDUV $QG WKH PHGLDQ RI DOO FRXQWULHV FRPELQHG LQ 7DEOH  DQG $SSHQGL[ 7DEOH  LV  \HDUV ,I WKLV ZHUH WKH guide, very few countries would be in the lower middle-income trap today. Second, Table  FRQWDLQV RQO\ QLQH FRXQWULHV 7KLV PHDQV WKDW GXULQJ WKH ODVW  GHFDGHV YHU\ IHZ countries have been able to jump from low-income into lower middle-income and from the latter into upper middle-income. In the second stage, the number of years that countries remained in the upper middleLQFRPH JURXS EHIRUH WKH\ JUDGXDWHG WR KLJKLQFRPH LV GHWHUPLQHG 7KHUH DUH  VXFK countries. These are again split into two groups: (i) those that made the transition from ORZHU PLGGOHLQFRPH WR XSSHU PLGGOHLQFRPH DIWHU   FRXQWULHV VHH 7DEOH   DQG WKHQ JUDGXDWHG WR KLJKLQFRPH DQG LL WKRVH WKDW PDGH WKH WUDQVLWLRQ IURP ORZHU PLGGOH LQFRPH WR XSSHU PLGGOHLQFRPH EHIRUH   FRXQWULHV VHH $SSHQGL[ 7DEOH   /RRNLQJ DW WKH OLVW RI FRXQWULHV LQ 7DEOH  WKH QXPEHU RI \HDUV VSHQW LQ WKH XSSHU PLGGOH LQFRPH FDWHJRU\ UDQJHV IURP  \HDUV IRU +RQJ .RQJ &KLQD WKH 5HSXEOLF RI .RUHD DQG 7DLSHL&KLQD WR  \HDUV IRU $UJHQWLQD DQG IURP  \HDUV IRU 6ZLW]HUODQG WR  \HDUV for the UK, for the countries in Appendix Table 4. The difference between the maximum number of years spent as upper middle-income country before graduating to high-income between these two groups is smaller than in the case of lower middle-income before JUDGXDWLQJ WR XSSHU PLGGOHLQFRPH FRPSDUH 7DEOHV  DQG $SSHQGL[ 7DEOH  ZLWK 7DEOH  and Appendix Table 4).

18 | ADB Economics Working Paper Series No. 306

Table 4: Economies that Became Upper Middle-Income after 1950 and Graduated to High Income
Economies Region Year Country Turned UM (YUM) 1976 1968 1988 1978 1986 1964 1961 1953 1964 1960 1960 1972 1975 1963 1955 1961 1978 1973 1954 1970 1992 1969 1991 Year Country Turned H (YH) 1983 1977 1995 1988 1993 1976 1973 1968 1979 1971 1973 2000 1990 1978 1970 1975 1996 1990 1968 2010 2005 1986 2003 Years as UM 7 9 7 10 7 12 12 15 15 11 13 28 15 15 15 14 18 17 14 40 13 17 12 Average GDP per Capita Growth Rate (%) (YUM to YH) 5.9 4.7 6.5 5.1 6.9 4.1 4.4 3.3 3.6 4.4 3.4 1.8 3.2 3.4 3.3 3.5 2.8 2.7 3.6 1.2 3.7 2.6 4.0

Hong Kong, China Japan Korea, Rep. of Singapore Taipei,China Austria Belgium Denmark Finland France Germany Greece Ireland Italy Netherlands Norway Portugal Spain Sweden Argentina Chile Israel Mauritius

Asia Asia Asia Asia Asia Europe Europe Europe Europe Europe Europe Europe Europe Europe Europe Europe Europe Europe Europe Latin America Latin America Middle East Sub-Saharan Africa

Source: Author’s estimates.

1RWH WKDW PRUH WKDQ KDOI RI WKH FRXQWULHV LQ 7DEOH  DUH (XURSHDQ DQG ¿YH DUH $VLDQ 7KH threshold that determines whether a country is in the upper middle-income trap is set as the median number of years that the countries in Table 4 spent in this group. This is 14 years. Thus, we say that a country is in the upper middle-income trap if it has been in this income group for 14 years or longer. )LJXUH  GRFXPHQWV WKH VWDWLVWLFDOO\ VLJQL¿FDQW QHJDWLYH UHODWLRQVKLS EHWZHHQ WKH \HDU a country turned lower or upper middle-income and the number of years it spent in that income group, until it graduated to the next one (i.e., upper middle-income or highincome). This indicates that transitions, i.e., for the relatively small group of countries WKDW PDNH WKHP WRGD\ DUH VLJQL¿FDQWO\ IDVWHU WKDQ WKRVH LQ WKH SDVW 7KLV LV HYLGHQFH RI convergence within this group. This is more obvious in the case of the number of years countries stay in lower middle-income group (Figure 4A, which combines the countries in 7DEOHV  DQG $SSHQGL[ 7DEOH  WKDQ DV XSSHU PLGGOHLQFRPH FRXQWU\ )LJXUH % ZKLFK combines the countries in Tables 4 and Appendix Table 4): a country that became lower
23

The median number of years as upper middle-income of the countries in Appendix Table 4 is 26 years. And the median of all countries combined in Table 4 and in Appendix Table 4 is 15 years.

Tracking the Middle-Income Trap: What is It, Who is in It, and Why? | 19

Figure 4: Year an Economy Turned Lower Middle-Income or Upper Middle-Income and Number of Years in that Income Group
A. Year an economy turned LM and number of years as lower middle-income NLD 120 BEL 100 AUS GBR 80 Years in LM 60 40 20 URY CHL

AUT FRA DNK DEU SWI CAN ESP SWE ITA NOR

HUN CRI MEX CRI BGR TUR JPN VEN PRT OMN THA MAL TPE KOR PRC

GRC FIN

B. Year an economy turned UM and number of years as upper middle-income 40 ARG

30

GBR AUS CAN NZL ISR NLD NOR ITAFIN SWI DNK SWE DEU BEL AUT FRA JPN GRC

Years in UM

20

USA PRT ESP IRL CHL MUS SGP HKG TPE KOR

0

10

LM = lower middle-income, UM = upper middle-income. Source: Author’s calculations.

1941 1942 1943 1945 1947 1953 1954 1955 1960 1961 1963 1964 1968 1969 1970 1972 1973 1975 1976 1978 1986 1988 1991 1992 Year turned UM Note: Equation for the fitted line is: Years in UM = 488 – 0.24*(year turned UM) t-stat: (3.5) (−3.6) Number of Observations: 29

1827 1845 1851 1854 1868 1872 1874 1876 1881 1882 1891 1896 1906 1907 1911 1922 1924 1925 1933 1942 1947 1952 1953 1955 1967 1968 1969 1976 1992 Year turned LM Note: Equation for the fitted line is: Years in LM = 1210 – 0.60*(year turned LM) t-stat: (13.5) (−14.2) Number of Observations: 33

20 | ADB Economics Working Paper Series No. 306

middle-income in year spent 0.6 more years (or about 7 more months) in this income JURXS WKDQ D FRXQWU\ WKDW EHFDPH ORZHU PLGGOHLQFRPH LQ \HDU W DQG OLNHZLVH D FRXQWU\ WKDW EHFDPH XSSHU PLGGOHLQFRPH LQ \HDU W VSHQW  PRUH \HDUV RU DERXW  more months) in this income group than a country that became upper middle-income in year t+1. 7KH WKUHVKROGV RI  DQG  \HDUV IRU WKH ORZHU PLGGOHLQFRPH DQG XSSHU PLGGOHLQFRPH WUDSV UHVSHFWLYHO\ DOORZ XV WR FDOFXODWH WKH DYHUDJH LQFRPH SHU FDSLWD JURZWK UHTXLUHG WR DYRLG WKHVH WUDSV $ FRXQWU\ WKDW UHDFKHV   333 SHU FDSLWD LQFRPH LH the lower middle-income threshold, must sustain an average income per capita growth of DW OHDVW  SHU DQQXP IRU  \HDUV WR DYRLG WKH ORZHU PLGGOHLQFRPH WUDS24 Similarly, a FRXQWU\ WKDW UHDFKHV DQ LQFRPH SHU FDSLWD RI   333  LH WKH XSSHU PLGGOH LQFRPH WKUHVKROG PXVW VXVWDLQ DQ DYHUDJH JURZWK UDWH RI DW OHDVW  IRU  \HDUV WR avoid the upper middle-income trap.25 7KH ODVW FROXPQV RI 7DEOHV  DQG  DQG RI $SSHQGL[ 7DEOHV  DQG  VKRZ WKH DYHUDJH growth rates of countries during their transition from lower middle-income to upper PLGGOHLQFRPH 7DEOH  DQG $SSHQGL[ 7DEOH   DQG IURP XSSHU PLGGOHLQFRPH WR KLJK LQFRPH 7DEOH  DQG $SSHQGL[ 7DEOH   $V DOUHDG\ SRLQWHG RXW LQ 6HFWLRQ , WKH TXHVWLRQ of why some countries are not able to escape the trap is the same as that of why some countries are not able to grow fast enough and sustain growth for a long period. The (DVW $VLDQ HFRQRPLHV WKH 35& WKH 5HSXEOLF RI .RUHD DQG 7DLSHL&KLQD VWDQG RXW especially the PRC. The PRC spent only 17 years as a lower middle-income country. During this period, income per capita grew at an average rate of over 7% per annum. 7KH WUDQVLWLRQV RI +RQJ .RQJ &KLQD WKH 5HSXEOLF RI .RUHD DQG 7DLSHL&KLQD IURP XSSHU middle-income into high-income countries was even faster, 7 years, at annual rates also close to 7% per annum. In sum, our criteria are as follows: a country is in the lower middle-income trap if it has EHHQ D ORZHU PLGGOHLQFRPH FRXQWU\ IRU  RU PRUH \HDUV $QG LW LV LQ WKH XSSHU PLGGOH income trap if it has been an upper middle-income country 14 or more years.26, 27

24 25

4.7% = {[(7250/2000)^(1/28)]-1}*100 3.5% = {[(11750/7250)^(1/14)]-1}*100 26 It should be obvious that the threshold number of years as lower middle-income and upper middle-income that will determine whether a country is in the trap or not, will change as new countries graduate. 27 According to these criteria, Bulgaria, Costa Rica, and Turkey (Table 3) were in the lower middle-income trap before they reached the upper middle-income threshold, while the East Asian countries managed to avoid this trap. Thailand, with 28 years, and Oman with 33, are borderline cases. Similarly, Argentina and Greece were in the upper middle-income trap before becoming high-income countries. The growth rates of these countries during the transition to the next income group were lower than the 4.7% and 3.5% estimated above. The East Asian countries that made it from upper middle-income to high-income (Hong Kong, China; Japan; the Republic of Korea; Singapore; and Taipei,China) avoided the upper middle-income trap.

Tracking the Middle-Income Trap: What is It, Who is in It, and Why? | 21

IV. Who is in the Middle-income Trap Today?
It is now possible to determine who in 2010 was in the middle-income trap from among WKH  PLGGOHLQFRPH FRXQWULHV  ORZHU PLGGOHLQFRPH DQG  XSSHU PLGGOHLQFRPH  ZKR LV DW ULVN RI JHWWLQJ LQWR LW DQG ZKR DUH OLNHO\ WR DYRLG LW 7DEOHV  DQG  OLVW WKH countries that are in the lower and in the upper middle-income traps, respectively. $QG 7DEOHV  DQG  OLVW WKRVH WKDW DUH QRW LQ WKH PLGGOHLQFRPH WUDS LQ  ,W FDQ EH REVHUYHG WKDW  RXW RI WKH  FRXQWULHV DUH LQ WKH PLGGOHLQFRPH WUDS  RI WKHP DUH in the lower middle-income trap (nine of them can potentially escape it in less than a GHFDGH DQG ¿YH DUH LQ WKH XSSHU PLGGOHLQFRPH WUDS WZR RI WKHP FDQ SRWHQWLDOO\ HVFDSH LQ DW PRVW  \HDUV  /LNHZLVH HLJKW RI WKH UHPDLQLQJ  PLGGOHLQFRPH FRXQWULHV DUH DW risk of getting into the trap if they continue to grow at their current pace. Table 5 also shows the number of years each has stayed as a lower middle-income FRXQWU\ WKH FRXQWU\¶V DQQXDO DYHUDJH LQFRPH SHU FDSLWD GXULQJ WKH SHULRG ± and the number of years that it will take each country to reach the upper middle-income threshold of $7,250 if its income per capita continues growing at the rate achieved during ± 2I WKH  FRXQWULHV LQ WKH ORZHU PLGGOHLQFRPH WUDS  DUH LQ /DWLQ $PHULFD QLQH DUH LQ WKH 0LGGOH (DVW DQG 1RUWK $IULFD VL[ LQ 6XE6DKDUDQ $IULFD WZR LQ (XURSH DQG WZR in Asia. This indicates that the lower middle-income trap is a phenomenon that affects PRVWO\ /DWLQ $PHULFDQ DQG $IULFDQ FRXQWULHV &RXQWULHV OLNH %UD]LO &RORPELD ,UDQ Panama, and Tunisia are close to the upper middle-income threshold of $7,250. In FRQWUDVW (O 6DOYDGRU /LE\D 5HSXEOLF RI &RQJR DQG <HPHQ ZLWK SHU FDSLWD LQFRPHV EHORZ  DUH VWLOO IDU EHKLQG ,W LV LPSRUWDQW WR QRWH WKDW  RI WKHVH FRXQWULHV²OLNH %UD]LO &RORPELD (FXDGRU -DPDLFD -RUGDQ /HEDQRQ 1DPLELD 3DQDPD 3HUX RU 6RXWK $IULFD²KDYH DOUHDG\ EHHQ ORZHU PLGGOHLQFRPH FRXQWULHV IRU RYHU  GHFDGHV 7KH\ DUH FOHDUO\ LQ WKLV WUDS %RWVZDQD DQG 6UL /DQND RQ WKH RWKHU KDQG DUH ERUGHUOLQH FDVHV EXW the former is expected to be the lower middle-income trap for the next 2 decades. Some countries in the lower middle-income trap will most likely leave it in the next few years if they maintain their recent income per capita growth performance. Most of the countries, however, will likely remain there for a long time (and a few might never be able to leave) if their lackluster growth performance of recent years persists. Table 5 shows WKDW %UD]LO &RORPELD ,UDQ -RUGDQ 3DQDPD 3HUX 6UL /DQND DQG 7XQLVLD FDQ OHDYH the lower middle-income trap in less than 10 years if their income per capita continues JURZLQJ DW WKH ± DYHUDJH JURZWK UDWH

22 | ADB Economics Working Paper Series No. 306

Table 5: Economies in the Lower Middle-Income Trap in 2010
Economy Region 2010 GDP per Capita (1990 PPP $) 3,054 5,459 4,392 4,507 3,065 6,737 6,542 4,802 4,010 2,818 4,381 3,484 7,146 3,510 5,733 3,552 3,936 6,789 5,752 5,061 2,924 3,672 6,389 2,852 4,858 2,391 3,858 4,655 4,725 3,270 Years as LM until 2010 34 28 37 49 45 53 61 38 58 47 60 56 56 38 61 42 31 52 55 58 43 34 39 35 28 33 56 61 61 41 Average Growth (%) 2000–2010 2.5 4.3 4.8 4.1 1.8 2.0 2.6 2.8 2.2 0.4 1.1 -0.3 2.4 1.5 4.2 2.2 3.0 3.4 3.5 4.1 2.4 3.3 3.5 0.9 1.7 1.8 0.0 2.4 2.0 2.2 Years to Reach $7,250* 35 7 11 12 49 4 5 15 27 251 47 1 48 6 34 21 2 7 10 39 21 4 109 24 63 19 23 37

Philippines Sri Lanka Albania Romania Bolivia Brazil Colombia Dominican Republic Ecuador El Salvador Guatemala Jamaica Panama Paraguay Peru Algeria Egypt Iran Jordan Lebanon Libya Morocco Tunisia Yemen, Rep. of Botswana Congo, Rep. of Gabon Namibia South Africa Swaziland

Asia Asia Europe Europe Latin America and Caribbean Latin America and Caribbean Latin America and Caribbean Latin America and Caribbean Latin America and Caribbean Latin America and Caribbean Latin America and Caribbean Latin America and Caribbean Latin America and Caribbean Latin America and Caribbean Latin America and Caribbean Middle East and North Africa Middle East and North Africa Middle East and North Africa Middle East and North Africa Middle East and North Africa Middle East and North Africa Middle East and North Africa Middle East and North Africa Middle East and North Africa Sub-Saharan Africa Sub-Saharan Africa Sub-Saharan Africa Sub-Saharan Africa Sub-Saharan Africa Sub-Saharan Africa

* Number of years to reach $7250 = ln(7250/gdp2010) / ln(1 + avegr), where avegr is the average growth rate of income per capita during 2000–2010. GDP = gross domestic product, LM = lower middle-income, PPP = purchasing power parity. Source: Author’s calculations.

In contrast, El Salvador and Yemen will remain in the lower middle-income for more than a century (two in the case of El Salvador) if their income per capita continues to grow by less than 1% per year. Countries like Albania, Botswana, Ecuador, and the Philippines will OLNHO\ EH WKHUH IRU DQRWKHU ± GHFDGHV DQG %ROLYLD 5HSXEOLF RI &RQJR DQG 3DUDJXD\ IRU PRUH WKDQ  GHFDGHV $W WKH H[WUHPH DUH *DERQ DQG -DPDLFD FRXQWULHV WKDW ZLOO never move on to the upper middle-income if their income per capita continues stagnating or contracting.

Tracking the Middle-Income Trap: What is It, Who is in It, and Why? | 23

Table 6 shows the countries in the upper middle-income trap, as well as the number of years they were lower middle-income, and the number of years until 2010 as upper middle-income countries. The last column of table 6 also provides the number of years that it will take each country to reach the high-income threshold of $11,750 if income per FDSLWD FRQWLQXHV WR JURZ DW WKH ± DYHUDJH UDWH Table 6: Economies in the Upper Middle-Income Trap in 2010
Country Region 2010 GDP per Capita (1990 PPP $) 10,567 10,934 9,662 8,396 8,717 Years as LM Years as UM until 2010 15 15 60 32 15 Average Growth (%) 2000–2010 2.6 3.3 1.4 0.9 1.7 Years to Reach $11,750 5 3 15 37 18

Malaysia Uruguay Venezuela Saudi Arabia Syria

Asia Latin America Latin America Middle East Middle East

27 112 23 20 46

* Number of years to reach $11750 = ln(11750/gdp2010) / ln(1 + avegr), where avegr is the average growth rate of income per capita during 2000-2010. GDP = gross domestic product, LM = lower middle-income, PPP = purchasing power parity, UM = upper middle-income. Source: Author’s calculations.

Saudi Arabia and Venezuela are clearly in the upper middle-income trap. Venezuela is a disappointing case, for it was a country that transited the lower middle-income JURXS LQ RQO\  \HDUV VHH $SSHQGL[ 7DEOH   PXFK IDVWHU WKDQ DQ\ RWKHU FRXQWU\ WKDW EHFDPH ORZHU PLGGOHLQFRPH EHIRUH  6DXGL $UDELD KDV EHHQ DQ XSSHU PLGGOH LQFRPH FRXQWU\ IRU  \HDUV )LQDOO\ 0DOD\VLD 6\ULD DQG 8UXJXD\ DUH ERUGHUOLQH FDVHV They have been upper middle-income countries for 15 years. Syria and Uruguay were SUHYLRXVO\ LQ WKH ORZHU PLGGOHLQFRPH JURXS IRU D ORQJ SHULRG LQ WKH FDVH RI 8UXJXD\ RYHU WKDQ FHQWXU\ ,W ZDV WKH ¿UVW FRXQWU\ LQ /DWLQ $PHULFD WR DWWDLQ ORZHU PLGGOHLQFRPH VWDWXV 5HG ÀDJV DUH UDLVHG LQ ERWK FDVHV The last column of Table 6 indicates that it should take only a few years for Malaysia and Uruguay to attain the high-income status if their income per capita continues to grow at DURXQG   6DXGL $UDELD 6\ULD DQG 9HQH]XHOD RQ WKH RWKHU KDQG ZLOO QHHG WR JURZ DERYH WKHLU ± DYHUDJH JURZWK UDWHV WR PDNH LW LQWR WKH ULFK FOXE HDUOLHU WKDQ WKH\ would if they continue to grow sluggishly. 7R VXPPDUL]H  RXW RI WKH  PLGGOHLQFRPH FRXQWULHV WRGD\ DUH LQ WKH PLGGOHLQFRPH WUDS² FRXQWULHV LQ WKH ORZHU PLGGOHLQFRPH WUDS DQG ¿YH FRXQWULHV LQ WKH XSSHU PLGGOH LQFRPH WUDS 7KLUWHHQ RI WKRVH LQ WKH WUDS DUH LQ /DWLQ $PHULFD  DUH LQ WKH 0LGGOH East and North Africa, six in Sub-Saharan Africa, three in Asia, and two in Europe. The transition through the middle-income may not be a trap in the same sense it is used to describe the problem of the poor low-income countries, but it can be a long walk for many countries.

24 | ADB Economics Working Paper Series No. 306

A.

Who is not in the Middle-Income Trap Today?

What about the other 17 middle-income countries? Will they avoid the trap or are they at ULVN RI JHWWLQJ LQWR LW" 7DEOHV  DQG  OLVW WKHVH FRXQWULHV Among the eight lower middle-income countries that were not in the trap in 2010, six are in Asia. Asian countries in the lower middle-income category have been there for a varying number of years. Cambodia, India, Myanmar, Pakistan, and Viet Nam attained lower middle-income status only during the last decade. Indonesia, on the other hand, has been in the same category for over two decades (Table 7). Its per capita income PXVW JURZ DW DQ DQQXDO DYHUDJH UDWH RI  GXULQJ ± WR DYRLG WKH WUDS 7KLV is very unlikely and therefore the country will be in the MIT. In the case of Pakistan, although it has just attained lower middle-income status, its income per capita must grow IDVWHU GRXEOH WKH ± DYHUDJH JURZWK WR DYRLG WKH WUDS Table 7: Lower Middle-income Economies Not in the Trap in 2010
Country Region 2010 GDP per Capita (1990 PPP$) Years in LM until 2010 Years before Average Falling into the Growth Lower Middle(%) Income trap * 2000–2010 22 19 3 21 22 19 17 24 8.2 6.1 3.9 9.0 2.6 6.1 1.6 5.8 Average GDP per Capita Growth (%) to Reach $7,250** 4.9 4.1 14.8 3.8 5.3 4.3 7.1 4.8

Cambodia India Indonesia Myanmar Pakistan Viet Nam Honduras Mozambique

Asia Asia Asia Asia Asia Asia Latin America Sub-Saharan Africa

2,529 3,407 4,790 3,301 2,344 3,262 2,247 2,362

6 9 25 7 6 9 11 4

*Calculated as (28 years – number of years in LM until 2010). **Average growth needed to reach $7,250 from the income level in 2010 over the years before falling into the lower middle-income trap. GDP = gross domestic product, LM = lower middle-income, PPP = purchasing power parity. Source: Author’s calculations.

In addition to the two Asian countries that are at risk of getting into the trap is Honduras. Although Honduras has just recently become a lower middle-income country, it may fall into the trap if it continues to grow at an average income per capita growth of 1.6%. $W WKLV UDWH LW ZLOO QRW JUDGXDWH RXW RI ORZ LQFRPH XQWLO  WKDW LV LW ZLOO IROORZ WKH IRRWVWHSV RI PRVW /DWLQ $PHULFDQ FRXQWULHV WKDW VWD\HG LQ WKH ORZHU PLGGOHLQFRPH category for a very long period before moving out of it. &DPERGLD ,QGLD 0\DQPDU 0R]DPELTXH DQG 9LHW 1DP EHFDPH ORZHU PLGGOHLQFRPH countries less than a decade ago. These countries can avoid the lower middle-income WUDS LI WKHLU SHU FDSLWD LQFRPH JURZV DW WKH UDWHV DFKLHYHG GXULQJ ± ,I WKH\

Tracking the Middle-Income Trap: What is It, Who is in It, and Why? | 25

DFKLHYH WKLV WKH\ FDQ EHFRPH XSSHU PLGGOHLQFRPH FRXQWULHV LQ  GHFDGHV RU OHVV² 0\DQPDU LQ  ,QGLD LQ  &DPERGLD DQG 9LHW 1DP LQ  DQG 0R]DPELTXH LQ  7DEOH  OLVWV WKH QLQH XSSHU PLGGOHLQFRPH FRXQWULHV WKDW ZHUH QRW LQ WKH XSSHU PLGGOH income trap in 2010. It is worth noting that, except for the PRC and Thailand (the latter borderline), all these countries were trapped in the lower middle-income class before they attained the upper middle-income status. These countries were lower middle-income FRXQWULHV IRU KDOI D FHQWXU\ $PRQJ WKH FRXQWULHV LQ 7DEOH  ¿YH IDFH WKH ULVN RI JHWWLQJ into the trap. These are Costa Rica, Hungary, Mexico, Oman, and Turkey. The case of Mexico particularly stands out. Mexico’s income per capita barely moved from the WKUHVKROG RI  DIWHU  \HDUV LQ WKH XSSHU PLGGOHLQFRPH FDWHJRU\ $W LWV ± average growth rate, it will not attain high-income status until 2074. On the other hand, Bulgaria, the PRC, Poland, and Thailand should be able to avoid the upper middle-income trap and will make it in time into the high-income group if they sustain their income per capita growth. At the rates their income per capita is growing, 3RODQG FDQ PDNH LW WR KLJK LQFRPH LQ  WKH 35& LQ  DQG %XOJDULD DQG 7KDLODQG LQ  Table 8: Upper Middle-income Economies Not in the Trap in 2010
Country Region 2010 GDP Years in per Capita LM (1990 PPP$) 8,019 9,143 8,497 9,000 10,731 8,123 8,207 7,763 8,202 17 28 53 51 50 51 54 53 33 Years in Years before Falling Average Average UM until into the Upper Growth (%) Growth (%) 2000-2010 to Reach 2010 Middle-Income Trap* $11,750** 2 7 5 10 11 6 5 8 10 12 7 9 4 3 8 9 6 4 8.9 3.6 4.7 2.4 3.9 2.3 2.9 0.7 1.4 3.2 3.6 3.7 6.9 3.1 4.7 4.1 7.2 9.4

China, People's Rep. of Thailand Bulgaria Hungary Poland Turkey Costa Rica Mexico Oman

Asia Asia Europe Europe Europe Europe Latin America Latin America Middle East

*Calculated as (15 years – number of years in UM until 2010). **Average growth needed to reach $11,750 from the income level in 2010 over the years before falling into the upper middleincome trap. GDP = gross domestic product, LM = lower middle-income, PPP = purchasing power parity, UM = upper middle-income. Source: Authors’ calculations

:H FORVH WKLV VHFWLRQ ZLWK WKH IROORZLQJ TXHVWLRQ GRHV WKH 0,7 DIIHFW HVSHFLDOO\ WKH resource-rich countries? The evidence we have gathered indicates that not all resourcerich countries necessarily end up in the MIT. OPEC member countries like Kuwait, 4DWDU DQG WKH 8QLWHG $UDE (PLUDWHV KDYH DOUHDG\ DWWDLQHG KLJK LQFRPH VWDWXV /LNHZLVH

26 | ADB Economics Working Paper Series No. 306

Kazakhstan, a resource-rich country, attained high-income status in 2010 (see Appendix 7DEOH E  %XW WKH FRXQWULHV LQ WKH PLGGOHLQFRPH WUDS DUH 23(& PHPEHUV²$OJHULD (FXDGRU ,UDQ DQG /LE\D DUH LQ WKH ORZHU PLGGOHLQFRPH WUDS ZKLOH 6DXGL $UDELD DQG 9HQH]XHOD DUH LQ WKH XSSHU PLGGOHLQFRPH WUDS $QJROD ,UDT DQG 1LJHULD KRZHYHU DUH VWLOO ORZLQFRPH FRXQWULHV $QJROD DQG 1LJHULD KDYH EHHQ ORZLQFRPH VLQFH  ZKLOH ,UDT IHOO EDFN LQWR WKH ORZLQFRPH JURXS IURP WKH ORZHU PLGGOHLQFRPH JURXS LQ  $V van der Ploeg and Venables (2007) indicate, what matters for these countries is how well or how poorly resource revenues are managed.

V. Conclusions
During the last 2 decades, both the press and economists have dedicated increasing DWWHQWLRQ WR WKH VRFDOOHG ³PLGGOHLQFRPH WUDS´ 7KLV UHIHUV WR D JURXS RI FRXQWULHV WKDW became middle-income some time ago, but which have not been able to cross the high-income threshold. The problem with the debate of what prevents these countries from becoming high-income economies is that it is not clear what the trap refers to, DV WKHUH LV QR DFFHSWHG GH¿QLWLRQ $QG PRUHRYHU WKH ZRUG ³WUDS´ LV WR VRPH H[WHQW PLVOHDGLQJ IRU LW LV GLI¿FXOW WR DUJXH WKDW FRXQWULHV WKDW KDYH DWWDLQHG PLGGOHLQFRPH VWDWXV (especially those in the upper middle-income segment) are in a trap, as understood in the GHYHORSPHQW OLWHUDWXUH HJ 1HOVRQ  0\UGDO   7KLV SDSHU KDV SURYLGHG D ZRUNLQJ HPSLULFDO GH¿QLWLRQ RI ZKDW WKH PLGGOHLQFRPH WUDS LV DQG LGHQWL¿HG WKH FRXQWULHV LQ WKH WUDS LQ  )LUVW LW XVHG D FRQVLVWHQW GDWD VHW IRU  FRXQWULHV IRU ± )RXU LQFRPH JURXSV ZHUH GH¿QHG RI *'3 SHU FDSLWD LQ  333 GROODUV L ORZLQFRPH XS WR  LL ORZHU PLGGOHLQFRPH EHWZHHQ  DQG  LLL XSSHU PLGGOHLQFRPH EHWZHHQ  DQG  DQG LY KLJKLQFRPH DERYH  7KHVH WKUHVKROGV DUH FRQVWDQW LQ WLPH ,Q  WKHUH ZHUH  ORZLQFRPH FRXQWULHV  PLGGOHLQFRPH DQG WKUHH KLJK LQFRPH ,Q  WKHUH ZHUH  ORZLQFRPH FRXQWULHV  RI WKHP KDYH EHHQ LQ WKLV JURXS IRU WKH ZKROH SHULRG   PLGGOHLQFRPH FRXQWULHV  ORZHU PLGGOHLQFRPH DQG  XSSHU PLGGOHLQFRPH  DQG  KLJKLQFRPH FRXQWULHV 7KLV UHVHDUFK XQFRYHUV WKH LPSRUWDQW IDFW that most of the world’s poor live in countries that today are in the middle-income group (the PRC, India, Indonesia, Pakistan). While the decrease in the number of low-income countries is good news, the dispersion of the world’s income per capita has increased VLJQL¿FDQWO\ DQG PDQ\ FRXQWULHV DUH QRW FORVLQJ WKHLU LQFRPH JDS ZLWK WKH 86 %XW LQFRPH WUDQVLWLRQV LH IRU WKH FRXQWULHV WKDW PDNH WKHP WRGD\ DUH VLJQL¿FDQWO\ IDVWHU WKDQ WKRVH in the past: a country that became lower middle-income in year t spent about 7 more months in this income group than a country that became lower middle-income in year t+1. This translates into a difference of one century spent as lower middle-income country EHWZHHQ WKH 1HWKHUODQGV WKH ¿UVW FRXQWU\ WR EHFRPH ORZHU PLGGOHLQFRPH LQ 

Tracking the Middle-Income Trap: What is It, Who is in It, and Why? | 27

DQG WR JUDGXDWH WR XSSHU PLGGOHLQFRPH  \HDUV ODWHU LQ  DQG WKH 35& ZKLFK EHFDPH ORZHU PLGGOHLQFRPH FRXQWU\ LQ  DQG JUDGXDWHG WR XSSHU PLGGOHLQFRPH  \HDUV ODWHU LQ   DQG OLNHZLVH D FRXQWU\ EHFDPH XSSHU PLGGOHLQFRPH LQ \HDU t VSHQW DERXW  PRUH PRQWKV LQ WKLV LQFRPH JURXS WKDQ D FRXQWU\ WKDW EHFDPH XSSHU middle-income in year t+1. This is evidence of convergence within the group of countries that make the transitions. Second, by analyzing historical income transitions, this study has determined the number of years that a country has to be in the lower and upper middle-income groups to fall LQWR WKH PLGGOH LQFRPH WUDS PRUH WKDQ  \HDUV LQ WKH ORZHU PLGGOHLQFRPH JURXS DQG more than 14 years in the upper middle-income group. These imply that a country that becomes lower middle-income has to attain an average growth rate of at least 4.7% to DYRLG IDOOLQJ LQWR WKH ORZHU PLGGOHLQFRPH WUDS DQG WKDW D FRXQWU\ WKDW EHFRPHV XSSHU PLGGOHLQFRPH KDV WR DWWDLQ DQ DYHUDJH JURZWK UDWH RI DW OHDVW  WR DYRLG IDOOLQJ LQWR the upper middle-income trap. 5HVXOWV LQGLFDWH WKDW  RXW RI WKH  PLGGOHLQFRPH FRXQWULHV LQ  RYHU WZR WKLUGV RI WKH WRWDO ZHUH LQ WKH PLGGOHLQFRPH WUDS² LQ WKH ORZHU PLGGOHLQFRPH WUDS QLQH RI WKHP FDQ SRWHQWLDOO\ JUDGXDWH VRRQ DQG ¿YH LQ WKH XSSHU PLGGOHLQFRPH WUDS WZR RI them can potentially leave it soon). Eight out of the remaining 17 countries (i.e., not in WKH WUDS DUH DW WKH ULVN RI IDOOLQJ LQWR WKH WUDS WKUHH LQWR WKH ORZHU PLGGOHLQFRPH DQG ¿YH into the upper middle-income). %\ UHJLRQ  FRXQWULHV LQ WKH WUDS WRGD\  DUH LQ /DWLQ $PHULFD  LQ WKH ORZHU PLGGOHLQFRPH WUDS DQG WZR LQ WKH XSSHU PLGGOHLQFRPH WUDS   LQ WKH 0LGGOH (DVW DQG North Africa (nine in the lower middle-income trap and two in the upper middle-income WUDS  DQG VL[ LQ 6XE6DKDUDQ $IULFD DOO RI WKHP LQ WKH ORZHU PLGGOHLQFRPH WUDS  ,Q $VLD WKHUH DUH WKUHH WKH 3KLOLSSLQHV DQG 6UL /DQND LQ WKH ORZHU PLGGOHLQFRPH WUDS DOWKRXJK WKH ODWWHU VKRXOG JHW RXW RI LW VRRQ 0DOD\VLD LQ WKH XSSHU PLGGOHLQFRPH WUDS DOWKRXJK LW VKRXOG DOVR JHW RXW RI LW VRRQ DQG ,QGRQHVLD DQG 3DNLVWDQ ZLOO PRVW OLNHO\ fall into the lower middle-income trap soon). In Europe there are two (both in the lower middle-income trap). The middle-income trap occurs mostly at the low level of the middleLQFRPH UDQJH  RXW RI WKH  FRXQWULHV DUH LQ WKH ORZHU PLGGOHLQFRPH WUDS DQG PRVWO\ DIIHFWV FRXQWULHV LQ /DWLQ $PHULFD DQG WKH 0LGGOH (DVW DQG 1RUWK $IULFD  RXW RI WKH  FRXQWULHV  2Q WRS RI WKLV PXVW EH DGGHG  6XE6DKDUDQ FRXQWULHV WKDW KDYH EHHQ LQ WKH ORZLQFRPH JURXS VLQFH  $VLD LV GLIIHUHQW IURP WKH RWKHU GHYHORSLQJ UHJLRQV 2I WKH  HFRQRPLHV IRU ZKLFK FRPSOHWH GDWD ZDV DYDLODEOH ¿YH DUH DOUHDG\ KLJKLQFRPH +RQJ .RQJ &KLQD -DSDQ WKH 5HSXEOLF RI .RUHD 6LQJDSRUH DQG 7DLSHL&KLQD  7KHUH DUH DOVR ¿YH $VLDQ HFRQRPLHV WKDW KDYH EHHQ ORZLQFRPH VLQFH  :H KDYH QRW FODVVL¿HG WKH HLJKW $VLDQ H[6RYLHW Republics (see Appendix Table 1b) given that there is data for only 21 years (some of these countries are already high-income). We have concluded that three Asian countries

28 | ADB Economics Working Paper Series No. 306

ZHUH LQ WKH PLGGOHLQFRPH WUDS LQ  6UL /DQND DQG 0DOD\VLD PD\ HVFDSH LW VRRQ  The other eight Asian economies are middle-income but are not (as of today) in the lower or upper middle-income traps (Indonesia and Pakistan are at risk of falling into the lower middle-income trap in the coming years). Although these countries are not in the middleincome trap, they should make sure that the do not fall into it. The PRC has avoided the lower middle-income trap and, although there is no guarantee, in all likelihood it will also avoid the upper middle-income trap (it has been an upper middle-income country only for 2 years). Therefore, claims that it may be approaching the trap are unwarranted (see, for example, The Economist   (YHQ DW D PRGHVW UHODWLYH WR LWV  DQQXDO JURZWK from 2000 to 2010) income per capita growth of 5%, the PRC should be able to avoid the upper middle-income trap. India became recently a lower middle-income country and it will also probably avoid the lower middle-income trap (although, again, there is no guarantee).

28 29

For a specific analysis of the PRC see Felipe, Kumar, Usui and Abdon (2010). For a specific analysis of India see Felipe et al. (2010b).

Tracking the Middle-Income Trap: What is It, Who is in It, and Why? | 29

Appendix Table 1a: 2010 Income Classification (124 economies)
Economy WB Class 2010 L UM* UM* LM* UM* H H L H L LM UM* UM* UM L L L* LM* H L L UM* UM UM* L LM UM LM* H UM* UM* LM LM L H H UM* L H LM* H LM L L GDPpc 2010 1,068 4,392 3,552 1,658 11,872 25,754 23,534 1,250 23,123 1,387 3,065 4,858 6,737 8,497 1,110 495 2,529 1,208 24,808 530 708 13,294 8,019 6,542 259 2,391 8,207 1,098 23,569 4,802 4,010 3,936 2,818 866 22,825 21,750 3,858 1,099 20,628 1,736 15,232 4,381 607 629 Our Class 2010 L LM LM L H H H L H L LM LM LM UM L L LM L H L L H UM LM L LM UM L H LM LM LM LM L H H LM L H L H LM L L L 61 24 19 61 61 61 16 33 8 3 61 61 55 61 61 61 42 61 28 2 58 23 3 30 14 61 61 61 1 1 61 61 Years (1950–2010) LM UM 37 42 28 14 11 45 28 53 53 6 42 17 61 33 54 3 3 38 58 31 47 14 10 56 10 21 60 32 20 12 12 5 19 13 2 5 15 15 11 4 13 28 Status H 1 41 35 38 42 6 43 32 40 1 38 11 LMIT LMIT LMIT LMIT LMIT LMIT LMIT LMIT LMIT LMIT LMIT LMIT LMIT continued.

Afghanistan Albania Algeria Angola Argentina Australia Austria Bangladesh Belgium Benin Bolivia Botswana Brazil Bulgaria Burkina Faso Burundi Cambodia Cameroon Canada Central African Rep. Chad Chile China, People's Rep. of Colombia Congo, Dem. Rep. Congo, Rep. of Costa Rica Cote d’Ivoire Denmark Dominican Republic Ecuador Egypt El Salvador Eritrea Finland France Gabon Gambia Germany Ghana Greece Guatemala Guinea Guinea Bissau

30 | ADB Economics Working Paper Series No. 306

Appendix Table 1a. continued.
Economy WB Class 2010 L LM H H* LM LM UM* LM* H H H UM* H UM* L H LM* UM* LM* L UM* L L UM L LM* UM* UM LM* LM L* L* UM* L H H LM* L LM* H H* LM UM* GDPpc 2010 664 2,247 32,434 9,000 3,407 4,790 6,789 1,046 25,238 18,108 18,887 3,484 22,260 5,752 1,115 11,900 1,864 5,061 1,987 806 2,924 654 807 10,567 1,185 1,281 15,424 7,763 1,015 3,672 2,362 3,301 4,655 1,219 23,912 18,147 1,679 516 1,674 27,522 8,202 2,344 7,146 Our Class 2010 L LM H UM LM LM LM L H H H LM H LM L H L LM L L LM L L UM L L H UM L LM LM LM LM L H H L L L H UM LM LM L 61 50 52 36 9 23 5 1 6 61 61 3 61 61 12 61 61 19 61 61 61 27 57 54 61 31 61 61 18 55 5 Years (1950–2010) LM UM 11 26 51 9 25 52 38 25 19 13 56 17 55 1 58 43 27 41 53 34 4 7 61 5 30 11 33 6 56 7 10 15 17 15 9 20 6 15 12 8 15 22 14 10 Status H 28 21 25 33 34 40 8 41 39 36 LMIT LMIT LMIT LMIT LMIT UMIT LMIT LMIT LMIT

Haiti Honduras Hong Kong, China Hungary India Indonesia Iran Iraq Ireland Israel Italy Jamaica Japan Jordan Kenya Kuwait Lao PDR Lebanon Lesotho Liberia Libya Madagascar Malawi Malaysia Mali Mauritania Mauritius Mexico Mongolia Morocco Mozambique Myanmar Namibia Nepal Netherlands New Zealand Nicaragua Niger Nigeria Norway Oman Pakistan Panama

continued.

Tracking the Middle-Income Trap: What is It, Who is in It, and Why? | 31

Appendix Table 1a. continued.
Economy WB Class 2010 LM UM* LM H* H H H UM* L H* LM* L H UM* H LM LM* LM H H LM* H L UM L UM* UM L H H H UM UM LM LM LM* L GDPpc 2010 3,510 5,733 3,054 10,731 14,249 18,632 20,724 4,507 1,085 8,396 1,479 707 30,830 4,725 18,643 5,459 1,612 3,270 24,107 24,795 8,717 22,461 813 9,143 615 6,389 8,123 1,059 14,691 22,555 30,686 10,934 9,662 3,262 2,852 921 900 Our Class 2010 LM LM LM UM H H H LM L UM L L H LM H LM L LM H H UM H L UM L LM UM L H H H UM UM LM LM L L L 23 27 19 12 61 61 61 33 61 20 17 61 26 61 22 4 61 52 26 61 61 Years (1950–2010) LM UM 38 61 34 50 28 4 19 49 20 28 61 23 28 41 4 46 19 28 39 51 3 46 1 9 35 11 18 16 7 32 10 17 14 9 15 7 7 6 20 12 15 60 Status H 15 41 16 9 23 21 43 52 18 61 38 49 LMIT LMIT LMIT LMIT UMIT LMIT LMIT LMIT UMIT LMIT UMIT UMIT LMIT -

Paraguay Peru Philippines Poland Portugal Qatar Rep. of Korea Romania Rwanda Saudi Arabia Senegal Sierra Leone Singapore South Africa Spain Sri Lanka Sudan Swaziland Sweden Switzerland Syrian Arab Republic Taipei,China Tanzania Thailand Togo Tunisia Turkey Uganda United Arab Emirates United Kingdom United States Uruguay Venezuela Viet Nam Yemen, Rep. Zambia Zimbabwe

*Economies for which the World Bank classification differs from this study’s. WB class = World Bank income classification; GDPpc = GDP per capita (second column) measured in 1990 PPP dollars; L = low-income; LM = lower middle-income; UM = upper middle-income; H = high-income; LMIT = lower middle-income trap; UMIT = upper middle-income trap; Our Class = income classification as defined in this paper. Sources: World Bank and author’s calculations.

32 | ADB Economics Working Paper Series No. 306

Appendix Table 1b: 2010 Income Classification (Czechoslovakia, Russian Federation, and Yugoslavia)
Economy Armenia Azerbaijan Belarus Bosnia and Herzegovina Croatia Czech Republic Estonia Georgia Kazakhstan Kyrgyz Republic Latvia Lithuania Macedonia, FYR Moldova Russian Federation Serbia and Montenegro Slovak Republic Slovenia Tajikistan Turkmenistan Ukraine Uzbekistan WB Class 2010 LM* UM UM* UM* H* H H LM UM* L* UM* UM UM* LM UM UM* H H L LM LM LM GDPpc 2010 10,042 9,137 13,674 7,132 8,307 12,469 17,841 6,115 12,150 2,840 12,236 9,993 4,041 3,567 8,828 3,562 12,866 16,845 1,633 4,920 4,486 6,046 Our Class 2010 UM UM H LM UM H H LM H LM H UM LM LM UM LM H H L LM LM LM Years (1950–2010) L 3 2 3 19 2 LM 14 14 13 18 13 20 12 18 8 10 21 21 13 21 5 2 19 21 21 UM 7 4 5 1 8 16 11 1 8 7 11 8 12 9 H 3 5 10 1 6 4 12 -

*Economies for which the World Bank classification differs from this study’s. WB class = World Bank income classification; GDPpc = GDP per capita (second column) measured in 1990 PPP dollars; L = low-income; LM = lower middle-income; UM = upper middle-income; H = high-income; LMIT = lower middle-income trap; UMIT = upper middle-income trap; Our Class = income classification as defined in this paper. Note: In endix 4: 2010 Income Classification upper middle-income in 2009 and 2010. Its estimated income per capita in 2010 is $10402. Sources: World Bank and author’s calculations.

Tracking the Middle-Income Trap: What is It, Who is in It, and Why? | 33

Appendix Table 2: GAP in 2010 and Annual Growth Rate of GAP with the US, 1985–2010 (percent)
Economies whose GAP with the US widened during 1985–2010 Economy GAP GAP Economy GAP GAP Economy with Growth with Growth US Rate US Rate (2010) (1985– (2010) (1985– 2010, 2010, %) %) Afghanistan 0.97 0.02 Guatemala 0.86 0.08 New Zealand Algeria 0.88 0.23 Guinea 0.98 0.02 Nicaragua Benin 0.95 0.07 Guinea Bissau 0.98 0.08 Niger Bolivia 0.90 0.02 Haiti 0.98 0.13 Oman Brazil 0.78 0.09 Honduras 0.93 0.08 Panama Bulgaria 0.72 0.13 Hungary 0.71 0.13 Paraguay Burkina Faso 0.96 0.01 Iraq 0.97 0.71 Romania Burundi 0.98 0.07 Italy 0.38 0.74 Rwanda Cameroon 0.96 0.17 Jamaica 0.89 0.15 Saudi Arabia Canada 0.19 0.95 Japan 0.27 0.22 Senegal Central African Rep. 0.98 0.06 Jordan 0.81 0.21 Sierra Leone Congo, Dem. Rep. 0.99 0.08 Kenya 0.96 0.05 South Africa Congo, Rep. of 0.92 0.25 Kuwait 0.61 0.04 Swaziland Cote d’Ivoire 0.96 0.20 Liberia 0.97 0.09 Switzerland Denmark 0.23 1.47 Libya 0.90 0.45 Syrian Arab Republic Ecuador 0.87 0.31 Madagascar 0.98 0.07 Togo El Salvador 0.91 0.04 Malawi 0.97 0.01 United Arab Emirates France 0.29 0.61 Mauritania 0.96 0.01 Venezuela Gabon 0.87 0.78 Mexico 0.75 0.25 Yemen, Rep. of Gambia 0.96 0.01 Mongolia 0.97 0.12 Zambia Germany 0.33 0.79 Namibia 0.85 0.05 Zimbabwe GAP with US (2010) GAP Growth Rate (1985– 2010, %) 0.73 0.17 0.05 0.28 0.12 0.17 0.26 0.05 1.02 0.05 0.12 0.19 0.06 5.16 0.11 0.09 6.63 0.61 0.09 0.03 0.15
continued.

0.41 0.95 0.98 0.73 0.77 0.89 0.85 0.96 0.73 0.95 0.98 0.85 0.89 0.19 0.72 0.98 0.52 0.69 0.91 0.97 0.97

34 | ADB Economics Working Paper Series No. 306

Appendix Table 2. continued.
Economies whose GAP with the US decreased during 1985–2010 Economy GAP GAP Economy GAP GAP with Growth with Growth Rate US Rate US (2010) (1985– (2010) (1985– 2010, 2010, %) %) Albania 0.86 −0.12 India 0.89 −0.26 Angola 0.95 −0.07 Indonesia 0.84 −0.28 Argentina 0.61 −0.35 Iran 0.78 −0.07 Australia 0.16 −1.67 Ireland 0.18 −4.43 Austria 0.23 −0.84 Israel 0.41 −0.25 Bangladesh 0.96 −0.05 Lao PDR 0.94 −0.07 Belgium 0.25 −0.47 Lebanon 0.84 −0.04 Botswana 0.84 −0.20 Lesotho 0.94 −0.08 Cambodia 0.92 −0.15 Malaysia 0.66 −0.79 Chad 0.98 0.00 Mali 0.96 −0.02 Chile 0.57 −1.15 Mauritius 0.50 −1.63 China, People's 0.74 −0.90 Morocco 0.88 −0.02 Rep. of Colombia 0.79 −0.04 Mozambique 0.92 −0.14 Costa Rica 0.73 −0.30 Myanmar 0.89 −0.27 Dominican Republic 0.84 −0.21 Nepal 0.96 −0.02 Egypt 0.87 −0.04 Netherlands 0.22 −0.69 Eritrea 0.97 −0.01 Nigeria 0.95 −0.02 Finland 0.26 −0.62 Norway 0.10 −1.84 Ghana 0.94 −0.04 Pakistan 0.92 −0.04 Greece 0.50 −0.35 Peru 0.81 −0.05
Note:

Economy

GAP with US (2010)

Philippines Poland Portugal Qatar Korea, Rep. of Spain Sri Lanka Sudan Sweden Taipei,China Tanzania Thailand Tunisia Turkey Uganda United Kingdom Uruguay Viet Nam  

0.90 0.65 0.54 0.39 0.32 0.39 0.82 0.95 0.21 0.27 0.97 0.70 0.79 0.74 0.97 0.26 0.64 0.89  

GAP Growth Rate (1985– 2010, %) −0.02 −0.44 −0.45 −0.95 −3.17 −1.20 −0.34 −0.06 −0.20 −3.62 0.00 −0.77 −0.27 −0.25 −0.03 −0.71 −0.51 −0.27    

Hong Kong, China is not in the table because in 2010 its gross domestic product per capita was above that of the United States. Sources: Author’s calculations, World Economic Outlook (IMF 2011), Maddison (2010).

Tracking the Middle-Income Trap: What is It, Who is in It, and Why? | 35

Appendix Table 3: Economies that Became Lower Middle-Income on or Before 1950 and Graduated to Upper Middle-Income
Economy Region Year Country Year Country Turned LM Turned UM (YLM) (YUM) 1848 1950** 1929* 1860** 1950** 1876 1854 1870 1912 1869 1874 1924 1910 1913** 1906 1827 1907 1929** 1947 1911 1896 1858* 1839* 1890** 1891 1952 1942 1882* 1925 1950** 1950** 1950** 1881 1860** 1950** 1942 1976 1968 1947 1978 1964 1961 1953 1964 1960 1960 1972 2001 1975 1963 1955 1961 2000 1978 1973 1954 1945 1941 1970 1992 2006 2000 1994 1948 1969 1970 1996 1943 1941 1991 Years as LM 94 39 88 107 83 52 91 86 48 91 57 128 54 31 62 58 87 102 101 54 58 112 23 62 81 Average Growth Rate (YLM to YUM) 1.35 3.58 1.52 1.18 1.57 2.50 1.44 1.51 2.70 1.45 2.25 1.02 2.47 4.17 2.18 2.22 1.49 1.27 1.27 2.37 2.22 1.16 5.67 2.07 1.65 -

Australia Hong Kong, China Japan New Zealand Singapore Austria Belgium Denmark Finland France Germany Greece Hungary Ireland Italy Netherlands Norway Poland Portugal Spain Sweden Switzerland United Kingdom Argentina Chile Costa Rica Mexico Uruguay Venezuela Israel Saudi Arabia Syrian Arab Republic Canada United States Mauritius

Pacific Asia Asia Pacific Asia Europe Europe Europe Europe Europe Europe Europe Europe Europe Europe Europe Europe Europe Europe Europe Europe Europe Europe Latin America and Caribbean Latin America and Caribbean Latin America and Caribbean Latin America and Caribbean Latin America and Caribbean Latin America and Caribbean Middle East and North Africa Middle East and North Africa Middle East and North Africa North America North America Sub-Saharan Africa

*This refers to the year these countries regained lower middle-income status. Australia was low middle- income in 1848 but fell back to low-income; Denmark in 1870; Finland in 1912; France in 1869; Germany in 1874; Hungary in 1910; Japan in 1929; Switzerland in 1858; the United Kingdom in 1839; and Uruguay in 1870. Japan fell to low-income once again from 1945 to 1950. **Sparse or no data prior to this year. What is only known is that these countries made it to LM on or before 1950 but it is not known when exactly. Thus the number of years they stayed as LM cannot be counted. GDP = gross domestic product, LM = lower middle-income, PPP = purchasing power parity, UM = upper middle-income, Y = year. Source: Author’s calculations.

36 | ADB Economics Working Paper Series No. 306

Appendix Table 4: Economies that Became Upper Middle-Income before 1950 and Graduated to High-Income
Country Region Year Country Year Country Turned UM Turned H (YUM) (YH) 1942 1947 1945 1941 1943 1941 1970 1972 1959 1973 1969 1962* Years as UM Average Growth Rate (YUM to YH) 1.7 1.7 3.1 1.5 1.9 1.8

Australia New Zealand Switzerland United Kingdom Canada United States

Pacific Pacific Europe Europe North America North America

28 25 14 32 26 21

*This refers to the year the United States regained high-income status. The United States reached the high- income threshold in 1944, but its income per capita slipped to upper middle-income in 1945. H = high-income, UM = upper middle-income, Y = year. Source: Author’s calculations.

Tracking the Middle-Income Trap: What is It, Who is in It, and Why? | 37

References
$EUDPRYLW] 0  ³&DWFKLQJ8S )RUJLQJ $KHDG DQG )DOOLQJ %HKLQG´ Journal of Economic History ± ADB. 2011. Asia 2050: Realizing the Asian Century. Asian Development Bank, Manila. Collier, P. 2007. The Bottom Billion—Why the Poorest Countries Are Failing and What Can Be Done about It. New York: Oxford University Press. (LFKHQJUHHQ % ' 3DUN DQG . 6KLQ  :KHQ )DVW *URZLQJ (FRQRPLHV 6ORZ 'RZQ ,QWHUQDWLRQDO (YLGHQFH DQG ,PSOLFDWLRQV IRU >WKH 3HRSOH
V 5HSXEOLF RI@ &KLQD 1%(5 :RUNLQJ 3DSHU  1DWLRQDO %XUHDX RI (FRQRPLF 5HVHDUFK &DPEULGJH (NVWURP -  2Q WKH 5HODWLRQ %HWZHHQ WKH 3RO\FKRULF &RUUHODWLRQ &RHI¿FLHQW DQG 6SHDUPDQ¶V 5DQN &RUUHODWLRQ &RHI¿FLHQW 8&/$ 6WDWLVWLFV 3UHSULQW  /RV $QJHOHV Felipe, J., U. Kumar, and A. Abdon. 2010. Exports, Capabilities, and Industrial Policy in India. :RUNLQJ 3DSHU  /HY\ (FRQRPLFV ,QVWLWXWH RI %DUG &ROOHJH 1HZ <RUN )HOLSH - 8 .XPDU 1 8VXL DQG $ $EGRQ  :K\ KDV >WKH 3HRSOH¶V 5HSXEOLF RI@ &KLQD 6XFFHHGHG" $QG :K\ ,W :LOO &RQWLQXH 7R 'R 6R :RUNLQJ 3DSHU  /HY\ (FRQRPLFV Institute of Bard College, New York. )UHHPDQ & DQG / 6RHWH  The Economics of Industrial Innovation. UG HG &DPEULGJH 0,7 Press. *LOO , DQG + .KDUDV  An East Asian Renaissance. The World Bank, Washington, DC. *HUVFKHQNURQ $  Economic Backwardness in Historical Perspective: A Book of Essays. Cambridge: Belknap Press of Harvard University Press. +REGD\ 0  Innovation in East Asia. Cheltenham: Edward Elgar. IMF. 2011. World Economic Outlook. International Monetary Fund, Washington, DC. Kharas, H. 2010. The Emerging Middle Class in Developing Countries. OECD Working Paper No.  2(&' 'HYHORSPHQW &HQWUH 3DULV .UHPHU 0  ³7KH 25LQJ 7KHRU\ RI (FRQRPLF 'HYHORSPHQW´ Quarterly Journal of Economics  $XJXVW ± .X]QHWV 6  Economic Growth of Nations: Total Output and Production Structure. Cambridge: Belknap Press of Harvard University Press. 0DGGLVRQ $  Phases of Capitalist Development. New York: Oxford University Press. ²²²  ³+LVWRULFDO 6WDWLVWLFV RI WKH :RUOG (FRQRP\  $'´ $YDLODEOH ZZZJJGFQHW MADDISON/oriindex.htm. Downloaded 5 July 2011. 0\UGDO *  Economic Theory and Under-Developed Regions. /RQGRQ 'XFNZRUWK 1HOVRQ 5  ³$ 7KHRU\ RI WKH /RZ/HYHO (TXLOLEULXP 7UDS LQ 8QGHUGHYHORSHG (FRQRPLHV´ American Economic Review   ± 2OVVRQ 8  ³0D[LPXP /LNHOLKRRG (VWLPDWLRQ RI WKH 3RO\FKRULF &RUUHODWLRQ´ Psychometrika ± 2KQR .  ³$YRLGLQJ WKH 0LGGOH ,QFRPH 7UDS 5HQRYDWLQJ ,QGXVWULDO 3ROLF\ )RUPXODWLRQ LQ 9LHWQDP´ ASEAN Economic Bulletin   ± 6FKXPDQ 0  The Miracle. The Epic Story of Asia’s Quest for Wealth. New York: HarperCollins. 6QRZHU '  ³7KH /RZVNLOO %DGMRE 7UDS´ ,Q $ %RRWK DQG ' 6QRZHU HGV Acquiring Skills: Market Failures, Their Symptoms and Policy Responses. Cambridge: Cambridge University Press. Spence, M. 2011. The Next Convergence. The Future of Economic Growth in a Multispeed World. 1HZ <RUN )DUUDU 6WUDXV DQG *LURX[ The Economist. 2011. Special Report on [the People’s Republic of] China  -XQH 3DJH  9DQ GHU 3ORHJ ) DQG $ 9HQDEOHV  ³+DUQHVVLQJ :LQGIDOO 5HYHQXHV 2SWLPDO 3ROLFLHV IRU 5HVRXUFHULFK 'HYHORSLQJ &RXQWULHV´ 2[IRUG &HQWUH IRU WKH $QDO\VLV RI 5HVRXUFH 5LFK Economies. Department of Economics. Oxford University. Processed. :KHDWOH\ $  ³$YRLGLQJ WKH 0LGGOH ,QFRPH 7UDS´ The New York Times. 25 October. World Bank. 2010. Research for Development: A World Bank Perspective on Future Directions for 5HVHDUFK :RUOG %DQN 3ROLF\ 5HVHDUFK :RUNLQJ 3DSHU 1R  :DVKLQJWRQ '&

About the Paper Jesus Felipe provides a working definition of the middle-income trap. In 2010 and out of 124 countries with available data, there were 52 middle-income countries, of which 35 were in this trap. Of the 35, 13 were in Latin America, 11 in the Middle East and North Africa, six in Sub-Saharan Africa, three in Asia, and two in Europe. The three Asian countries trapped were the Philippines, Sri Lanka, and Malaysia, although the last two may escape it soon. Indonesia and Pakistan are at the risk of falling into it in the coming years. The People’s Republic China and India are not in the trap.

About the Asian Development Bank ADB’s vision is an Asia and Pacific region free of poverty. Its mission is to help its developing member countries reduce poverty and improve the quality of life of their people. Despite the region’s many successes, it remains home to two-thirds of the world’s poor: 1.8 billion people who live on less than $2 a day, with 903 million struggling on less than $1.25 a day. ADB is committed to reducing poverty through inclusive economic growth, environmentally sustainable growth, and regional integration. Based in Manila, ADB is owned by 67 members, including 48 from the region. Its main instruments for helping its developing member countries are policy dialogue, loans, equity investments, guarantees, grants, and technical assistance.

Asian Development Bank 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines www.adb.org/economics ISSN: 1655-5252 Publication Stock No. WPS124670
March 2012

< 0124 6704 >
Printed on recycled paper Printed in the Philippines

Sign up to vote on this title
UsefulNot useful